ETFs for options trading in 2022

Options trading on ETFs?

That's right, numerous ETFs out there have options chains available. Because ETFs trade on exchanges like stocks do, they also have a strong derivatives market behind them. Investors can buy and sell calls and put to their hearts' content with ETFs as the underlying asset. 

The advantage of using an ETF here is decreasing idiosyncratic risk. Instead of betting on a single stock, I can now trade options on an index, sector, or thematic fund. This reduces the chance of a large loss due to the underlying suffering of an unexpected event. While a company can get delisted/go bankrupt/miss earnings, ETFs are generally safer, albeit still volatile. 

Options trading using an ETF is also a great way to implement broader, macro-based strategies. For individual stocks, your options strategy often centers on a particular catalyst, such as an upcoming earnings report, FDA approval, or a meme stock pump. With ETFs that track an index or sector, you can instead bet on broader catalysts like inflation, Fed meetings, rate hikes, etc. 

ETFs for options trading

Finding the most suitable ETF for options trading is a matter of sifting for high assets under management (AUM) and trading volumes. Normally, these factors don't matter for buying and holding ETFs due to the open-ended creation/redemption mechanism. Even for ETFs with low AUM and volume, investors can still get good fills if they place a limit order. 

Not so for options. The most well-developed options chains are generally found in highly traded, popular ETFs. For smaller or lesser-known ETFs, options chains can be quite illiquid. This can cause aspiring ETF options traders to incur large bid-ask spreads, and not have the strike prices/expiry dates they're looking for. This is highly detrimental and can severely eat into your profits. 

I've provided a list of potential ETFs for options trading in 2022, in descending order, based on daily options volume. They cover a variety of asset classes, including stocks, bonds, and commodities. 

• SPDR S&P 500 ETF (SPY)
• Invesco QQQ Trust Series 1 (QQQ)
• iShares Russell 2000 ETF (IWN)
• iShares Iboxx High Yield Corp Bond ETF (HYG)
• iShares 20+ Year Treasury ETF (TLT)
• ARK Innovation ETF (ARKK)
• SPDR Financial Select Sector ETF (XLF)
• SPDR Energy Select Sector ETF (XLE)
• SPDR Gold ETF (GLD)

Keep in mind that options trading can be dangerous. Some options strategies like selling naked calls and puts introduce unlimited risk. Before you decide to trade options on ETFs, ensure you have a strategy in place, a plan for managing risk, and know when to take profits and cut losses. If you're a new options trader, consider sticking to beginner strategies like covered calls, protective puts, cash-secured puts, collars, and long-term equity appreciation securities (LEAPS). 

Please note this article is for information purposes only and does not constitute investment advice.