ETF Futures and Options
ETF futures and options are derivative products based on existing exchange traded funds. Futures address an agreement to buy or sell shares of an underlying ETF at a settled upon price at the latest a predetermined date from here on out. Options, then again, give the holder the right, however not the obligation, to trade the underlying ETF shares at a settled upon price prior to a predetermined date from here on out.
Derivatives in the ETF market operate equivalent to an individual equity option or futures contract. These products are typically used to take a speculative bet on the economy, index, or specific sector with less capital outlay.
Grasping ETF Futures and Options
ETF futures and options have developed in fame with the increased adoption of standard exchange-traded funds. These unique products give the productivity of a traditional ETF with the flexibility of options trading. Thusly, investors can gain exposure to the performance of an index or sector without committing large measures of capital.
Moreover, options are a great device for hedging against a drawdown in a specific sector or asset classes. Having these components can upgrade a portfolio's return, as investors profit from the developments of an ETF with an additional layer of leverage. Beginning with ETF options is logistically equivalent to traditional options trading. There are standard put and call options traded in blocks of 100 shares in the underlying asset.
ETF futures operate similarly as a normal futures contract. These contracts never claim the asset, however keep the capital moving starting with one basket of futures then onto the next. This means investors don't have direct exposure to the underlying assets and must deal in cash terms.
Most ETF futures track the commodity and currency markets, similar to the case for normal futures contracts. Commodities welcome speculative trades on the future price developments of raw materials used to create different products.
Risks with ETF Futures and Options
The greatest weakness of ETF futures is the contango effect. This happens when the future price of a commodity surpasses the expected future spot price. As such, the future spot price is below the current price, and investors will pay more for the commodity in the future than its true value.
Moreover, derivatives like options and futures are dangerous for unpracticed investors. The two products are time-delicate investments subject to systematic drawdowns, counterparty risk, and price risk.
Features
- Moreover, ETF futures are like normal futures contracts. Investors never claim the asset, however keep capital moving starting with one basket of futures then onto the next.
- ETF options work just like traditional stock options. There are standard put and call options traded in blocks of 100 shares in the underlying asset.
- Likewise with traditional futures and options trading, ETF futures and options are risky for unpracticed investors.
