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Differences between SPY and ES Intraday Trading


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Differences between SPY and ES Intraday Trading

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  #1 (permalink)
Minneapolis, MN, USA
 
 
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I need some help here. I have been price action trading SPY options in good winning ratio lately, but commission fees are high, and that is the main reason I'm evaluating whether or not switch to ES.

When I do SPY option trading, I normally wait for the price come to some key points such as prior close, strike prices especially integral numbers. Then observe the price movement and enter if I determine a good winning probability.

I have been observing ES for a while. ES price is several points away from SPY, different closing time, and ES resistant and support levels are all over the map, I can hardly to correlate with SPY numbers that I'm used to. I also heard that there is more price noise in ES, and larger stop is needed to give your trade room to move to your direction.

So my questions are: "How big the differences between SPY & ES price movement?", "how to transition from SPY to ES?", "do you trade either SPY or ES, or both?"

Thank you very much!!!

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  #3 (permalink)
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When ES futures move 1 tick (0,25) SPY move 0,03 cents. ES futures have better liquidity and costs are lower then by SPY.

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  #4 (permalink)
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mnwind View Post
I have been observing ES for a while. ES price is several points away from SPY, different closing time, and ES resistant and support levels are all over the map, I can hardly to correlate with SPY numbers that I'm used to. I also heard that there is more price noise in ES, and larger stop is needed to give your trade room to move to your direction.

So my questions are: "How big the differences between SPY & ES price movement?", "how to transition from SPY to ES?", "do you trade either SPY or ES, or both?"

Since they are both derivatives of the same index, the overall structure is very similar. Sometimes SPY will trade a penny or two above a high or low, while ES will not, and this is largely due to the spread being larger in ES than in SPY; but by and large, a chart of each will look very, very similar.

So from an intraday perspective it comes down to which you prefer based on the order flow, tax consequences of each (ES has more favorable tax treatment with a 60/40 LT/ST split), liquidity requirements, and so on. From my perspective, having traded both, I like the tighter spread in SPY--I don't mind taking liquidity for a penny and a take fee, if it means I get the trade I want. Then again, depending on what your rates are to trade each, one may be much more favorable than the other. It comes down to your personal preference and what rates you get. Do the math and it should be much more clear.

For longer term support/resistance levels as you mentioned, they will be different. The issues with ES are that because it is a futures contract, the price will converge from about a 6 handle spread with SPX to zero on expiration, which introduces some "inaccuracy" as far as being different from the index. Thus, you have to determine whether to have non-backadjusted charts, spliced, etc. SPY has its own issues since it goes ex-div every quarter and thus its chart will be different from SPX. My advice--don't worry too much about these differences. For very long term price levels to work against, use the cash index, which has no such roll/div issues.

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  #5 (permalink)
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mnwind View Post
So my questions are: "How big the differences between SPY & ES price movement?", "how to transition from SPY to ES?", "do you trade either SPY or ES, or both?"


josh View Post
Since they are both derivatives of the same index, the overall structure is very similar.

@josh made a lot of excellent points about both, and of course the fact that the underlying is the same makes them very similar in a broad sense.

I would also look at the differences in the types of instruments:

- With the futures, there's no premium decay. If price isn't moving, time value doesn't slip away. Also, if volatility increases, time value doesn't balloon, and if it decreases, time value doesn't shrink. There isn't any time value.

- There isn't any distinction of "in the money" or "out of the money". If price suddenly moves in one direction, previously near-worthless strikes don't suddenly become worth something, and previously valuable ones don't collapse.

- Price does change in the futures as rollover approaches, but it's not the same as when an option approaches expiration, or expires. Options expire worthless all the time. Oops.

You get the idea. When I moved from options to futures I breathed a sigh of relief. "This is much more straight-forward" I said, naively.

Naively, in part because of the nature of leverage and risk in the two instruments. With options, you've bought the thing (from what you wrote I'm assuming outright directional trades [unhedged], although perhaps not). You can lose, but you can't lose more than you put in. [Note: that's 100%, which is a big percent.]

With futures, you've put up a small margin to cover the likely price variation of the instrument. If price moves against you more than your margin, which is not hard, you will owe more than you have put in, and if you can't either cover the margin call or get closed out in time, things can get messy. [Note: that's more than 100%, which is a bigger percent.]

Now, all that complexity in options provides enormous opportunity to many smart people, to the point that many do not do unhedged, pure directional trades, holding options outright. There's a lot of money in exploiting the complexity. But then, you can get complex with futures too.

Here's the thing, for me: trading ES, I look at a chart of the S&P itself, SPX, from time to time, and it may not be exactly like ES always, but mostly it is, and mostly I just look at ES (changing near rollover). Trading SPY options (holding outright), I kept a SPY chart and always a chart of my options, since they would not necessarily move in step with SPY due to the premium/time decay/volatility issues, which can exaggerate or tamp down price movements, or even go contrary to the SPY as expiration approaches.

For myself, I have not bought an option in years. I strive for simplicity, although I often fail.

I think that they both have their good points, as instruments. I also think that a smart person with a good handle on his/her game can do well with either. But this is my two cents.

Hope some of this makes sense to you.

Bob.

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  #6 (permalink)
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Thank you Josh! I figure out that trading ES can save about $10 for each round trip (1 contract / 500 shares). It could be $2,000 annual saving if one trades once a day for 200 days a year.

Do you trade SPY and ES any differently from price action perspective? For example, larger stop loss for ES due to more price noises?




josh View Post
So from an intraday perspective it comes down to which you prefer based on the order flow, tax consequences of each (ES has more favorable tax treatment with a 60/40 LT/ST split), liquidity requirements, and so on. From my perspective, having traded both, I like the tighter spread in SPY--I don't mind taking liquidity for a penny and a take fee, if it means I get the trade I want. Then again, depending on what your rates are to trade each, one may be much more favorable than the other. It comes down to your personal preference and what rates you get. Do the math and it should be much more clear.


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  #7 (permalink)
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I normally only hold for 20-60 minutes once I enter the trade @ Support / Resistance. I figure out that the price should change direction in this time window if it is a true S/R. Time decay should be minimal since I only trade monthly ATM options with ~$0.07 daily decay. I observed that about half of the decay is lost overnight at the market open. The decay < 1 hour is tiny maybe $0.01 if any. The exception is when IV implodes, you can see daily decay reach $0.20-0.30, and then you will certainly suffer decay even within an hour. For example, on this Wednesday or Thursday the put changed from $1.76 to $1.67 within two hours before close while SPY price stayed the same. That is -$0.09 loss, an IV crash!

Anyway, my main question for the post is about the difference of price action & S/R between SPY and ES. For example, there has been strong support @ SPY $188 level in the past couple of days. You see it is @ an option Strike, or an integral number. So when I trade SPY options, I select such numbers as potential S/R and watch when SPY approaching them to decide the trade. The success rate has been ~70% lately.

But when I look at ES at the same time, it is $1874, not a whole number, not a prior close number, not a strike number. Without SPY reference, I even don't know where to anticipate, where to plan for the trade. I'm not sure if this is because my mind is not in sync with ES, or it requires different manner to identify S/R for ES.

I'll certainly spend more time to observe ES and only do the switch after I feel comfortable with ES price action.






bobwest View Post
@josh made a lot of excellent points about both, and of course the fact that the underlying is the same makes them very similar in a broad sense.

I would also look at the differences in the types of instruments:

- With the futures, there's no premium decay. If price isn't moving, time value doesn't slip away. Also, if volatility increases, time value doesn't balloon, and if it decreases, time value doesn't shrink. There isn't any time value.

- There isn't any distinction of "in the money" or "out of the money". If price suddenly moves in one direction, previously near-worthless strikes don't suddenly become worth something, and previously valuable ones don't collapse.

For myself, I have not bought an option in years. I strive for simplicity, although I often fail.


Bob.


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  #8 (permalink)
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mnwind View Post
Anyway, my main question for the post is about the difference of price action & S/R between SPY and ES. For example, there has been strong support @ SPY $188 level in the past couple of days. You see it is @ an option Strike, or an integral number. So when I trade SPY options, I select such numbers as potential S/R and watch when SPY approaching them to decide the trade. The success rate has been ~70% lately.

But when I look at ES at the same time, it is $1874, not a whole number, not a prior close number, not a strike number. Without SPY reference, I even don't know where to anticipate, where to plan for the trade. I'm not sure if this is because my mind is not in sync with ES, or it requires different manner to identify S/R for ES.

I'll certainly spend more time to observe ES and only do the switch after I feel comfortable with ES price action.

There is a vast amount of posting on futures.io (formerly BMT) about S/R, price action, and every other trading topic you could think of, on ES and the other futures contracts. Diving into it may be confusing initially, since people are not always going to agree. Certainly not all of it would prove useful to you; what works and makes sense for one person may be Greek to another.

[Unsolicited plug:] There's a whole lot more material/threads/posts available if you spend the one-time 100 bucks for an Elite subscription. No pressure is meant, and no one could possibly pay me enough to say this. But you get a lot of experienced people to talk to, ask questions of, learn from. And the culture here is oriented to sharing and mutual contribution. It's a good place to learn stuff, and it's better if you can access everything. OK, [End plug.]

In the meantime, it's good that you've got something that is working for you, and it's a good decision not to mess with it until you can see something better. Hope you find everything that you're looking for here.

Bob.

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  #9 (permalink)
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mnwind View Post
Anyway, my main question for the post is about the difference of price action & S/R between SPY and ES.

You are way overthinking this. ES and SPY are the exact same thing, except one is a futures contract and the other is an ETF. ES trades 24/5, while SPY doesn't. If your SPY "S/R level" doesn't match ES (due to overnight trading) then your SPY "S/R" level is probably meaningless.

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  #10 (permalink)
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Does anybody know what explains the difference today between ES, which gapped up above yesterday's high, and SPY, which opened in the middle of yesterday's range?

thanks.

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