Options Trading With ETF’S (KWT, XLF)

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June 18, 2009 11:22am ETF BASIC NEWS

optionsThe most popular ETF’s boast great daily volume.   Some ETF’s have very low volume and investors do not trade them because they believe they are not liquid enough. 


“However, you don’t have to sweat the volume when you’re trading ETFs. Since every ETF share is composed of fragments of the equities on which it’s based, there should be no liquidity issues as long as the underlying stocks are sufficiently active. Of course, ETF options are a different animal,”  Says Elizabeth Harrow from schaeffersresearch.com.

“In other words, ETF options are not composed of fragments of options on the equities on which it’s based. Rather, ETF options are straightforward derivatives based on the performance of the underlying fund. So, I must admit that you could potentially encounter low liquidity-related issues when trading these contracts,”  Says Elizabeth Harrow.

They way to avoid these issues would be to “Keep an eye on the bid/ask spreads of the ETF you’re interested in trading. If you’re looking at a five-point differential, that’s kinda disturbing. There’s no set benchmark for this, but I would be very wary of trading ETF options that have low volume and minimal open interest combined with drastic bid/ask spreads. I’m not saying it’s a recipe for disaster; instead, I’m simply suggesting that you might have trouble entering or exiting the position at desirable prices,”  Says Elizabeth Harrow.

I have included an example of the call/put option spreads between a low volume ETF -Market Vectors Solar Energy ETF (KWT) and a high volume ETF -Financial Select Sector SPDR (XLF).  As you see below, the low volume ETF-KWT has bid/ask spreads of $.70 cents versus the high volume ETF-XLF has bid/ask spreads of $.15 cents. 

ETF -Market Vectors Solar Energy ETF (KWT)   (View By Expiration: Jun 09)

CALL OPTIONS Expire at close Fri, Jun 19, 2009
Strike Symbol Last Chg Bid Ask Vol Open Int
14.00 KKJFN.X 2.40 0.00 0.95 1.65 4 5
15.00 KKJFO.X 1.75 0.00 0.05 0.70 5 15
16.00 KKJFP.X 1.20 0.00 N/A 0.20 60 63
18.00 KKJFR.X 0.40 0.00 N/A 0.20 20 20
PUT OPTIONS Expire at close Fri, Jun 19, 2009
Strike Symbol Last Chg Bid Ask Vol Open Int
12.00 KKJRL.X 0.10 0.00 N/A 0.20 1 10
15.00 KKJRO.X 1.55 0.00 N/A 0.30 20 20
16.00 KKJRP.X 1.25 0.00 0.40 1.05 10 30
17.00 KKJRQ.X 2.30 0.00 1.35 2.05 10 10
18.00 KKJRR.X 3.00 0.00 2.35 3.10 10 10

 

ETF -Financial Select Sector SPDR (XLF)   (View By Expiration: Jun 09)

 
CALL OPTIONS Expire at close Fri, Jun 19, 2009
 
Strike Symbol Last Chg Bid Ask Vol Open Int
3.00 XJZFC.X 8.95 0.00 8.80 8.95 43 252
4.00 XJZFD.X 7.90 0.00 7.80 7.95 3 113
5.00 XJZFE.X 7.35 0.00 6.80 6.95 4 16,457
6.00 XJZFF.X 6.44 0.00 5.80 5.95 3 7,557
7.00 XJZFG.X 4.85 0.00 4.80 4.90 5 44,597
8.00 XJZFH.X 3.90 Up 0.04 3.80 3.95 36 43,869
9.00 XJZFI.X 2.86 Up 0.23 2.85 2.89 74 276,228
10.00 XJZFJ.X 1.92 Up 0.26 1.83 1.89 1,063 266,448
11.00 XJZFK.X 0.87 Up 0.18 0.85 0.87 530 313,815
12.00 XJZFL.X 0.08 Up 0.02 0.07 0.08 8,966 248,587
13.00 XJZFM.X 0.02 0.00 N/A 0.01 23 252,234
14.00 XJZFN.X 0.01 0.00 N/A 0.01 1,551 184,880
15.00 XJZFO.X 0.01 0.00 N/A 0.01 1 74,873
16.00 XJZFP.X 0.02 0.00 N/A 0.01 110 28,834
17.00 XJZFQ.X 0.02 0.00 N/A 0.01 40 22,588
18.00 XLFFR.X 0.02 0.00 N/A 0.02 10 4,639
19.00 XLFFS.X 0.01 0.00 N/A 0.02 10 3,476
20.00 XLFFT.X 0.01 0.00 N/A N/A 50 2,857
21.00 XLFFU.X 0.01 0.00 N/A 0.02 30 1,059
22.00 XLFFV.X 0.01 0.00 N/A 0.02 20 453
23.00 XLFFW.X 0.02 0.00 N/A 0.02 0 626
24.00 XLFFX.X 0.25 0.00 N/A 0.02 0 110
25.00 XLFFY.X 0.19 0.00 N/A 0.02 0 396
 
PUT OPTIONS Expire at close Fri, Jun 19, 2009
 
Strike Symbol Last Chg Bid Ask Vol Open Int
1.00 XJZRA.X 0.02 0.00 N/A 0.01 0 1
2.00 XJZRB.X 0.02 0.00 N/A 0.01 0 35
3.00 XJZRC.X 0.01 0.00 N/A 0.02 40 8,593
4.00 XJZRD.X 0.01 0.00 N/A 0.02 50 5,756
5.00 XJZRE.X 0.01 0.00 N/A 0.02 10 60,647
6.00 XJZRF.X 0.01 0.00 N/A 0.01 20 292,149
7.00 XJZRG.X 0.01 0.00 N/A 0.01 1 226,055
8.00 XJZRH.X 0.01 0.00 N/A 0.01 25 133,606
9.00 XJZRI.X 0.01 0.00 N/A 0.01 1 260,536
10.00 XJZRJ.X 0.01 0.00 N/A 0.02 252 337,193
11.00 XJZRK.X 0.02 Down 0.01 0.01 0.02 2,125 292,812
12.00 XJZRL.X 0.26 Down 0.22 0.27 0.28 6,367 206,837
13.00 XJZRM.X 1.19 Down 0.26 1.18 1.20 544 43,143
14.00 XJZRN.X 2.20 Down 0.14 2.15 2.22 2 15,245
15.00 XJZRO.X 3.15 Down 0.30 3.10 3.25 10 7,426
16.00 XJZRP.X 3.80 0.00 4.10 4.25 3 3,459
17.00 XJZRQ.X 5.24 Down 0.11 5.10 5.25 38 1,638
18.00 XLFRR.X 6.30 0.00 6.10 6.25 12 2,020
19.00 XLFRS.X 7.30 0.00 7.10 7.25 10 1,940
20.00 XLFRT.X 8.25 Down 0.05 8.10 8.25 53 1,407
21.00 XLFRU.X 9.30 0.00 9.10 9.25 20 485
22.00 XLFRV.X 10.18 Down 0.07 10.10 10.25 10 142
23.00 XLFRW.X 11.95 0.00 11.10 11.25 10 142
24.00 XLFRX.X 11.62 0.00 12.10 12.25 10 66
25.00 XLFRY.X 13.50 0.00 13.10 13.25 32 93

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