CHAPTER 24
ETF Options
An advantage of an ETF is that it can enable you to take advantage of your unique view of the market. This chapter will provide background information on ETFs, list some ETFs I like to follow that may help you in your trading, provide a sample ETF option chain, and describe double and inversely correlated ETFs. ETF strategies are presented Appendix A to help show you how ETF options can be used in numerous scenarios.
OVERVIEW
An ETF option works in essentially the same manner as an option on a stock. For example, like an option on a stock, the ETF option buyer has unlimited reward potential and limited risk, and the ETF option seller has limited reward potential and unlimited risk. An ETF call option provides the purchaser the right, but not the obligation, to buy 100 shares at the strike price on or before the (Friday) expiration date. An ETF put option provides the purchaser the right, but not the obligation, to sell 100 shares at the strike price on or before the (Friday) expiration date. The ETF call seller is obligated to sell if assigned and the ETF put seller is obligated to buy if assigned. The factors that affect the price of an ETF option are the same as those affecting the price of an equity option, including the value of the underlying instrument (an ETF, in this case), strike price, time to expiration, volatility, interest rate, and dividends.
WHAT IS AN ETF?
An ETF is typically an investment product that tracks a defined benchmark (usually ...
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