ETFs With The Most Liquid Options

November 08, 2021

[Editor’s Note: This article was one of ETF.com's most popular of 2021.]

After months of holding at stubbornly high levels, expectations about volatility are retreating. The Cboe Volatility Index (VIX) traded down to around 15 last Friday, below the year-to-date average of 19.5 and nearly half of 2020’s average of 29.19.

The S&P 500 Index rose for seven straight sessions through Friday, notching record high after record high. Neither hot inflation readings nor the start of the Fed taper could dent the rally, giving investors the sense that it’s clear skies ahead.  

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 last March, its highest level ever. Today, it stands at more typical levels and has been hovering around the 15-17 range lately.

 

VIX

 

Options Market Active As Ever

Implied volatility is a key determinant of an option’s price. Today’s VIX suggests that options at the index level are reasonably priced—neither expensive nor cheap.

Investors use put options to hedge their portfolios against a market decline, while speculators use call options to juice their returns if markets go up. Options can also be combined into much more complicated strategies that use both put and call options.  

On the other side of the market are option sellers, who receive a premium for writing options contracts. One popular strategy is writing “covered calls,” whereby a stock or ETF holder will sell call options on their position. This gives them a little bit of extra return, but at the expense of lost upside if the strike price of the options is exceeded.

In today’s market environment, speculative call options have been in vogue, especially with retail investors, who are buying the options. According to the Wall Street Journal, the average daily options volume in 2021 has been double that of 2019.

SPY Trounces IVV

While a lot of this year’s options activity has taken place in individual stocks, there’s a ton of demand for options on ETFs as well.

In fact, 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 $427 billion in AUM, currently has 20.1 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 20,086,849
QQQ Invesco QQQ Trust 9,522,085
IWM iShares Russell 2000 ETF 7,712,509
EEM iShares MSCI Emerging Markets ETF 6,803,063
HYG iShares iBoxx USD High Yield Corporate Bond ETF 5,924,657

Source: Bloomberg. Data as of Nov. 5, 2021. 

 

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 26,323. 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 Invesco QQQ Trust (QQQ) currently has the deepest and most liquid options market based on open interest. The fund boasts total open interest of 9.5 million contracts, ahead of No. 3 on the list, the iShares Russell 2000 ETF (IWM), with open interest of 7.7 million contracts.

The iShares MSCI Emerging Markets ETF (EEM), the iShares iBoxx High Yield Corporate Bond ETF (HYG) 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 iPath Series B S&P 500 VIX Short Term Futures ETN (VXX) and the KraneShares CSI China Internet ETF (KWEB).

These ETFs have some of the most liquid options markets, even though they don't have a tremendous amount of assets. VXX, for example, only has AUM of $1.1 billion, while USO has $2.8 billion and XOP has $4.2 billion. That suggests these funds are popular with short-term traders.

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 20,086,849
QQQ Invesco QQQ Trust 9,522,085
IWM iShares Russell 2000 ETF 7,712,509
EEM iShares MSCI Emerging Markets ETF 6,803,063
HYG iShares iBoxx USD High Yield Corporate Bond ETF 5,924,657
XLF Financial Select Sector SPDR Fund 5,344,523
SLV iShares Silver Trust 5,118,887
XLE Energy Select Sector SPDR Fund 3,434,157
EWZ iShares MSCI Brazil ETF 3,264,123
GDX VanEck Gold Miners ETF 3,025,680
FXI iShares China Large Cap ETF 2,701,203
GLD SPDR Gold Trust 2,650,500
EFA iShares MSCI EAFE ETF 2,203,481
TLT iShares 20+ Year Treasury Bond ETF 1,801,881
VXX iPath Series B S&P 500 VIX Short Term Futures ETN 1,645,047
XOP SPDR S&P Oil & Gas Exploration & Production ETF 1,425,474
ARKK ARK Innovation ETF 1,221,571
KWEB KraneShares CSI China Internet ETF 1,204,170
USO United States Oil Fund 1,186,648
KRE SPDR S&P Regional Banking ETF 982,996

Source: Bloomberg. Data as of Nov. 5, 2021.

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

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