In simple terms, an ETF option represents an option on an ETF. Of course, understanding that definition assumes you know what an option is, and what an ETF is.
So, let's break it down a bit. Futures (or options, as they are sometimes called) represent contracts that allow one person to buy or sell something at a predetermined price. They are called "futures" because the transaction is set to take place sometime, well...in the future.
So a typical option might go like this: the buyer has the right to purchase 100 shares of MSFT at $120 in 30 days. The person buying the option can decide to exercise the option, but they don't have to. If the stock is trading at $119 when the option expires, it would be stupid to exercise the option and pay $120. But if the stock is trading at $125, then exercising the option represents a quick potential $5 profit per share.
Okay, so that's an option.
ETF stands for Exchange Trade Fund. It can represent a basket of stocks that cover broad industries or themes. (It doesn't necessarily have to be stocks...some ETFs cover things like bonds as well.)
There's an ETF to track the S&P 500. There's an ETF to track the tobacco industry. There's an ETF to follow biotech stocks. ETFs allow you to buy one financial instrument and have a financial interest in dozens (even hundreds) of stocks or bonds (or whatever)...instant diversification.
So to repeat: an ETF option is an option on an ETF. You have the right (but not the obligation) to buy or sell some number of shares in an ETF at some point in the future at a set price. Just like the option on MSFT, but for an ETF instead.
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Finance: What Are ETFs?275 Views
Finance allah shmoop shmoop what are efs Well first this
is the random financial terms you want to be asked
in the financial term spelling bee and second you should
know that e t f stands for exchange traded fund
f's are kissing cousins of index funds with one key
subtle but important difference f don't change at least generally
speaking an index fund might reflect the transportation industry and
have so much exposure to ford gm united airlines tesla
etcetera But it's required tohave say sixty five percent of
its exposure to companies based in the united states in
its charter every month that index fund has to re
balanced that exposure So if the auto companies do very
poorly in a given month index fund has to re
balance by buying mohr shares of those auto companies to
make up the difference you know given that they've performed
poorly relative toa airlines trucking company's railroads jeff howard segways
and so on But in a t f the fund
is basically set once and the shares just really kind
of float if over a decade the auto companies do
really well then in an e t f the auto
companies will just have a dominant influence on the overall
performance of the fund The management company doesn't have to
buy and sell shares regularly in an e t f
till fulfill the legal promises it agreed to at the
outset of the fund in the way in index fund
re balances its shares by buying and selling them So
what does that mean to you Well it means that
fc may drift in given directions like this guy For
example a generic technology e t f might have had
a total exposure of say five percent to internet stocks
in the beginning of nineteen ninety seven but amazon ebay
yahoo netflix and a well performed massively better than the
broader technology market which did well but just not omg
dot com well so that five percent waiting twenty years
later might be more like fifty percent or mohr of
that particular e t f but one other key aspect
of it is that it's traded like a stock i
e in one block and trade throughout the day there's
a bid and an ask price The bids are all
added up and shares in the fund can be bought
And sold at any time throughout the day Although the
market sets the price of an f just like it
does on a stock Well there now you're all ready
for the financial term spelling bee And they might also
ask you to spell lipo Yeah you might want to 00:02:33.69 --> [endTime] write that one on your arm
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