29 Option Spread Strategies You Need to Know (Part 2)
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For many traders, the only thing more exciting than the prospect of exchange-traded fund ETF trading is the idea of trading options on ETFs. But for some traders who trading options trading etfs part 2 to leverage both the power of our high probability ETF trading strategies, and the power of derivatives, the idea of buying and selling calls trading options trading etfs part 2 puts on ETFs is irresistible.
Trading options on ETFs allows traders to use the leverage of the derivatives market to potentially increase gains from high probability ETF trades. But not all ETFs have liquid options for traders to use. Traders looking to make options trading a part of their ETF trading strategies should make sure that the options that would be used are liquid, with relatively tight spreads.
Options Table Courtesy of OptionsXpress. Calls, of course, are options that traders trading options trading etfs part 2 when they think that prices are headed higher. A call gives the owner the right, but not the obligation, to buy stock at a pre-set price.
By contrast, a deep out of the money call would have a strike of 50, 55 or higher. The same strategy works for traders who receive short ETF signals and want to express that market opinion using puts. Puts are used by traders who believe that prices are likely to head lower in the near term and increase in trading options trading etfs part 2 as their underlying market retreats. And as with calls, buying puts that are deep in the money is the preferred way for traders to use puts on overbought ETFs if the ETF is trading at 38, a deep in the money put would have a strike price of 45 or Why a deep in the money option as a choice for ETF traders using options?
When trading options as, essentially, ETF substitutes, traders should use deep in the money options because those options are most likely to closely track their underlying asset an ETF in this case. While out of the money options often provide greater leverage and are an attractive alternative to many, there are a few dangers with trading out of the money OTM options that ETF traders should keep in mind.
Foremost, because the options are out of the money, they have no intrinsic value. Practically speaking this means that, among other things, adverse price movements in the underlying could have a major impact on the price of an OTM option. As such, even when the underlying rebounds and perhaps closes profitably as a straight ETF trade, an options trader who used deep out of the money options may not see his or her OTM options recover significantly before it is time to exit.
This can be all the more true as options expiration day approaches. Trading options — options on stocks or options on ETFs — can be complicated for some. But a basic understanding of what options are, and the difference between trading in the money and out the money calls and puts, is something that most traders can grasp — trading options trading etfs part 2 after a little reading and a little practice.
Try, for example, paper trading ETFs using different types of options — out the money, in the money — and see how the results and risks for yourself. At Connors Research, we are using it as an trading options trading etfs part 2 to many of our best strategies to make them even better -- now you can, too.
The Connors Group, Inc.