ETF Options vs. Index Options: An Overview

In 1982, stock 澳洲幸运5开奖号码历史查询:index futures trading began. This marked the first time traders could actually trade a specific market index itself, rather than the shares of the companies that comprised the index. First came options on stock index futures, then options on indexes, which could be traded in stock accounts.

Next came 澳洲幸运5开奖号码历史查询:index funds, which allowed investors to buy and hold a specific stock index. A burst of growth began with the advent of the 澳洲幸运5开奖号码历史查询:exchange-traded fund (ETF) and was followed by th🀅e listing of opti♔ons for trading against a wide swath of these ETFs.

ETFs and ETF Options

An ETF is essentially a 澳洲幸运5开奖号码历史查询:mutual fund📖 that trades li💞ke an individual stock. As a result, anytime during the trading day, an investor can buy or sell an ETF that represents or tracks a given segment of the market.

The vast proliferation of ETFs has been another breakthrough that has greatly expanded the ability of investors to take advantage of many unique opportunities. Investors can now take long or 澳洲幸运5开奖号码历史查询:short positions—as🉐 well as in ♏many cases, leveraged long or short positions in the following types of securities:

• Foreign and Domestic Stock Indexes (large-cap, small-cap, growth, value, sector, etc.)
• Currencies (yen, euro, pound, etc.)
• Commodities (physical commodities, financial assets, commodity indexes, etc.)
• Bonds (treasury, corporate, munis international)

As with 澳洲幸运5开奖号码历史查询:index options, some ETFs have attracted a great deal of options trading volume while the majority have attracted very little.

Figure 2 displays some of the ETFs that enjoy the most attractive options tradin𓆏g volume on the Cboe.ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ

A reason to consider volume is that many ETFs track the same indexes that straight index options track, or something very similar. Therefore, you should consider which vehicle offers the best opportunity in terms of option liquidity and 澳洲幸运5开奖号码历史查询:bid-ask spreads.

Index Options

The listing of options on various market indexes allowed many traders for the first time to trade a broad segment of the financial market with one transaction. The 澳洲幸运5开奖号码历史查询:Cboe Exchange (Cboe) offers 澳洲幸运5开奖号码历史查询:listed options on over 450 domestic, foreign, sector, and volatility-based indexes.

The first thing to n🎃ote about index options is that there is no trading going on in the underlying index itself. It is a calculated value and exists only on paper. The options only allow one to speculate on the price direction of the underlying index, or to hedge all or some part of a portfolio that might correlate closely to that particular index.

Key Differences

There are several important differences between index options and options on ETFs. The most significant of these revolves around the fact that trading options on ETFs can result in the need to assume or deliver shares of the underlying ETF (this may or may not be viewed as a benefit by some). This is not the case with index options.

As mentioned, the reason for this difference is that index options are "European" style options and settle in cash, while options on ETFs are "American" style options and are settled in shares of the underlying security.

American options are also subject to "early exercise," meaning that they can be exercised at any time prior to expiration, thus triggering a trade in the underlying security. This potential for 澳洲幸运5开奖号码历史查询:early exercise or having to deal with a position in the underlying ETF can have major ramifications for a trader.

Index options can be 澳洲幸运5开奖号码历史查询:bought and sold prior to expiration; however, they cannot be exercised since there is no trading in the actual underlying index. As a result, there are no concerns regarding early exercise when trading an index option.

Special Considerations

The amount of options trading volume is a key consideration when deciding💦 which avenue to go down in executing a trade. This is particularly true when considering indexes and E𝓡TFs that track the same, or similar, security.

For example, if a trader wants to speculate on the direction of the S&P 500 Index using options, they have several choices available. SPDR S&P 500 ETF Trust (SPY) and iShares Core S&P 500 ETF (IVV) each track the S&P 500 Index. Both SPY and IVV trade in great volume and in turn enjoy very tight bid-ask spreads. This combination of high volume and tight spreads indicates that investors can trade these two securities freely and actively.

The Bottom Line

Whether you purchase ETF options or ind𝓀ex options will depend on your investment goals. If you are looking to make a specific trade with the goal of a cash outlay, then an index option is your friend. Conversely, if you are looking to hold shares in an ETF, then you can purchase ET𒉰F options.