Controlling Position Size with Futures Options
Controlling Position Size with Futures Options
Futures options can provide exposure to an index with a fraction of the buying power of naked short premium positions
- Most traders want some level of index exposure, but naked short premium positions in the indexes with equity options can eat up a lot of capital.
- With futures options, you can achieve similar levels of exposure to an index at a fraction of the buying power.
- It is important to note, however, that futures options are quoted very differently than equity options.
Most of the time, traders want exposure to the main indexes, such as SPY, QQQ, or DIA, before they jump in with positions in individual stocks. Doing this can often produce more predictable results, while limiting the outlier risk of single stock positions.
However, building short premium positions in these indexes with equity options can sometimes be quite capital intensive, especially with naked positions such as short puts or short strangles.
This is where futures options come into play
Reducing size with futures options
In the futures market, at least in the financial futures space, you have mini contracts, such as /ES for the S&P 500 and /NQ for the Nasdaq, and you have micro contracts, such as /MES for the S&P and /MNQ for the Nasdaq. When it comes to buying power, futures options almost always provide more relief relative to an equity options position in the same index.
For example, in a standard margin account, a 40-delta short put in SPY (the S&P 500 equity option) in the May cycle with 43 days-to-expiration (DTE) costs you about $10,000 in buying power. But a 40-delta short put in /MES in the same May cycle only costs you about $1,000 in buying power. Similarly, a 20-delta short strangle in QQQ (the Nasdaq equity option) in the May cycle is about $6,700 in buying power, whereas the 20-delta short in /MNQ in the May cycle is only about $1,200 in buying power.
In both instances, using futures options over equity options gives you similar index exposure at a fraction of the buying power.
Reading futures options quotes
While futures options and equity options can give you similar levels of exposure to an index, you need to be aware that these products are quoted differently.
With equity options, the quotes are always quoted in dollars and cents, so it is easy to compare one trade in one stock to a separate trade in a different stock. With futures options (financial futures specifically), the quotes are quoted in points or ticks, and the point values differ from one financial future to another.
For example, /MES is $5 per point and /MNQ is $2 per point. So, when you see a quote of “23.50” on an /MES futures options, that means the total value of that credit would be:
23.50pts x $5/pt = $117.50
Or, if you see a quote for an /MNQ futures option at “118”, that means the total value of the credit would be:
118pts x $2/pt = $236
So, while the buying power relief with futures options is certainly attractive, make sure you spend a little time familiarizing yourself with the contract specifics, such as point multipliers and notional values, for whatever product you might want to trade.
Jim Schultz, a quantitative expert and finance Ph.D., has been trading the markets for nearly two decades. He hosts From Theory to Practice, Monday-Friday on tastylive, where he explains theoretical trading concepts and provides a practical application of those concepts to a trading portfolio. @jschultzf3
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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.