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10 Reasons to Use ETFs When Trading Options

已有 651 次阅读2009-4-18 04:56 AM |

10 Reasons to Use ETFs When Trading Options
Michael Shulman

How do investors and traders cope with a market that has fallen more than 40% in just one year and survive until greener pastures return?

Many traders have lived to tell the tale by trading both the long and short sides, or by taking a longer-term inverse (contra) Exchange-Traded Funds (ETFs) as a portfolio hedge. And it's the contras that have insulated them against the big slides.

These are funds that benefit from market declines and advances in price -- some approximately point-for-point and others by a factor of two. And they enable you to have all the benefits of shorting the market without the hassles of borrowing stock and incurring margin debt.

Here are 10 reasons why you should consider using ETFs when trading options:

  • The Appeal Of Segments - Market segments -- financials, housing, oil and so on -- have been hit hard, but often an individual name trades against the segment. If you think oil is moving in a certain direction, do you really want to pick one or two winners or losers or is it smarter to play a move in the entire segment? It is much smarter to play the segment -- and if you want the volatility you get with an individual stock, you can buy a call or a put.
  • Technical Purity - ETFs are the purest way to mirror the movement of a market segment such as financials or oil stocks and new ETFs are added literally every week. Many of these ETFs have options and liquidity in these options is increasing every hour. The charts on these ETFs typically have nicely sloped charts that are easy to read, easy to trade -- making options trading less volatile and easier to manage.
  • A New Efficient Tool - Buying an ETF to go long (or short) a market segment means you have an opinion about that segment. So why limit yourself, and the ability to make money on this opinion to just the ETF itself? You buy options on stocks or the market, and more and more this activity is migrating from your trading or play money account to your serious trading or investment account. Why not expand your horizons to entire market segments, a much more efficient and potentially profitable approach? 
  • Minimizing Volatility - If you want to minimize the volatility of a position, ETFs can help, and puts and calls on ETFs do the same. An individual semiconductor stock may move 10%-33% on a given day -- for or against you -- based on news and headlines. If you think chips, in general, are headed one way or another, you play the ETF -- in this case, calls on the ETF -- and they will turn out to be far less volatile than an individual stock. This eliminates surprise news having too great an impact on an individual position.
  • Maximizing Volatility - If you want to maximize volatility, puts and calls on ETFs are the way to go. A 3% drop in the Dow Jones Financial Index equates to a 6% gain in the ProShares UltraShort ETF (SKF) which, in turn, would probably generate a 40%-75% gain in selected calls for that ETF. Not bad for a 3% move in the index, far more than you would get if an individual bank stock went down 3%.Recently double short ETFs have diverged significantly from their underlying indices. For this reason they are not being recommended. And here are five reasons why buying puts and calls on ETFs can be more profitable than options on stocks or entire market indices.

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