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How to trade ndx options

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how to trade ndx options

Join the NASDAQ Community today and get free, instant access to portfolios, stock ratings, real-time alerts, and more! When investors first enter the realm of options trading, they typically stick to buying vanilla puts and calls on individual stocks. However, stocks aren't the only optionable entities on Wall Street. Whether you're bullish on utilities or bearish on regional banks, there's a good chance that you can find an index or exchange-traded fund ETF that aligns with your trading ideas. What's more, these vehicles allow you to diversify your portfolio, trade loading up on a multitude of stocks or options, creating a low cost way to reduce risk. But, before we get ahead of ourselves, let's back up a bit. An index is a statistical compilation of several stocks that are related in some manner into one number. Meanwhile, an exchange-traded fund more commonly referred to as an ETF is an investment vehicle that contains how pool of securities representing a sector or specific index. ETFs are composed like mutual funds, but they trade just like stocks. In other words, both indexes and ETFs represent the performance of a particular group or sector of the stock market. Whether you're interested in commodities, home builders, defense stocks, or alternative energy, I guarantee you can find an index or ETF that's focused on ndx specific sector. So, how do you play ETF or index options? Just as you would any other option. Let's say that you anticipate a short-term rally in the airline sector. You could always buy stock in Delta Air Lines DAL and hope for the best -- but what if Delta's entire fleet is spirited away by pirates in the dead of night, and the shares tank as a result? You'd miss out on the entire airline-sector rally! This is where index and ETF options come in handy -- if you're bullish or bearish on a given sector, but you want to protect yourself against weakness or strength in any one particular security within that group. In this instance, you could purchase a call option on the AMEX Airline Index XAL. By placing your bet on XAL, you'll gain exposure to sector heavyweights such as Delta, UAL Corp. UAUAContinental Airlines CALand US Airways LCC. If the group rallies as how expect, the use of a call option will how your profits. Ideally, the group's overall performance will effectively offset any outliers -- in the above worst-case scenario, that would be the hypothetically tanking shares of Delta. And even how the sector fails to soar, your only loss on the position will be the premium you paid to enter the option trade. You ndx also use ETF and index options to inexpensively hedge your stock holdings, your other option positions, or even your entire portfolio. For example, let's say you've decided to short a specific stock within the natural gas sector. However, you're concerned that rising natural gas prices could throw a wrench in your trading strategy. In order to hedge against this possibility, you could purchase a call option on the United Options Natural Gas Fund UNG. In this manner, you can take part in a sector-wide rally, and any gains in the long option will help to offset potential losses on the stock you sold short. Think of the premium you pay for the UNG call as a car insurance payment -- you ndx you won't need it, but it's there just in case. Alternatively, let's say that you anticipate a period of short-term weakness in the broader equities market. Overall, there's no reason not to trade ETF and index options. There are a variety of uses -- in addition to straightforward speculation, you can use them to hedge, or in tandem with other option plays as part of a pairs trade. There's no time like the present to familiarize yourself with these endlessly useful trading tools. Schaeffer's Investment Research Inc. Please click here to sign up for free newsletters. Founder Bernie Schaeffer is the author of the groundbreaking book, The Option Advisor: The views and opinions expressed herein are the views ndx opinions of the author and do not necessarily reflect those of Nasdaq, Inc. Unauthorized reproduction of any SIR publication is strictly prohibited. Enter up to 25 symbols separated by commas or spaces in the text box below. These symbols will be available during your session for use on applicable pages. You have selected to change your default setting for the Quote Search. This will now be your default target page; unless you change your configuration again, or you delete your cookies. Are you sure you want to change your settings? Please disable your ad blocker or update your settings to ensure that javascript and cookies are enabledso that we can continue to provide you with the first-rate market news and data you've come to expect from us. Company News Market Headlines Market Stream. Economic Calendar Business Video Technology News. 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3 thoughts on “How to trade ndx options”

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