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ETF Options and IRA Options

12. ETF Options. This is a type of option that is based on the exchange-traded fund (ETF), which is simply an investment pool, traded on the stock exchanges. ETFs holds a specific set of underlying assets (like stocks, commodities, or bonds) and trade close to its net asset value over the course of a trading day.

Shares in an ETF, and their corresponding options, are traded in the same manner as shares of stock in publicly listed companies. In other words, ETF shares are traded on a stock exchange, where a trader can buy or sell shares, or options, of an ETF through a brokerage account.

ETFs are available on all of the major stock indexes, like the Dow Jones Industrial Average (DIA) and Nasdaq 100 Composite (QQQQ), to name a few. Another way of trading ETFs is to select a particular industry (most major industries offer an ETF for their sector). This allows the trader to focus predicting movements in one industry instead of on a mixed selection of stocks offered by regular index ETFs.

As ETFs and their related options trade instantaneously all day long, much like ordinary stocks, these options can be very useful for day-trading strategies like hedging. When day trading actively in ETF options, and particularly when using a hedging strategy which involves executing various trading positions (rather than just buying simple call or put options), a trader should be well versed in the background of the underlying security. Once the trader feels confident and familiar, he can benefit from the low costs and tax benefits of trading in ETF options.

13. Individual Retirement Account Options. IRA options are not available for day trading due to the U.S. Securities and Exchange Commission's day trading rules. The SEC requires day trading accounts to be designated as such. They must also be margin brokerage accounts. In contrast, an IRA account is limited to cash type accounts and cannot be a margin account. Simply stated, the day trading of stocks or stock options requires a margin account status and an IRA will have a cash account status.

One alternative is to open an IRA with a commodity futures broker, where options can trade against the value of futures contracts. There are no restrictions concerning the day trading of futures or futures options through an IRA account with a commodity futures broker.