The best ETFs to trade options are those giving the required focused exposure to a part of the stock market and whose ETF options are liquid. Here are some great examples of great ETFs for options trading.
US Index ETF Options
The first group are ETFs that offer exposure to a wide variety of US stocks – often tracking a well established index.
The are the best ETFs to trade options spreads related to market movements (or lack of movement in the case of some delta neutral trades).
DIA: SPDR Dow Jones Industrial Average ETF Trust
Probably the most venerable of the indices is the Dow Jones Industrials.
DIA is the related ETF which tracks this index, and thus offers exposure to the bluest of blue chip stocks which are low volatility and steady.
DIA’s options are therefore priced with a low implied volatility, making them attractive for option buyers in particular.
SPY: S&P 500 SPDR
SPY is the ETF connected to the S&P 500 index, often preferred to the DOW as a tracker of the market.
The DOW contains mainly old style industrial companies, whereas the S&P contains all sectiors such as technology and is therefore a better gauge of market sentiment.
Its options are the most liquid in the world due to their popularity in trading the performance of the top US companies.
Due to this liquidity the bid-ask spread for the most popular near term options is usually just a couple of cents.
IWM: Russell 2000 iShares ETF
The Russell 2000 index tracks a basket of small cap US stocks, and is a great way to obtain exposure to smaller higher growth companies.
Due to its higher risk, IWM (owned by ishares, part of Blackrock) is more volatile than SPY and hence its options have higher implied volatility.
They are therefore popular with option sellers who look to collect this IV, usually by positive theta trades which exploit time decay.
QQQ: Nasdaq QQQ Invesco ETF
A good way to gain exposure to high growth (especially technology) companies is tracking the NASDAQ, which is exactly what QQQ does.
NASDAQ is the world’s second largest index and as such its options are liquid.
US Sector ETF Options
The second group offers exposure to a specific sector of the US stock market:
XLF: S&P 500 Financials Sector SPDR
The S&P 500 Financials Sector SPDR (XLF) ETF tracks financial stocks in the S&P 500 index, weighted by their market capitalization.
XLE: The Energy Select Sector SPDR Fund
A similar ETF for the Energy sector.
OIH: VanEck Oil Services ETF
An ETF tracking Oil stocks.
Geographical Market ETF Options
The third group of ETFs offer exposure to different geographical markets from the US:
EEM: Emerging Markets iShares MSCI ETF
The Emerging Markets iShares MSCI ETF (EEM) tracks ‘emerging markets’ – stocks from markets such as Brazil, South Korea and Mexico.
Due to their less developed nature, companies from such markets are inherently higher risk than similar stocks in the US.
As such their options contain high IV and offer high returns at a higher risk than those over US shares.
EWZ: Brazil iShares MSCI ETF
EWZ is a similar ETF to EEM except that it tracks performance in just Brazilian shares.
FXI: China Large-Cap Ishares ETF
As the name suggests FXI tracks Chinese stocks.
Non Stock ETF Options
The fourth and final collection covers ETFs in non stocks:
HYG: High Yield Corp Bond Ishares Iboxx $ ETF
HYG is an ETF tracking high yield corporate bonds.
It is popular with traders wanting exposure to high growth companies, but at a lower risk (not by much) than equity investments.
Its options are therefore a good way of trading expectations in the yields of high growth companies.
VXXB: Ipath.B S&P 500 VIX Short-Term Futures
The VIX is a measure of ‘average’ implied volatility across the option markets and hence is known as the ‘fear index’ (IV rises as investors become fearful).
Options over this index are therefore a strange beast: options over the IV in options.
However they offer a good way to gain exposure to expected changes in market sentiment and are popular.
Conclusion: Examples Of The Best ETFs To Trade Options
So these then are some examples of the best ETFs to trade options, but there are lots more. However most fall into the above groups and are a good selection of the main types.