As one of the fastest growing investment vehicles in recent years, ETF option trading is being viewed as a sound method for buying and selling. While ETFs are relatively new to the investment arena, ETFs and options should be understood in order for the investor to decide if ETFs are a good addition to her portfolio.
What Are Options?
An option in the financial world is the claim to sell or buy a stock or ETF before a certain date at a set price. It is a privilege sold from one person or group to another person or group. The right to make this transaction is valuable, and investors buy and sell these rights on the market. There is plenty of speculation involved in options, as the market can go in either direction unexpectedly.
When it comes to ETF options, the ability to buy is considered conservative, because the investor already owns the ETF. Think of a cattle rancher to better understand how a seller can benefit with ETF options; the cattle rancher can arrange to sell grown cattle in one year from the newborn calves he already owns. The cattle rancher is locking in the price for a future transaction today and pockets the cash. If the price of beef drops in the next year, he comes out ahead; if the price skyrockets, his buyer gets a great deal and the rancher experiences huge losses.
The Pros of ETF Options
ETF options can be bought (call) and sold (put) in accordance with an investor's strategy. Experience and research are key components when it comes to using ETF options as an investment tool. Many investors choose ETF options over index options because, although they are similar, there are important differences. ETF options buy and sell like stocks, with a physical delivery of the security, or the ETF itself, while index options require cash to settle. Investors often consider ETF options as versatile aspects of a portfolio, as they can hedge against losses and also be used to speculate.
 | What are ETFs? Exchange Traded Funds combine an index fund's diversity with a stock's flexibility. Learn more about what they can do for your portfolio. |
 | ETFs, or exchange-traded funds, have grown in popularity. These investment vehicles can be described as index funds that are traded similar to stock shares, and they both follow the performance of an index. Many investors often ask themselves whether they should use ETFs or index mutual funds. |
 | An exchange-traded fund, or ETF, is a fund that follows an index. An inverse ETF is an investment strategy that seeks to make a profit when prices fall. Many investors turn to inverse ETFs when the markets are falling with the goal of hedging portfolios. |
An ETF seems like the perfect balance between a stock and a mutual fund. It offers diversity, yet you can still buy and sell it like a stock. But the popularity of ETFs doesn't mean they are appropriate for you. |
Exchange-traded funds sprung onto the investment scene nearly 15 years ago, but they've been stealing the spotlight from their more mature mutual fund cousins in recent years. |
