You may already know a lot more than you think you do about trading options on stock index futures. That’s because the concept of options and the strategies you trade to define risk and fine tune your market position are completely transferable to futures from equities.
The biggest difference is that equity index options on futures exercise into a position in the underlying futures contract rather than cash or 100 shares of stock. Yet like equities, you may, close out your options position rather than exercise.
What you might not realize is that options on futures have several other benefits that are appealing to self-directed traders in equities, options and ETFs. Take a look at this overview on how you can maximize capital and reduce risk with options on stock index futures. Then, contact us to get started!
No matter if it exercises into 100 shares of stock, a cash settlement or a single futures contract. It still conveys the right, but not the obligation, to take a position in the underlying instrument.
You already know the strategies for trading options on futures. That’s because the strategies you use to trade equity options or stock index options are the same as the ones you would use to trade options on stock index futures, like the E-mini S&P 500. The only difference is the underlying instrument.
Outright put or call positions in E-mini S&P 500 options typically account for about two-thirds of daily volume. Option spreads are about one-third of trading volume and may cover 17 different strategies.
You’ll recognize the most popular spread strategies in E-mini S&P 500 options easily. Vertical spreads are the most popular, followed by butterfly spreads and diagonal spreads. Add in a 1x2 ratio spread and you’ve tagged about 80% of all spread trading in the E-mini S&P 500 options.
Vertical Call Spread
Like trading options on equities, you can reduce your capital commitment by trading a bull call spread in E-mini S&P 500 options. Same strategy, same procedure. Simply buy the lower strike call and sell the higher strike call with the same expiration dates.
Let’s face it. The U.S. stock market is affected by global developments that occur around the clock, but the U.S. market is only open 6.5 hours a day. That leaves another 17.5 hours each day that you’re exposed to domestic, international, economical and geopolitical risk — unless you trade stock index futures and options.
Stock index futures and options trade almost 24 hours a day from the time Asian markets open for the week on Sunday night through the U.S. close on Friday afternoon. That attracts traders and trading from around the world to provide the liquidity you need when it is time to act first.
Making the most of what you have with the least amount of hassle is always a good thing. Options on stock index futures deliver on both counts.
First, you may be able to take advantage of margin offsets between your positions in equity index options and the underlying futures contract that can maximize capital efficiency. Talk to your broker for more information about
how this might work for you.
Second, options on futures are designed specifically to collapse into the underlying futures contract easily for bookkeeping and tax purposes. And remember, futures are taxed at a preferential rate of 60/40 for long and short term capital gains for qualified individuals. Discuss these benefits of options on futures trading with your tax advisor.
With the S&P 500 at 1900*, even the E-mini contract — with a notional contract value of $95,000 — might not be mini enough for a self-directed trader. But, you can create your own mini-sized exposure by trading out-of-the-money options.
Here’s an example of how it works: Simply find out-of-the-money options with a delta that matches the kind of exposure you’d like to take. For example, an option with a delta of 0.2 means that you have 20% of the exposure you’d have versus an at-the-money option. Instead of $95,000 in exposure in the E-mini S&P 500, you’ve created your own mini contract with just $19,000 in exposure. Hold two options and you’ve got $38,000 in exposure.
Note: Your delta exposure is dynamic and can change as the underlying markets price changes over time.
*Prices and contract value as of March 28, 2014