ETF Options
Exchange-traded funds are vehicles that represent ownership in a fund or
investment trust. This fund is made up of a basket of an underlying index’s
securities—usually equities. The contract specifications of ETF options are
similar to those of equity options. Let’s look at an example.
One actively traded optionable ETF is the Standard & Poor’s Depositary
Receipts (SPDRs or Spiders). Spider shares and options trade under the
symbol SPY. Exercising one SPY call gives the exerciser a long position of
100 shares of Spiders at the strike price of the option. Expiration for ETF
options typically falls on the same day as for equity options—the Saturday
following the third Friday of the month. The last trading day is the Friday
before. ETF options are American exercise. Traders of ETFs should be
aware of the relationship between the price of the ETF shares and the value
of the underlying index. For example, the stated value of the Spiders is
about one tenth the stated value of the S&P 500. The PowerShares QQQ
ETF, representing the Nasdaq 100, is about one fortieth the stated value of
the Nasdaq 100.