Best ETF’s For Trading Options

Last updated on September 13th, 2020

One of the unique challenges of being in a decade long bull market is the expensive stock prices that we are seeing across the board.

Nasdaq stocks like AMZN, TSLA, AAPL, GOOGL, FB, and NFLX are all active stocks that traders love to use but they also require large amounts of capital to take stock or options positions in.

While we love the movement that these stocks show, we don’t like having to use thousands of dollars to buy an individual call or put option.

 

Use ETFs For Exposure (and less cost)

Instead of avoiding these stocks due to the expensive prices, we like to use the Exchange Traded Funds (ETF’s) to get exposure to these markets for far less cost.

ETF’s are a type of investment fund that track assets like stocks, currencies, bonds, and commodities. They are similar in many ways to a mutual fund except they are traded on an exchange like an individual stock. In other words, we are able to get exposure to a whole basket of products through trading one ETF.

We are able to get instant diversification in a highly liquid individual product.

There are ETF’s that track specific index products:

  • S&P 500
  • Different sectors like energy or technology
  • Entire regions of the world like Asia or Europe.

Many retail traders overlook the ETF’s due to thinking they aren’t as active or powerful as the individual stocks like AAPL and AMZN. They think the big volatility that those stocks offer will lead to bigger profits.

While I’m not opposed to trading AAPL or AMZN, they are only a part of our toolbox. The ETF’s can actually produce much more consistent results with far less risk making them great complements to the individual stocks.

In the U.S. alone there are over 2000 ETF’s that are available to trade. While it is nice to have so many candidates to consider, it can also be overwhelming knowing which ones are best to trade.

We have a Watch List of 53 ETF’s that we like to track on a weekly basis at NetPicks.

 

My Full List Of ETFs To Trade

Before I share with you the exact list of ETF’s that we trade let’s take a look at what went into creating this watch list and how we use it each week.

ETF Watch List Criteria

1. Diversification – One of the top issues that holds retail traders back from producing consistent profits is the lack of diversification in their trading. So many traders get caught up in chasing the hot stock that is in the news at the moment and then loading the boat with big positions on that stock. It’s way too aggressive.

We much prefer to take a larger number of smaller positions. That way we can spread our capital across many different markets.

We want to make sure we have a mix of markets represented on our watch list. Depending on account size, we like to see traders with a watch list of 15-30 ETF’s that they look at on a regular basis. This will allow for good diversification regardless of what the market is throwing our way. We are able to quickly adjust to the market rotation that we see these days.

2. Liquidity – We mentioned earlier there are over 2000 ETF’s that are available in the U.S. While that is a great number, it doesn’t mean all of those ETF’s are worth trading. We want to make sure we are trading the products that have good liquidity in the options.

To track liquidity, we use both volume and open interest. We prefer there be good volume and open interest in the options that we are trading as this will make it easier to get in and out of trades quickly and at good prices.

We recommend looking for open interest in the options of 30x the number of contracts you are looking to trade. Doing so will make it easier to get good fill prices on your options orders.

Many of the ETF’s that are on our watch list have very liquid options which will result in tighter bid/ask spreads. The tighter the markets the better it is for us as active traders.

3. Cost Savings – Using ETF’s will allow us to get exposure to entire sectors of the market, entire regions of the world, or general index products for a fraction of the cost of trading the expensive individual stocks. We are looking to create a watch list of ETF’s that will give us the flexibility to use different options strategies that will lower the cost of taking multiple positions.

If trading call or put options on Amazon or Nike isn’t realistic due to the expensive cost required, you can trade an ETF like XLY which tracks the Consumer Discretionary stocks. Instead of using thousands dollars of capital trading options on Amazon, you can take a trade on XLY for a few hundred dollars.

The Consumer Discretionary ETF will be heavily influenced by the movement in stocks like Amazon and Nike but with far less risk.

For example, let’s say you want to put on a bullish position on AMZN through buying a call option in the monthly expiration cycle.

To buy the 3100 call options it would require over $17,000 of capital. That cost can be problematic for many retail traders.

Instead, you can buy the 146 call option on XLY for $435 per contract.

You get bullish exposure from the XLY position which will be heavily influenced by the movement in Amazon stock as AMZN is 24% of the ETF for a fraction of the cost.

Best Strategies for Trading ETF’s

Using ETF’s is a big part of our overall trading at NetPicks. They give us the flexibility that we are looking for as traders.

We can get access to a wider range of markets and in today’s ever-changing markets that is crucial to seeing consistent results.

Not only are we able to diversify with the different areas of the market that the ETF’s track but we are also able to use the flexibility that options offer with different strategies to react to changing market conditions.

We like to use a wide range of strategies with these products to best control our risk regardless of what the market is doing.

Here are the most popular strategies for trading our ETF Watch List:

  1. Buying and selling the shares of an ETF – We much prefer to use the options when trading the ETF’s as they will allow us to keep the risk lower and will give us multiple ways of making money. However, if you don’t feel comfortable trading options you can trade all of the ETF’s on our list buying or selling the shares of stock.
  2. Long Calls and Puts – The ETF’s tend to be better trending products when compared to trading individual stocks. This makes them prime candidates to buy and sell call and put options to make a directional bet. Buying calls when bullish and buying puts when bearish can lead to high reward with low risk trades.

We like to use long calls and long puts with 1/3 of our trading portfolio.

  1. Vertical Spreads – Our favourite options strategy long term is the vertical spread. They give us the most flexibility when reacting to different market conditions. We much prefer to use the credit spreads when trading the ETF’s. Selling a credit spread to open a trade will produce 5 ways of making money on a trade. This will give us a more forgiving trade with a higher winning percentage.

We are giving up some profit potential when using a vertical spread but in exchange we are able to stack better odds in our favor. On top of the better winning percentage, we are able to reduce the cost of the trades by 30-50% in many cases when compared to buying the individual call or put option.

We like to use vertical spreads with 2/3 of our trading portfolio.

NetPicks ETF Watch List

Below you will find our Watch List of ETF’s that we use on a weekly basis.

Keep in mind you don’t need to trade all of these products on a weekly basis. You can pare this list down depending on your account size. We like to see traders with a watch list of 15-30 names that they are tracking.

There are also names on the watch list that we don’t trade very often but we still track on a regular basis to get a better feel for overall market conditions.

DIA for example is an ETF that tracks the Dow Jones Industrial Average. I don’t trade DIA very often in my own trading, but it is a product that I track every day as it gives me a feel for overall market movement.

In our opinion you will want to have exposure to a list of ETF’s that you can trade on a regular basis. The list above is our go to list each week for our options trading. Establish a watch list of your own and you will be better equipped for the volatile conditions that are now a mainstay of today’s markets.

4 Responses to “Best ETF’s For Trading Options”

  1. Matthew Garza

    Just trying to learn as much as i can about everything im new to stocks…options… So i figured i might need to know how to do things right…I have a small account so my money is small and before i can do anything i have to make sure my stuff is on point..i dont have the money to play with to learn…Thank you and your team for the free stuff it really helped me alot

    Reply
    • CoachMike

      Hey Matthew thanks for the comment. Feel free to contact me directly with any questions you might have. We are more than willing to help you along the way. Mike@netpicks.com

      Reply
  2. John van Osnabrugge

    I am a NOS member for one month now and I payed the fee for two years. Allthough I am interested in the ETf’s I like to wait untill I earned my two years fee back. Let’s hope this will be fast

    Reply
    • CoachMike

      Hi John thanks for the comment. The NOS program has had 16 wins over the last 19 trades so hopefully you have started to see your account grow. Let us know when you would like to add the ETF’s as well and we will be in touch right away to help out.

      Reply

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