ETFs With The Most Liquid Options

August 31, 2019

Stocks may be coasting to record highs, but investors are still bracing for volatility. The S&P 500 Index hit a new all-time high last week, but the Cboe Volatility Index (VIX) held stubbornly above 20—a level that in recent years has been associated with turbulent markets.

Though the VIX is down from the heady levels of March, the fact that it refuses to go below 20 suggests that investors are still hedging their bets with options, perhaps anticipating renewed volatility later this year due to the coronavirus or the U.S. presidential election.

The VIX, which measures the “implied volatility” of S&P 500 Index options based on how much investors are willing to pay for them, jumped to nearly 83 in March, its highest level ever. It’s currently hovering around 25.

Implied volatility is a key determinant of an option’s price. A VIX of 25 means that S&P 500 Index options are roughly 40% more expensive than their five- and 10-year averages.

Options Market Active As Ever

Expensive options are either a good thing or a bad thing, depending on who you ask. For investors looking to hedge their portfolios against a market decline using put options, or for speculators interested in betting on more gains in the stock market using call options, it will cost a pretty penny.

The opposite is the case for options sellers. They are receiving a solid premium for writing options contracts.

In any case, high volatility is not a bad thing for the options market—which remains as active as ever—particularly when it comes to ETFs. Below, we look at the 20 ETFs with the most liquid options markets.

SPY Trounces IVV

Just as is perennially the case, the SPDR S&P 500 ETF Trust (SPY) has the most liquid options market of any ETF or even stock. The world's largest ETF, with $303 billion in assets under management (AUM), currently has 22.7 million options contracts outstanding—also called “open interest” (each options contract gives the owner the right to 100 shares of the underlying ETF; the right to buy in the case of calls; and the right to sell in the case of puts).

Bid/ask spreads on SPY options are often no more than a penny wide, minimizing transaction costs for those who want to hedge or speculate on the S&P 500. Here are the top five ETFs with the most liquid options. (For full list of the top 20, see table at the end of the story.)

 

Ticker Fund Open Interest
SPY  SPDR S&P 500 ETF Trust 22,683,856
SLV  iShares Silver Trust 8,919,983
QQQ  Invesco QQQ Trust 8,578,043
IWM  iShares Russell 2000 ETF 7,430,732
EEM  iShares MSCI Emerging Markets ETF 6,909,528

Source: Bloomberg. Data as of Aug. 27, 2020. For the full list, see the table at the end of the article.

 

Even though SPY is the largest ETF and has the most liquid options market, that correlation doesn't always hold true. There are plenty of big funds with illiquid or even nonexistent options markets.

Take the $217 billion iShares Core S&P 500 ETF (IVV). The second largest ETF by assets only has total options open interest of 11,863. That's nothing for a fund of that size. Bid/ask spreads for IVV options are huge, making the fund a poor choice for options traders.

Some ETFs Punching Above Their Weight

After SPY, the iShares Silver Trust (SLV) currently has the deepest and most liquid options market based on open interest. The fund boasts total open interest of 8.9 million contracts, just ahead of No. 3 on the list, the Invesco QQQ Trust (QQQ), with open interest of 8.6 million contracts.

The iShares Russell 2000 ETF (IWM), the iShares MSCI Emerging Markets ETF (EEM) and the Financial Select Sector SPDR Fund (XLF) are a few other behemoths with active options markets.

Then there are also a number of ETFs on the list punching well above their weight. Those include the United States Oil Fund LP (USO), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the iShares China Large-Cap ETF (FXI), the Invesco DB U.S. Dollar Index Bullish Fund (UUP) and the ProShares UltraPro Short QQQ (SQQQ).

These ETFs have some of the most liquid options markets, even though they don't have a tremendous amount of assets. UUP, for example, only has AUM of $417 million, while SQQQ has $1.4 billion and XOP has $2.2 billion. That suggests these funds are popular with short-term traders—not a surprise considering that currencies, oil and the tech-heavy Nasdaq are trader favorites.

Here is a full list of the top 20 ETFs with the most liquid options:

 

Ticker Fund Open Interest
SPY  SPDR S&P 500 ETF Trust 22,683,856
SLV  iShares Silver Trust 8,919,983
QQQ  Invesco QQQ Trust 8,578,043
IWM  iShares Russell 2000 ETF 7,430,732
EEM  iShares MSCI Emerging Markets ETF 6,909,528
XLF  Financial Select Sector SPDR Fund 5,567,791
GLD  SPDR Gold Trust 4,791,982
USO  United States Oil Fund LP 3,663,653
HYG  iShares iBoxx USD High Yield Corporate Bond ETF 3,300,724
EFA  iShares MSCI EAFE ETF 3,187,622
FXI  iShares China Large-Cap ETF 2,805,143
GDX VanEck Vectors Gold Miners ETF 2,632,608
EWZ  iShares MSCI Brazil ETF 2,276,920
XOP  SPDR S&P Oil & Gas Exploration & Production ETF 1,876,820
XLE  Energy Select Sector SPDR Fund 1,513,040
VXX  iPath Series B S&P 500 VIX Short Term Futures ETN 1,429,110
TLT  iShares 20+ Year Treasury Bond ETF 1,098,331
LQD  iShares iBoxx USD Investment Grade Corporate Bond ETF 951,260
UUP  Invesco DB U.S. Dollar Index Bullish Fund 849,948
SQQQ  ProShares UltraPro Short QQQ 665,314

Source: Bloomberg; data as of Aug. 27, 2020

 

​Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2

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