ETFs With The Most Liquid Options

August 07, 2019

Options just got a lot more expensive. An escalation of the trade war between the U.S. and China sent stocks plunging and volatility surging on Monday, boosting the cost of options on stocks and ETFs.

The CBOE Volatility Index (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 25, its highest level since early January.

Implied volatility is a key determinant of an option’s price. A VIX of 25 means that S&P 500 Index options are roughly 65% more expensive than their five-year average and 45% more expensive than their 10-year average.

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 (SPY) has the most liquid options market of any ETF or even stock. The world's largest ETF, with $268 billion in assets under management (AUM), currently has 19.4 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 19,401,425
EEM  iShares MSCI Emerging Markets ETF 9,559,353
QQQ  Invesco QQQ Trust 6,723,139
IWM  iShares Russell 2000 ETF 4,626,784
HYG  iShares iBoxx $ High Yield Corporate Bond ETF 4,125,567

Source: Bloomberg. Data as of Aug. 5, 2019. 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 $183 billion iShares Core S&P 500 ETF (IVV). The second-largest ETF by assets only has total options open interest of 7,528. 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 MSCI Emerging Markets ETF (EEM) has the deepest and most liquid options market. The fund boasts total open interest of 9.6 million contracts, well above No. 3 on the list, the Invesco QQQ Trust (QQQ), with open interest of 6.7 million contracts.

The iShares Russell 2000 ETF (IWM), the SPDR Gold Trust (GLD) and the iShares MSCI EAFE ETF (EFA) are a few other behemoths with active options markets.

Then there's also a number of ETFs on the list that are punching well above their weight. Those include the VanEck Vectors Semiconductor ETF (SMH), the United States Oil Fund (USO), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the iShares MSCI Brazil ETF (EWZ), the iShares Silver Trust (SLV) and the iShares China Large-Cap ETF (FXI).

These ETFs have some of the most liquid options markets, even though they don't have a tremendous amount of assets. SMH, for example, only has AUM of $930 million, while XOP has $1.8 billion. That suggests these funds are popular with short-term traders—not a surprise considering that semiconductors, oil, Brazil, silver and China are among the most volatile areas of the markets.

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

 

Ticker Fund Open Interest
SPY  SPDR S&P 500 ETF Trust 19,401,425
EEM  iShares MSCI Emerging Markets ETF 9,559,353
QQQ  Invesco QQQ Trust 6,723,139
IWM  iShares Russell 2000 ETF 4,626,784
HYG  iShares iBoxx $ High Yield Corporate Bond ETF 4,125,567
EFA  iShares MSCI EAFE ETF 3,947,224
FXI  iShares China Large-Cap ETF 3,555,439
GDX  VanEck Vectors Gold Miners ETF 3,354,685
EWZ  iShares MSCI Brazil ETF 3,236,333
GLD  SPDR Gold Trust 3,111,171
XOP  SPDR S&P Oil & Gas Exploration & Production ETF 2,912,814
SLV  iShares Silver Trust 2,557,681
XLF  Financial Select Sector SPDR Fund 2,518,648
USO  United States Oil Fund LP 2,016,862
TLT  iShares 20+ Year Treasury Bond ETF 1,088,178
XLE  Energy Select Sector SPDR Fund 866,920
KRE  SPDR S&P Regional Banking ETF 740,587
SMH  VanEck Vectors Semiconductor ETF 695,555
OIH  VanEck Vectors Oil Services ETF 686,810
XLU  Utilities Select Sector SPDR Fund 555,199

Source: Bloomberg; data as of Aug. 5, 2019
 

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

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