Welcoming a New Feature: Scanning for and Excluding ETFs

Welcoming a New Feature: Scanning for and Excluding ETFs

For some investors, they feel more comfortable buying and selling Exchange Traded Funds (or ETFs) rather than individual stocks. Perhaps for some, it depends on the overall market condition and they ferry back and forth between using stocks or ETFs. ETFs also make it simple and convenient for traders to gain exposure to an entire sector of the market without having to seek out individual companies.

Why does this matter? Say you want exposure to energy or technology. Investors could seek out the top stocks in each sector, then look for company-specific events, issues and catalysts. This can work both ways. For starters, positive news or events could be good for the stock, without providing a boost to the stock’s industry or sector. However, a poor earnings report, FDA announcement, sudden strategic issue, unexpected pre-announcement, dividend cut or seemingly any other random event could crush the stock — and the trader — without harming the entire sector.

So not only does the trader have to find the right companies in the right sector and the right trade, they need to do their homework on it to make sure they won’t wake up to any bad surprises.

While trading an ETF doesn’t mean investors shouldn’t do their homework, they do not face the same stock-specific risk that individual companies carry. Using our example about energy or tech, energy investors would likely be drawn to the XLE, XOP or OIH funds. On the tech side, the QQQ or XLK would likely be investors’ first choice.

Now, an unexpected bad oil inventories number can still ding the XLE or a swift decline in AAPL can still drag the QQQ or XLK lower too. But because investors are trading an ETF with a more diverse portfolio, they simply do not face the same risk-reward of owning an individual stock. At times that can be good and other times it can be a disadvantage.

Trading ETFs

Most investors are likely familiar with ETFs, particularly large funds such as the SPY (S&P 500 holdings) or the QQQ (a Nasdaq-based fund). An ETF trades just like a stock, but is usually a fund holding stakes in hundreds of different companies. ETFs can also track the prices of commodities (GLD for gold, USO for oil) and other different underlying assets. The companies that manage the ETF charge a fee. These management fees are generally cheaper than a mutual fund (but not always) and an ETF is more flexible in how it can be bought and sold.

That’s important in the trading world and even more importantly in our case, they have options available.

Why’s it beneficial that we can trade options on ETFs? Simple, it gives us more options — no pun intended — to find the best overall trade available. It also allows Option Party to cater more specifically to each individual investor’s specific needs. Take the latest pre-screening features that we’ve added. As usual, investors can choose either very broadly what their direction bias is — bullish, bearish or neutral — or they can select individual strategies.

After choosing their minimum probabilities of success, expiration dates and risk amounts, investors have the choice of screening exclusively for or completely excluding ETFs. They can also leave the feature blank, allowing ETFs to mix in with the results of individual stocks. It seems like a simple feature, but it’s wildly convenient.

After personally using Option Party’s trade scanning hundreds of times, it’s hard to convey how helpful this feature is. At times, investors only want to use ETFs depending on the strategy. Other times, their specific trade requirements find the results page littered with ETFs that they may have little to no interest in. It’s not Option Party’s fault that these securities match their trade requirements. But having the ability to now exclude them makes life a lot easier, allowing traders to find more accurate setups that fit their needs. 

Taking It One Step Further

If we’re looking for bearish strategies that expire within the next four weeks and only include ETFs. In that case, under “Stocks and Options,” we would go under “ETF Filter,” deselect “No Preference” and change it to “Only Scan ETFs.” In the event that we do not want ETFs to show up, we would select “Exclude All ETFs.”

Investors can also use the whitelist-blacklist feature in combination with the ETF scanner. Say we only want to scan ETFs in our results, but we do not want certain ones to show up. First we would tell Option Part to “Only Scan ETFs.” Then we would blacklist (Under the “White or Black List” tab) whatever ETFs we do not want in the results page. This will allow us to still broadly scan the ETF universe while simultaneously excluding the ETFs we don’t want to see. 

While we could “Only Scan ETFs” and whitelist specific ones, it would be an unnecessary step. If investors already know which securities they want to scan for, they wouldn’t need to scan all ETFs first, they could simply enter their whitelist selections and go from there.

Obviously scanning or excluding all ETFs can also be used alongside other key features in the Option Party platform, such as IV Rank, which allows investors the ability to add complex implied volatility strategies to their arsenal.

One Last Look

Just to highlight the differences, we wanted to do a quick scan. It first included a fairly specific string of requirements. We’re looking for only bull put spreads and bull call spreads, with a minimum return of 7% and maximum loss probability of 4%. Other filters include:

Minimum probability of profit: 72%

Minimum probability of target return: 72%

Options expiration: within 4 weeks

Blacklist: DUST, NUGT, SVXY

Notice how these results are very stock heavy. Note, this does not include “exclude all ETFs.” This is scanning for everything in the market, with exception to what we have blacklisted. In this result, stocks like NVDA, APA and BABA dominate the top results. Those stocks are certainly not for everybody when it comes to trading. However, in our next result, we can see what a vast difference is created by turning on the “Only Scan ETFs” filter.

Also Read

Using IV Rank to Choose Better Trades

How to Pick Your Options Strategy

How to Estimate the Anticipated Move After Earnings (or Any Big Event)