March 11, 2008 at 11:00 am by Tom Lydon
Options trading with exchange traded funds(ETFs) has been surging lately, with the most recent spike taking place last month.
It appears people were getting defensive, according to Joe Cusick, market analyst for optionsXpress.
Options are different from simply buying a stock or ETF: they’re used to bet on the direction of an ETF or stock’s price. There are two types: calls and puts. When you buy a call option, you have the right to buy a stock at the "strike price" before the option’s expiration. When you buy a put option, you have the right to sell a stock at the strike price.
Murray Coleman for Seeking Alpha says that the market volatility could be the reason options are suddenly gaining in popularity. They can be a way to hedge your bets against wild swings.
Not all ETFs are a big portion of options trading, and just three ETFs in particular have made up the bulk of the activity:
- The iShares Russell 2000 Index Fund (IWM) has averaged
395,383 daily options volume, a 97% increase from the same period a
year ago. - PowerShares QQQ (QQQQ) averaged 268,000 in options trading per day, up 61% compared with the same time last year.
- SPDRs (SPY) averaged 337,000 daily options trades, up 242%.
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