The easiest way to search for ETFs that you can buy and sell
options on is to screen for them using a stock screener like
It's extremely easy to do so and only requires 3 simple steps.
1. Click on the 'All' tab
2. Set Average Volume to "Over 1M"
3. Set Option/Short to "Optionable"
This first screen is a necessary part of the process when trading
options on ETFs. That's because many ETFs are not optionable,
meaning options are not available on the ETF. If the ETF is
optionable it may still lack the volume necessary to make a sound
and reasonable option investment.
Lack of volume is the main reason that I do not use individual
stocks in my strategies. Most stocks do not offer liquid options.
And the ones that do are subject to volatile moves due to
unforeseen announcements, earnings surprises, etc. There is no need
to take on this type of risk knowing that I can make consistent
gains using ETF options.
Anyway, this screen will save you lots of time.
I suggest saving this screen for future reference so you can go
back and check your list to see if your next ETF of choice is
optionable. You'll thank me later, as I will show you why
this will be a true time saver.
The most important search criteria for finding what I call
'tradeable' options on ETFs -
. The reason I search for ETFs with an average volume over 1
million shares traded is because I want liquid options. Liquidity
directly translates into a reasonable bid/ask spread for options -
this is critical.
The more liquid the option the tighter the bid/ask spread. This is
extremely important because the bid/ask spread impacts the cost of
using options. Wide bid/ask spreads eat into the potential
profitability of your investment, and contribute to what is known
A real world example of how volume effects the bid/ask spread
should help to clarify.
Powershares Nasdaq 100 (
Market Vectors Agribusiness (
for our example. I chose these two ETFs because they both have
share prices of roughly $50 a share. I want to choose two ETFs with
equal properties, other than volume. The impact of volume will be
blatantly obvious on the bid/ask spread.
If you look at the September 50 calls for both stocks you will see
the following bid/ask spread:
Notice the difference?
The bid/ask spread is $.02 on QQQ compared to an enormous $0.40 on
This difference is the reason why a tight bid/ask spread is so
critical when using options as part of your investment strategy.
You can rarely buy an options contract at anything other than the
ask price, and you can rarely sell one at anything other than the
bid, especially if the options are illiquid. With a wide bid/ask
spread you are technically underwater 10 to 30 percent or more,
right from the get go. Nobody wants to be required to earn 10% -
30% just to breakeven.
Just think if you bought MOO and paid $2.10 for the option
contract, you would have to make $0.40 or 19% just to break even.
Of course, you could try to wiggle your way into the price by
placing a bid at $2.30 in between the bid/ask price, but you would
still have to make $0.20 or just over 8.5% to breakeven. This is
why it is
to only use options that are liquid and have tight bid/ask spreads.
In conclusion, dealing with the bid/ask spread is an inevitable
part of the options arena. Focus on more liquid and actively traded
contracts that have smaller bid/ask spreads, rather than stocks
with little to no volume and wide spreads.
Once you put this lesson to work using options as part of
our investment strategies you will save yourself many headaches and
most importantly, hard-earned money
Editor and Chief Options Strategist