An option to sell or buy an ETF before a certain date at a set price. Unlike other types of options where option traders don’t usually have a long position in the underlying, holders of ETF options already own the ETF. ETFs (exchange-traded funds), by definition, are shares of trusts that manage portfolios of equity holdings (shares of stock) designed to closely track the price movement and yield of specific indexes. Technically, options on these products are similar to stock/ equity options. However, ETF options are physically settled and have an American-style exercise feature.

ETF options are instrumental for investors willing to hedge ETF risk, generate revenue, take a bet on volatility and even hedge other assets and investments.