10 Reasons to Use ETFs When Trading Options

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A rewarding (but risky) trade is buying a call on an inverse or short ETF. These ETFs are designed to move as an index or underlying commodity moves. Given recent anomalies in the prices of double-inverse ETFs, this trade can produce the best short-term gains when you want to short a market segment, even though it has a lot of volatility and more risk than other trades.

Consider this scenario: You think three major banks -- Citi (C), Bank of America (BAC) and Wells Fargo (WFC) -- are going to surprise with worse-than-expected earnings. You buy calls on the Short Financials ProShares (SEF) –- the short ETF for financials-– and you hang on for the ride. Although premiums seem stiff, a 5% down move in the financials means a 5% up move on the ETF and perhaps a 40 % up move in the call. That's an eightfold increase in profits, thanks to the leverage provided by the call.

Before you do any of this, make sure the puts and calls on an ETF are liquid and don't be put off by spreads, they are wider than for most options on stocks. Use limit orders and, well, you know the rest.

Good luck trading.

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