Market Measures

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Overcoming Illiquidity

Market Measures

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

Can we substitute trading an illiquid ETF with its core underlyings?

  • Sold 1 Standard Deviation (16 delta) Strangles in sector ETFs Energy (XLE), Finance (XLF), and Technology (XLK), as well as their top 5 holdings

  • Compared average performance of top 5 holdings to sector ETF to check for substitutability

  • 2010 to present; 45 DTE options

We find that the performance between the ETF's and their top five holdings is very similar, therefore we can substitute using the illiquid XLC with 5 of its top holdings: GOOG, DIS, FB, VZ, CMCSA.

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