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Jun 10, 2022

Top 2 ETFs to Trade in June 2022

By:Ryan Sullivan

Why trade options on ETFs?

Exchange Traded Funds (ETF) are securities that pool stocks into one tradable instrument. Usually, ETFs track an index and are comprised of the individual stocks that make up that index. However, ETFs can be structured to track anything.

The very first ETF was the SPDR S&P 500 ETF (SPY), which began trading in 1993 and tracks the S&P 500 Index.

ETFs consist of a basket of stocks, and they make for good trading vehicles because when one or a few stocks that are in the ETF have large swings in price over a short period, the overall price of the ETF is likely to move much less. This is because the price of the ETF is based on the prices of all the stocks in the ETF and will not be greatly influenced by one or a few stocks.

It is important to note that not all ETFs are as diversified as others. Some ETFs are equally weighted, buying equal amounts of each stock in the fund, while other ETFs concentrate the purchasing of stocks in the fund based on different factors. Often, these factors try to skew the concentration of the ETF toward the top performing stocks in the fund. For that reason, it may be the case that an ETF is comprised of dozens of securities yet most of the value in the fund is concentrated in just a hand full of assets.

Top 2 ETFs to Trade in June 2022

  1. China Large-Cap Ishares ETF (FXI)
  2. Vaneck Junior Gold Miners ETF (GDXJ)
Fig. 1: Price percent change graph of SPY, FXI, and GDXJ since January 2022.
Fig. 2: Correlation chart for SPY, FXI, and GDXJ over the last three months.

China Large-Cap Ishares ETF (FXI)

The China Large-Cap Ishares ETF (FXI) seeks to track the FTSE China 50 Index which is composed of large-capitalization Chinese equities that trade on the Hong Kong Stock Exchange. The FXI itself trades on the New York Stock Exchange. This ETF currently has 59 total holdings.

The FXI is currently a good options trading vehicle because it has a high IV Rank of 40.8, based on the tastyworks calculation, and is heavily traded. On June 9th, 2022, it traded more than 49 million shares. At the money options in July’s expiration have a tight bid-ask spread of about $0.05. IV Rank has also remained above 30 for the majority of 2022.

This ETF allows us to trade volatility via options on a group of stocks that are based on companies that do not trade in the United States. This makes it a great addition to a portfolio because it is less correlated to US markets than other ETFs made up of US stocks. Based on Fig. 2 we see that over the last three months FXI has a 0.53 correlation to SPY. FXI is a good trading instrument for many options selling strategies.

Vaneck Junior Gold Miners ETF (GDXJ)

The Vaneck Junior Gold Miners ETF (GDXJ) seeks to track the MVIS Global Junior Gold Miners Index, which attempts to track the overall performance of small-cap companies involved primarily in mining for gold and/or silver. The GDXJ trades on the New York Stock Exchange. This ETF currently has 103 total holdings.

The GDXJ is currently a good options trading vehicle because it has a high IV Rank of 43.2, based on the tastyworks calculation, and is heavily traded. On June 9th, 2022, it traded more than 7 million shares. At the money options in July’s expiration have a tight bid-ask spread of about $0.06 to $0.12. IV Rank has also remained above 25 since mid-February of 2022.

This ETF allows us to trade volatility via options on a group of stocks that are historically less correlated to the S&P 500. Based on Fig. 2 we see that over the last three months GDXJ has just a 0.24 correlation to SPY. GDXJ is a good trading instrument for many options selling strategies.

Trade these ETFs and over 8,000 stocks and options, open an account on tastyworks!

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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