Spotlight on ETF options

Here's how to use options to trade ETFs, plus some investing ideas.

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There are myriad reasons to like ETFs. Similar to mutual funds, they allow you to access many parts of the market—stocks, bonds, sectors, industries, currencies, and more. Many ETFs are relatively low cost, and can be tax efficient. You can use them to build a diversified portfolio or implement a more targeted strategy. Plus, unlike mutual funds, ETFs trade intraday like stocks—potentially making them attractive to short-term, active traders, in addition to longer-term investors.

No wonder money has poured into the exchange-traded product (ETP) market, which is composed almost entirely of ETFs. In fact, US-based ETP assets under management have surged past $3 trillion this year.1

But did you know that, according to the Options Clearing Corporation, you can also trade options on 647 ETFs/ETPs? Options contract volume on US-listed ETF options hit a record 1.7 billion contracts in 2011, up more than fivefold from 2006. After a pullback in 2012, those contract volumes have been on the rise—and 2017 is on pace for another strong year.

An investor might choose to use options on ETFs for many of the same reasons that they would use options on stocks. Whether you are looking to establish a position on a segment of the market, hedge an investment, or just implement an investing idea, ETF options can be a useful tool for experienced options investors.

How they work

If you trade stock options, you should have little trouble utilizing ETF options. Similar to plain vanilla stock options, ETF options have standardized contract terms. They are American style (offering the possibility of early exercise and assignment) and are physically settled upon exercise by the delivery of the underlying ETF shares, unless the option position has not been closed by an offsetting trade.

Of course, there are unique characteristics and risks associated with ETFs that can affect ETF options—including market risk and exposure to exotic parts of the market that involve increased complexity, among others. However, in general, ETF options offer the same characteristics as stock options.

Implementing ETF options strategies

Suppose you have a strong view on the near-term direction of US large-cap stocks, but you didn’t want to invest a lot of your money in the market just yet. You could buy a SPDR S&P 500 ETF (SPY) call, for example, which gives you the right, but not the obligation, to buy SPY at a predetermined price for a set time. SPY was the first and largest ETF, and it seeks to track the 500 largest US stocks. The primary reason for buying calls, as opposed to simply buying a stock or ETF, is that options enable you to control the same amount of shares with a lower initial investment.

Alternatively, what if you are worried about a short-term US stock market correction, but don’t want to sell your investment? You might consider a short-term strategy where you would buy a put on the SPY. An SPY put would give you the right, but not the obligation, to sell the SPY at a predetermined price over a specific time period. The put would gain in value if the SPY declined in price after you purchased it. You would purchase put options to capitalize on a bearish outlook, and to have a known, limited-risk—in contrast to a short stock position.

Or, let’s say you have analyzed the business cycle and are bullish on the technology sector, but are unsure which stocks to buy. You could consider purchasing call options on a technology sector ETF. There are several technology sector ETFs, so you could consider narrowing your available choices using Fidelity’s ETF Screener to generate a list of highly liquid technology ETFs that meet your investing criteria and are optionable. Then, you can go to the options chain for that ETF (available in Fidelity.com or Active Trader Pro®–login required) to see what options are available. On Fidelity.com, you can find the options chain by clicking on the Research tab and selecting Options. On this options research page, select Quotes and Tools and then enter an ETF symbol. If the ETF has options, the options chain will appear.

Of course, just as you should thoroughly analyze the broad market or a technology stock and its associated options, you would need to do your due diligence on the SPY or technology ETF. Consider the ETF’s liquidity, how well it tracks its benchmark (e.g., tracking error), the costs, tax implications, and any other factor that may influence your strategy.

Finding ETF options opportunities

Thanks to a wide variety of ETFs available for investment, options investors may be able to take advantage of market outlooks in ways that were previously difficult to do using options. There are ETF options covering themes like market cap, sectors, global markets, commodities, interest rates, and volatility, affording investors a multitude of ways to utilize ETF options.

There are several ways you can find ETFs that offer options. As previously noted, you can go to the options chain to search for a specific ETF option. If you would like to explore options trading ideas, you can go to Fidelity.com, click the Research tab, and select Options. On the options research page, select Trading Ideas. Here, you can use tools such as Strategy Ideas and the Report Finder to search for option-specific strategies based on an ETF or a strategy. The list of trading strategies and ETF ideas is generated by LiveVol and S&P Capital IQ, independent options research providers.


Once you are on the options pages, there is a wealth of information and strategies to explore. You can also see which ETFs are most active each day by visiting the Options Industry Council’s (OIC) website, then click on the ETF tab. The most active ETFs typically offer relatively strong liquidity, compared with infrequently traded ETF options, which can help reduce total costs. Also, ETFs or stocks with stronger liquidity may offer more options contracts, which may allow you to find the best contract for your strategy.

For instance, as of October 31st, the most active ETF/ETP options according to OCC were:

  • SPDR S&P 500 ( SPY )
  • Powershares QQQ ETF ( QQQ )
  • iShares Russell 2000 ( IWM )
  • iPath S&P 500 VIX Short Term Futures ETN ( VXX )
  • iShares MSCI Emerging Markets ETF ( EEM )
  • Financials Select Sector ( XLF )
  • United States Oil Fund LP ( USO )
  • SPDR Gold Trust ( GLD )
  • Proshares Ultra VIX Short Term Futures ETF ( UVXY )
  • Vaneck Vectors Gold Miners ETF ( GDX )

Next steps to consider

Find new options ideas and get the latest data on options.

Learn what you need to know before trading the market.

Learn more about ETFs and how they can help you trade.

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1. Source: BlackRock's Follow the flow report, as of November 15, 2017.
Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read Characteristics and Risks of Standardized OptionsOpens in a new window.. Supporting documentation for any claims, if applicable, will be furnished upon request.
Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility, as well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of exchange-traded notes). The degree of liquidity can vary significantly from one ETP to another and losses may be magnified if no liquid market exists for the ETP's shares when attempting to sell them. Each ETP has a unique risk profile, detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.
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