Definition
ETF options are option contracts whose underlying asset is an exchange-traded fund, a basket of securities that trades like a single stock. Common examples include options on broad index funds, sector funds, and bond funds.
Because an ETF holds many securities, an option on it gives exposure to a whole market segment at once. The contracts trade and clear through the same mechanics as single-stock options.
Why it matters
How it works
An investor who wants protection for a diversified portfolio can buy puts on a broad-market ETF rather than puts on dozens of individual holdings. Because an ETF spreads risk across many securities, its options tend to show steadier, lower volatility than options on a single company exposed to earnings or news shocks. The deep liquidity of major ETF options keeps bid-ask spreads narrow, which lowers trading costs. The same strategies used on stocks, covered calls, spreads, and collars, all apply to ETF options.