ETF options represent a more conservative approach to use options in our index trading system. In this page we will discuss the SPY option as well as the QQQQ option.
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As you already understood those options are related to etfs which are related to the indexes. So the SPY option is related to the SPY etf which represents the SP500 index. The QQQQ option is related to the QQQ etf and which represents the Nasdaq 100 index. As you know also the SPY ETF represents the SP500 index divided by 10. So if the SP500 index is at 1000 then the SPY etf will trade at 100. The QQQQ ETF represents the Nasdaq 100 index divided by 40. So if the Nasdaq 100 index is at 1600 the QQQQ ETF will be at 40. So if we decide to trade an ETF option we then trade a quite small slice of the underlying index thus reducing the risk, at the same time the premium is much lower. It becomes much more flexible as well. You can decide for instance to trade 3 SPY options. If you bought a call the SP500 index needs to move 10 points to increase the SPY option value by 1 dollar. With QQQ option the nasdaq 100 needs to advance 40 points to increase the QQQ option value by 1 dollar.
It is a lot easier also to choose an expiration month further in the future because the premium does not increase much over the months. So this trading tool suits quite well to trade the index market mid term. That would be much more difficult and dangerous with
index options
.
ETF options trading certainly represents a new interesting method to use our index trading system. Investors with small amount of money can use our index trading system.
