Tip 7 - Trading ETF Options


The other reason to consider volume is that many ETFs track the same indexes that straight index options track, or something very similar. I call my system the 10K Strategy. You may, however, disable certain tracking as discussed in our Cookie Policy.

When markets nosedive, setting the brakes


Guaranteed Winning Trading Strategies? Options on the most popular ETFs, such as the ones representing the popular indexes, trade in very large volume and have lots of liquidity. This makes entry and exit easier, as well as keeping bid-ask spreads reasonable.

Many options on ETFs have strike prices at one point intervals, instead of the usual 2. This makes it easier to target the specific move you expect, as well as set up strategies such as condors or butterflies much more easily. Since ETFs represent an index or a sector, the risk of dramatic overnight price movement is reduced compared to stock ownership or options on individual stock. An index can't report good or bad earnings, it can't go bankrupt or be bought out.

Some of the most popular options on index ETFs have a quarterly expiration in addition to the normal monthly expiration. In addition to the normal "third Friday of the month" expiration, they have separate options that expire on March 31, June 30, September 30, and December This gives more trading opportunities and more chances to roll. The availability of these quarterly options depends on your broker - not all brokers offer trading in the quarterlies.

ETF options allow you to participate in the overall market direction, or to hedge other positions easily. If the market rises as you expect, the OTM option may be an insignificant loss.

If the market unexpectedly falls and damages your bullish positions, the OTM double contra option may show a good gain. In many cases, a single market maker sets the prices, and it is difficult to get good executions when you trade. This means that every time you buy an option, you pay more than you would if the options were more actively traded, and when you sell, you receive less than you would in an active options market.

The options market for XLF is liquid. Bid-asked spreads are small, and you can successfully execute spread orders and count on getting decent prices regardless of whether you are buying or selling. Why is XLF better than trading individual companies? It has nothing to do with the company. Rather, it has to do with the price behavior of most individual companies.

The 10K Strategy does best when the stock does not gyrate wildly. At certain times, most individual companies are subject to sudden wide swings in their stock prices. Earnings are announced, and the company either exceeds or fails to meet expected results, and the stock moves accordingly.

An analyst upgrades or downgrades the stock unexpectedly, and the stock makes a big move. Sudden price changes in the stock can result in losses when using the 10K Strategy , so we prefer to trade on a basket of stocks like XLF rather than an individual company.

That way, if one company has a big swing in stock price, the effect on the total basket of stocks is usually minimal. I call my system the 10K Strategy. It is somewhere between a boring buy-and-hold strategy and day-trading. It is not a marathon — you do not have to wait forever to see results. Neither is it a sprint, dependent on short-term increases in the price of the stock. Like any race, it takes a little effort to execute. But the extraordinary profit potential makes it all worth while, at least to my way of thinking.

A Simple Options Strategy: The 10K Strategy is based on the simple fact that all options become less valuable every day if the stock stays flat , but short-term options go down in value decay at a faster rate than long-term options. I purchase slower-decaying long-term options and use them as collateral to sell faster-decaying short-term options to someone else.

If the stock stays flat, I always win. But as we know, all stocks do not stay flat. Some good stocks, like XLF, actually go up much of the time. Having a good feeling about a stock and being right makes the 10K Strategy even more profitable than just enjoying the option decay advantage.

If the stock goes up, I can make more with the 10K Strategy than I ever could with the stock alone. The strategy consists of calendar spreads at several different strike prices both above and below the stock price , with differing numbers of spreads at different strikes depending on your personal risk tolerance , often involves puts rather than calls even if you are bullish on the stock , and is governed by a strict set of Trading Rules that determine when adjustments need to be made.

Does the 10K Strategy make money all the time? But it is close. To check how the portfolio has performed since that time, go to our Track Record page. It all sounds too complicated — can you manage the 10K Strategy for me?

I publish an options newsletter, and am not a licensed investment advisor. The White Paper costs less than a meal for two at a decent restaurant. It gives you all the information you will need to execute the 10K Strategy, and set up, and maintain, a portfolio that matches the degree of risk that you are comfortable taking. Complete Trading Rules for every risk level portfolio are included as well.

And there is more. If you wish, you can mirror one or more of these portfolios in your own account, or sign up for Auto-Trade with thinkorswim , Inc. You can figure out all these numbers precisely, before you make the investment. Once you have become an Insider by buying the White Paper , you will have access to several valuable reports on a variety of option strategies, many of which you will not be able to find in any books on options.

All this for less than the cost of a meal for two at a decent restaurant. And once you put the strategy to work, you might well be spending many pleasant evenings at better-than-decent restaurants for the rest of your life.

It did to me, and I want to pass on my learning experiences to you. Here is the link that could change the way you invest your money for the rest of your life - https: If you are not convinced that now is the right time to make this investment in yourself, at least sign up for my free newsletter. For more information about the "Lazy Way" strategy to double your money, click Tip 5. For more information about options in general, click Tip 1.