With Micro E-mini options on futures, option traders can participate in the futures market with less capital and with streamlined risk management.
Micro E-mini options on futures are set to launch on August 31
Hey, traders! Have you heard? You can now trade options on Micro E-mini futures. Ever since Micro E-mini futures were launched more than a year ago, traders have been looking forward to trading options on these smaller-bite futures contracts. The E-mini options have been popular, so it’s a natural evolution to offer options on these futures.
CME Group will begin listing its Micro E-mini options on futures for the S&P 500 Micro E-minis (/MES) starting August 31, 2020. The contracts will be 1/10 the size of the E-mini options (one point is $5 for /MES). The smaller size of the options on micro futures gives traders less notional exposure per contract. They’re still risky—as all futures and options are, because they’re traded on margin—but the smaller size makes the risk more manageable. (Learn more about futures margin and contract specs.)
This is also good news for those who’ve been itching to trade options on futures (and perhaps have experimented on the paperMoney® simulator) but thought they weren’t quite ready for the big leagues. Options on Micro E-mini futures could act as a stepping stone to bridge that gap.
There are a couple of points to note about the micro options. For one thing, because of their smaller size, you’ll likely have to put up less capital. Initially, there’ll be fewer product offerings—five Friday weekly expirations, three end-of-month, and two quarterly. CME Group chose this 10-per-quarter expiration cycle to help keep liquidity concentrated.
You can use the Micro E-mini options to trade the same strategies—market-neutral, directional, or multi-leg—as you would for trading the E-mini or any other options. When markets are moving fast, traders may prefer less exposure to the market. With smaller contract sizes, traders can scale in or out of their positions by buying several contracts and adding on or selling a few at a time, depending on how the market moves.
Keep in mind: these options settle into a position in the underlying futures contract. So you may not want to hold them until expiration. But if you do and you exercise or get assigned, you’ll need to understand your position in the underlying, which would be the Micro E-mini futures contract.
Let’s look at some of the dynamics of trading micro options.
Looking at the Option Chain for the August 20 E-mini S&P 500 options on the thinkorswim® platform from TD Ameritrade (see figure 1), suppose you buy a 3375 call for $20.25 and sell a 3395 call for $10.75. That spread would cost you $9.50 x $50, or $475. Now if you were to put on the same trade using the Micro E-mini S&P 500 contracts, it would cost you $9.50 x $5 = $47.50.
FIGURE 1: TRADING OPTIONS ON FUTURES. From the Option Chain on thinkorswim, find out which strikes you’d like to buy and sell and then figure out how much the trade will cost you using the multiplier for the corresponding micro futures contract. Chart source: the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Maybe you’re familiar with equity options, but you’ve never ventured into options on futures. Once you’ve gotten acclimated to the contract specs and dynamics of futures margin, the two should feel about the same. They’re kind of like cousins—a lot of shared DNA but with some subtle differences. The options strategies and risk analytics (“the greeks”) are the same for both.
So whether you’re selling covered calls, buying puts for protection, or shorting vertical spreads—or any options strategy, really—micro futures options could be useful for smaller positions that require less capital.
Here are just a few of the options strategies you might consider:
Selling calls. When you sell a call, you receive a premium in exchange for honoring the buyer’s right to buy the futures contract at the strike price. So if the option is exercised, you’ll have to sell the futures at the strike price. A common strategy option traders use is the covered call, which is a short out-of-the-money (OTM) call against a long position in the underlying (in this case, a futures contract).
Buying puts for protection. When you buy a put, it gives you the right to sell the underlying futures contract at the strike price. If the index falls, the puts could increase in value. So, if you expect the S&P 500 to fall, you could buy OTM put contracts to protect your long positions. Remember that although the puts may increase in value, the value of an option decays as time passes.
Shorting vertical spreads. Think the S&P 500 will drift down or stay roughly where it is for a while? You could sell a near at-the-money (ATM) call and buy a further OTM call with the same expiration. This is referred to as a call vertical credit spread. Your maximum profit would be the credit you take in, and your maximum loss would be the difference between the two strike prices, minus the credit. And of course, there are transaction costs to consider.
Beta is a ratio that compares a stock’s volatility to a benchmark such as the S&P 500. If a stock has a beta of 1.50, it means the stock is 50% more volatile than its corresponding index. So if the index moves 1%, you can expect the stock to move 1.50%.
When you beta weight your portfolio, you’re converting all your positions into one standard unit. This can help you better understand how your portfolio moves in relation to the benchmark.
Option traders can potentially use options on futures, especially index options, to hedge their portfolios. If you don’t have a large portfolio, micro options are worth considering when you want to hedge your portfolio around a probable future event. Beta weighting can be useful, but it can also be difficult to understand. For more on beta weighting, visit the beta weighting page on the thinkorswim Learning Center.
As with anything new, it’s a good idea to practice before risking your money. Practice analyzing, strategizing, and trading with paperMoney® on the thinkorswim platform from TD Ameritrade. You can use it to practice trading micro options as well as the E-minis or full-size contracts when you’re ready to make the leap.
While options trading involves unique risks and is definitely not suitable for everyone, if you believe options trading fits with your risk tolerance and overall investing strategy, TD Ameritrade can help you pursue your options trading strategies with powerful trading platforms, idea generation resources, and the support you need.
Learn more about the potential benefits and risks of trading options.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Options on futures are not suitable for all clients and the risk of loss in trading futures and options on futures could be substantial. Additionally some options expire prior to the final settlement or expiration of the underlying futures contract.
The paperMoney software application is for educational purposes only. Successful virtual trading during one time period does not guarantee successful investing of actual funds during a later time period as market conditions change continuously.
Futures and futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure Statement prior to trading futures products.
Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC).
Futures and futures options trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify. Prior to a name change in September 2021, Charles Schwab Futures and Forex LLC was known as TD Ameritrade Futures & Forex LLC.
Charles Schwab Futures and Forex LLC, a CFTC-registered Futures Commission Merchant and NFA Forex Dealer Member. Charles Schwab Futures and Forex LLC is a subsidiary of The Charles Schwab Corporation.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.