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Why Aren’t Index Options Listed On This Popular ETF?

Posted by Pete Stolcers on February 13, 2009

Option Trading Question

This question was posted in October of 2007, but the answer still applies to future option listings. The QID is a huge product (ETF of double short NASDAQ). I would think it would have a large speculative appeal as a listed index option. Is there some rule or reason there are no options listed for this product?

Option Trading Answer

The demand for a particular determines if options will listed. The Market Makers/Specialists that commit time and resources to maintaining an orderly market need to know that all of their expenses will be justified. They make money by buying bids, selling offers and hedging risk through futures or the underlying basket of stocks. If the liquidity is not there, they will lose money because of their upfront and ongoing expenses. Most of there function is currently done by auto-quote and the positions are electronically hedged in seconds. There aren’t the man-hours like there used to be, but there are still costs.

In this instance, traders have many alternatives to achieve an equivalent QID position in existing, liquid markets. Instead of going long a QID, they calculate the coresponding ratio and they short in the NDQ futures or QQQQ. The options in those products are also very active and the bid/ask is tight. There is no advantage to trading QID except for IRA accounts where you can only go long. Most IRA accounts will let you buy puts anyway. There are so many ETFs being listed that someday there will be more ETFs than stocks, just as there are more mutual funds than stocks. 

As soon as you get off “the beaten path”, option bid/ask spreads widen out. When there is an equivalent way to structure a trade using liquid markets, that will always be your best option. Greater liquidity means there are more people to take the other side of your trade and you are not at the mercy of a Market Maker who won’t budge on a wide bid/ask.

When it comes to liquidity can be an issue. However, every company is different and in many instances, I can justify taking a position even if the option bid/ask spreads are wide. In these cases, it has to be a long-term trade using at least 4-month options. I do not want to navigate that bid/ask more than twice - once on the entry and once on the exit.

Thank you for the question.

Option Trading Comments

  • On 10/07, Shawnya Michaels said:

    What are bearish ETF’s like TWM? They don’t have anything listed in their portfolio, but they are currently showing a bullish trend. Are they a good trade for the current market?

  • On 02/26, Jason said:

    I tried to submit a question, but was denied...so I’ll ask it here.

    Something stuck me in your latest post you said

    “Commodity prices will rise on that alone and it will be important to gauge commodity prices based on the yen (not the dollar). It is currently one of the strongest currencies.”

    I have been watching USD/JPY over the last month or so and noticed it consolidated and broke out to the upside. The dollar against the yen has nearly been up in a straight line for the past 8 days. Many thoughts and questions come to mind…

    As the yen weakens agains the dollar, is this just a minor retracement before the dollar starts to weaken again?

    I have also noticed the correlation between the Yen and /ES...when the Yen is up, /ES is down and vice versa. If the Yen is going to regain it’s strength against the dollar again, would that mean this updraft in /ES has run it’s course?

    If the Yen is going to get stronger against the dollar, what is the best way to play that trend? Sell puts in FXY? Buy calls in FXY?

    How do you base a commodity price against the Yen versus the dollar?

    Sorry for all the questions...and Thanks in advance for any answers you may be able to provide.

  • On 02/26, Ivory D. Hills said:

    Pete,

    Thanks for your fantastic site.  It is one of about four sites I visit on a daily basis.  I had a quick question concerning your constant desire to sell OTM put spreads on “strong stocks”.  No doubt if you do this on the appropriate stock you can make money in this environment; however, why do you think this is a higher probability strategy than selling OTM call spreads on “weak stocks”?  For the last three months you have been bang on with regards to the overall market direction(I’ve agreed with you the whole way); furthermore, it looks like things are going to get worse.  Based on this assessment it simply seems that taking a delta negative position would be a better thing to do.  I’m a profitable options trader, but I’ve only been doing this for two years and until I’ve been doing this for about half a century, I’ll assume I still have alot to learn so any additional insight is most appreciated.

    Thanks!

  • On 02/27, Pete Stolcers said:

    Long term (1-2 years) the dollar will weaken against the yen as we issue more debt and run huge deficits. Short term, the dollar is a flight to quality because of the woes in Europe and the long standing strength of the US.

    To calculate gold on a relative basis, divide the price of gold by the yen/dollar exchange rate. As the yen rises or the dollar falls, the exchange rate will increase. That means you are dividing gold by a bigger number and you are factoring out the declining dollar’s influence on gold.

  • On 02/27, Pete Stolcers said:

    Selling OTM call spreads has been a great strategy on weak stocks. Unfortunately, I have been wounded by bear market rallies in the past and I find it easier to adjust risk on short put positions when the market is drifting lower than to try and reel in call spreads when the market flies higher. Prices are very compressed and one event could spark a huge rally. For instance, if we find Osama Bin Laden, who knows what that could do for confidence in Obama and our war on terrorism. I’m not saying that is going to happen, but the news can come from anywhere. The weak stocks are also compressed and any shred of good news will shoot those stocks higher. My approach has more to do with predicatbility than anything else. When a good stock has been beaten senseless, it tends not to go dwon even if the market suffers another loss.  Thanks for a great question.

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