An Introduction To Options On S&P 500 Futures

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An Introduction To Options On S&P 500 Futures

Except for minor differences in product specifications, basic options principles such as delta, time value, and strike price apply to futures options in the same manner as they do to stock options. This post will introduce you to the world of S&P 500 futures options.

Key Takeaways

  • S&P 500 index options are among the most popular and frequently utilized by investors, speculators, and hedgers.
  • The underlying asset for S&P 500 options is a futures contract that tracks this benchmark index and is settled for cash rather than delivery of the index’s equities.
  • The E-mini S&P 500 options feature a 50x multiplier, which means that a one-point movement in the index results in a $50 change in the contract value.

Stock Index Options on Futures

The first surprise you may have when first considering options on futures is that you may not be acquainted with a futures contract—the underlying instrument on which options on futures trade. Remember that the underpinning for stock options is the equity issue (e.g. IBM call options trade on IBM stock).Because most investors understand how to analyze stock prices, determining the underlying is simple.

When studying futures options, traders new to any market (bonds, gold, soybeans, coffee, or the S&Ps) must get acquainted not only with the option specifications but also with the product specifications of the underlying futures contract. These, however, are negligible impediments in today’s world, which provides so much information at the push of a button. This article should pique your curiosity in these intriguing markets and fresh trading prospects.

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S&P Options on Futures

To demonstrate how options on futures function, I will go through the fundamentals of S&P 500 options on futures, which are the most popular in the world of futures options. Although they are cash-based futures options (they immediately settle in cash at expiry), the rationale of S&P futures options is the same as that of stock options. S&P 500 futures options, on the other hand, have a distinct advantage: they may enable you to trade with improved margin rules (known as SPAN margin), allowing you to make better use of your trading money.

The simplest method to get a sense for options on futures is to look at a quotation table that compares the prices of S&P 500 futures with the prices of the matching options on futures. Essentially, the pricing concept of S&P futures is the same as the price behavior of any stock. You want to purchase cheap and sell high. In other words, if the price of S&P futures increases, the contract’s value rises, and vice versa if the price of S&P futures falls.

Differences and Characteristics

There is, however, a significant distinction between futures and stock options. A $1 adjustment in a stock option equals $1 (per share), which is consistent across all equities. A one-point movement in the index is worth $50 (per contract) in the CME E-mini S&P 500 contract, although this is not consistent across other futures and futures options markets.

While there are additional concerns to get acquainted with, such as the fair value of S&P futures and the premium on the futures contract, they are irrelevant in reality and for understanding most option strategies.

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Aside from the price specification difference, there are numerous other essential properties of S&P options. Because these options trade on the underlying futures, the level of S&P futures, not the S&P 500 stock index, is the primary factor influencing the values of S&P futures options. Volatility and time-value decay also play a role, just as they do with stock options.

Let’s take a deeper look at S&P futures and options pricing, specifically how changes in futures prices effect changes in option prices. Let’s start with the S&P futures product specification, which is shown in Table 1.

Table 1: S&P Futures Product Specification
Futures ContractContract ValueTick SizeDelivery MonthsLast Trading Day
E-Mini S&P 500$50 * price of S&P 500.25 in premium = $12.50 in notional valueMarch, June, Sept. and Dec.Thursday prior to the third Friday of the contract month

S&P E-Mini futures trade in 0.25-point increments of $12.50 each, thus a full point is worth $50. The “front-month contract” is the first of the three delivery months indicated in Table 2. All S&P futures contracts have their final trading day on the Thursday before expiry, which is on the third Friday of the contract month.

Table 2: Settlement Prices
ContractHighLowSettlementPoint Change
June 20224385.754380.004390.50-65.00

In Table 2, for example, the June S&P futures contract finished at 4390.50. The -65.00 point shift equates to a $3,250 gain for one contract (-65 x $50 = $3,250). It is worth noting that the S&P futures and the S&P 500 stock index will trade virtually equally, with the S&P futures carrying a tiny premium.

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Understanding S&P Futures Options

Now consider some of the related options, where price is consistent across futures and options. That is, a $1 change in premium has the same value as a $1 change in futures price. This simplifies everything.

The strike prices of various June S&P futures puts and calls are shown below. The delta in our examples below is positive for calls and negative for puts, just as we would anticipate for stock put and call options. As a result, because the June S&P E-Mini futures dropped by 65 points, the value of the puts increased while the value of the calls decreased.

The Bottom Line

While there are several strategies to trade options, many traders choose to be net sellers of options. Whether you like to purchase or write (sell) stock options using simple spreads or more intricate methods, you can simply convert many of your favorite tactics to S&P options on futures using the principles described here.

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