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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)
mnwind
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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)
 Obelixtrader 
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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)
 josh 
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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)
 bobwest 
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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)
mnwind
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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)
mnwind
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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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 bobwest 
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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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 gfmatt 
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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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 Anna K 
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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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 josh 
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Anna K View Post
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.

@Anna K
Ex-div date for SPY (happens every quarter on HMUZ cycle expiration day) -- 93 cents this time.

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 ElChacal 
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bobwest View Post

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.]

Bob.

I have been looking into SPY, SPXL and SPXS ETF's to swing trade (on a daily chart no intraday). Unfortunately, my Stoploss is too far on the ES contract to trade this without hurting my account in case it goes the wrong way.

What I am not sure is how many shares of SPY I should buy to make an equivalent ES?
I believe that half the value of an ES point would fit my account size, to help me sleep better.

@bobwest how is a Call or Put Option better than purchasing the (outright?) stock?

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  #13 (permalink)
 bobwest 
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ElChacal View Post
I have been looking into SPY, SPXL and SPXS ETF's to swing trade (on a daily chart no intraday). Unfortunately, my Stoploss is too far on the ES contract to trade this without hurting my account in case it goes the wrong way.

What I am not sure is how many shares of SPY I should buy to make an equivalent ES?
I believe that half the value of an ES point would fit my account size, to help me sleep better.

@bobwest how is a Call or Put Option better than purchasing the (outright?) stock?

Well....

Purchasing a call or put outright (meaning, you just are long the call or put, not hedged or any other strategy) is not really comparable to purchasing the stock or ETF.

Here are two simple differences:

1. The option will expire. At that point its value is zero. As time goes on, the approaching expiration will cause a decline in price, unless the underlying stock/ETF is in a strong trend to offset that decay. The stock or ETF won't do that. This is not exactly "better," most of the time.

2. The leverage, meaning the size of the profit or loss you have as a percentage of your purchase price, can be enormous. An option doubling in price in a few weeks (or days or hours!) is not unusual. It goes the other way, too, and can go down to zero fairly quickly. This is not so "better" either, although the leverage is a reason that many people will buy options. Usually they are just going to lose, because their directional bet has to be very right, to offset the decline of price over time as expiration approaches.

In fact, a very profitable strategy is just selling the options, not buying them. The buyer will usually just see his purchase price disappear due to time decay, while the seller keeps the money. This is called "selling premium" and can make you a good income, although it is not risk-free either, or it wouldn't be possible to make a profit doing it.

The entire world of options is complex and tricky. If sleeping better is part of your goal, as you mentioned, then you will need to look into it a lot deeper before trying it out, and only with money that you don't mind putting at serious risk. Read a few good options books and then be willing to pay the tuition in the market (that is, take losses) to really learn about them.

If ES is too risky, just buy the ETF and sleep at night.... Stay away from buying the options.

Bob.

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 ElChacal 
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@bobwest Thanks great explanation. I think I need $25k to test the ES waters based on money management rules. I will stick to ETFs for now.

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 hobart 
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one other quick thought, on low cost brokers like IB, the commissions are much much much cheaper. throwing 200-500 spy around on IB is going to be 2-4$ a turn, which isnt much different than a future which is going to get you for 2.50$ a turn

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 Southpaw 
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bobwest View Post

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.]


Bob.

Check the brokerages. Mine will liquidate (for a fee) any position that exceeds 80% of your account automatically.

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 ElChacal 
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Disregard my comment above. Started with $11k and currently trading ES. It is pretty bold because my stoploss order is above the 3% account rule but I believe I have some "edge" to my trading strategy.
I found a good strategy after a little over (1) year of thoroughly backtesting lots of ideas out there.
What you cannot do is trade futures with scared money, that is why at least some "edge" is crucial.

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 bobwest 
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bobwest View Post
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.]


Southpaw View Post
Check the brokerages. Mine will liquidate (for a fee) any position that exceeds 80% of your account automatically.

Right, and most, of course, will. If they didn't, they would be stuck with the loss, not you, because they would still be responsible to their clearing broker, which is responsible to the exchange. If they have to take it, they will go after you for it.

Closing you out is meant to keep the loss down, and it will unless the market is moving too fast for them to get a good fill (definitely happens), and unless there is a trading halt due to a limit down day... which means no one can get out. We came very close to limit down in many of the big equity contracts within the last couple of days.

In most cases, your risk will not be more than your account, but it can happen, and sometimes will.

The point of the original post was that you can (rather easily) lose 100% on your option position, but no more than that -- which is a small comfort -- but it can be more in futures. Just a comparison between the two in terms of max risk. Both can be pretty frightful if you're not prepared for it, and haven't managed your risk well.

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 ElChacal 
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bobwest View Post
Right, and most, of course, will. If they didn't, they would be stuck with the loss, not you, because they would still be responsible to their clearing broker, which is responsible to the exchange. If they have to take it, they will go after you for it.

Closing you out is meant to keep the loss down, and it will unless the market is moving too fast for them to get a good fill (definitely happens), and unless there is a trading halt due to a limit down day... which means no one can get out. We came very close to limit down in many of the big equity contracts within the last couple of days.

In most cases, your risk will not be more than your account, but it can happen, and sometimes will.

The point of the original post was that you can (rather easily) lose 100% on your option position, but no more than that -- which is a small comfort -- but it can be more in futures. Just a comparison between the two in terms of max risk. Both can be pretty frightful if you're not prepared for it, and haven't managed your risk well.

Bob.

True, that is why one should always have a Stop in place. The stop is your risk. It can be more than the stop loss if price gaps badly, but in contracts with sufficient volume I think gaps are unlikely.

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 bobwest 
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ElChacal View Post
True, that is why one should always have a Stop in place. The stop is your risk. It can be more than the stop loss if price gaps badly, but in contracts with sufficient volume I think gaps are unlikely.

You're right, on the whole.

I'm not trying to get an argument going , but, while it is certainly good to have a "disaster" stop in place, or at least I do (some good traders don't -- see the S&P spoos thread), it really is not a foolproof safeguard. In a true disaster, you do not know where, or if, you will get filled.

During the flash crash, there was no liquidity at all, and you have no idea where your stop would have gotten filled; probably near the bottom, when some buying finally came in.

Today, you don't know where you would get filled if there were a trading halt due to limit down. Remember, there is a whole lot of volume in ES, but we were within a whisker of being limit down the other day.

Sorry to go on about this topic; by all means, assess your risk profile and make your own decisions about what you want to do. Just trying to fill in some of the details here.

I hope you do well in your trading.

Bob.

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 ElChacal 
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bobwest View Post
You're right, on the whole.

I'm not trying to get an argument going , but, while it is certainly good to have a "disaster" stop in place, or at least I do (some good traders don't -- see the S&P spoos thread), it really is not a foolproof safeguard. In a true disaster, you do not know where, or if, you will get filled.

During the flash crash, there was no liquidity at all, and you have no idea where your stop would have gotten filled; probably near the bottom, when some buying finally came in.

Today, you don't know where you would get filled if there were a trading halt due to limit down. Remember, there is a whole lot of volume in ES, but we were within a whisker of being limit down the other day.

Sorry to go on about this topic; by all means, assess your risk profile and make your own decisions about what you want to do. Just trying to fill in some of the details here.

I hope you do well in your trading.

Bob.

I agree 100%. There are some violent moves in the market that despite the volume you don't know when you will get filled...

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 whtfr 
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10 SPY cents = 1 ES point $1 dollar move in spy = 10 ES points move. For intra-day trading I've never really seen a difference of the values not lining up.

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 GuppyDRV 
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I like the tight spreads on SPY options. I've found good results charting from an ES continuous contract from IQ feed try @ES#C on a tick chart. This gives you the instantaneous moves as I have found a SPY chart can but not always have time lag. I keep a SPY chart on a smaller window for reference. I'm looking at 6 monitors so I have plenty of real estate. If I'm looking outside market hours then options on the ES future contracts are my choice. Different animal but worth the price of education if you're willing.

GuppyDRV

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 tradertool 
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With TD Ameritrade's free commission on stocks and ETFs, isn't better to trade SPY instead of ES? Also, TDAmeritrade allows 24 hour trading on SPY. There is no advantage in trading ES.

I am also, trying to figure out selling options (ATM straddle) 5 weekly options on SPY. Cover with 500 shares of SPY long and 1 contract of ES for short. That way I am perfectly covered for loss and pick up premiums on a weekly basis. Is this possible? Has anyone done a backtest?

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 Sandpaddict 
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tradertool View Post
With TD Ameritrade's free commission on stocks and ETFs, isn't better to trade SPY instead of ES? Also, TDAmeritrade allows 24 hour trading on SPY. There is no advantage in trading ES.

I am also, trying to figure out selling options (ATM straddle) 5 weekly options on SPY. Cover with 500 shares of SPY long and 1 contract of ES for short. That way I am perfectly covered for loss and pick up premiums on a weekly basis. Is this possible? Has anyone done a backtest?

I don't think that's totally correct. Although I could be totally wrong.

Two things come to mind.

1. Futures use margin requirements and leverage. Stocks you need to have the capital to purchase enough to equal the returns in the futures yet you need much more capital for the same return. So return in capital is NOT the same.

2. Taxes! And this is a big one. Futures are two lines on your tax return. Stocks are a nightmare. I hope to never have to go through that again!

I could go on but for those two reasons alone I stick to futures.

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  #26 (permalink)
 josh 
Georgia, US
 
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tradertool View Post
With TD Ameritrade's free commission on stocks and ETFs, isn't better to trade SPY instead of ES? Also, TDAmeritrade allows 24 hour trading on SPY. There is no advantage in trading ES.

ES (and futures in general) have quite a few advantages. Some of them:
  • 22.75 hour trading window. SPY is available to trade 16 hours a day: from 4am to 8pm, Eastern time. ES is available from 6pm to 4:15pm, and 4:30pm to 5:00pm. Liquidity is of course less than in the core cash hours, but for any retail trader it is more than sufficient. This gives near 24 hour exposure, and is available while all world markets are trading.
  • Leverage. Let's assume current market prices. ES is 4134, SPY is 413. ES notional value per contract is 4134*50 = $206700. SPY's notional equivalent is thus 206700/413 = 500. So, 500 SPY roughly equals 1 ES. In other words, buying 500 shares of SPY at 413 and selling at 418 gives you a $2500 profit, while buying 1 ES at 4134 and selling at 4184 gives you a $2500 profit. However, those 500 shares of SPY at $413 will cost you $206,700. However, the exchange margin requirement for ES is $11,000. So, you only need $11K to take the equivalent trade in ES. And as we all know, unless you hold that during the close, your broker will let you get by with putting up only $500-$1000 for that contract. Not sensible, but possible. So, an outlay of $206K versus $1K... Now, if you have a larger account, your broker may provide portfolio margin. Maybe you can get even 10:1 for SPY, but this still is dwarfed by the 50:1 leverage that ES provides out of the box. Again, leverage is a sword that cuts both ways, so use caution here.
  • Day-trading margin. PDT rules don't allow actively day-trading SPY unless you maintain a minimum account of $25,000. This is a barrier to entry for small traders. Most brokers allow opening accounts as small as $1000 and with micro contracts (last bullet point), day trading is possible (even if not advisable for accounts this size).
  • Favorable tax treatment. If you are fortunate enough to *make* money, then you get more favorable tax treatment with futures (section 1256 contracts). Whereas short term SPY trades (held less than 1 year) are taxed fully at the short term capital gains rate (a higher %), 60% of futures profits are taxed at a long term capital gains rate (a lower %), and only 40% are taxed at the higher short term rate.
  • Ubiquity. ES is the most liquid, most heavily traded futures contract on the planet. Its primary mechanism is to hedge risk on SPX options, which are the options on the most liquid global market, the S&P 500. SPY is liquid of course, but as ES is primarily a hedging vehicle, it is the go-to.
  • Favorable spread margin. Let's say you think cyclicals/industrials are due to outperform tech due to an increased risk of rising interest rates. You work out the notional equivalents and you decide to buy YM futures and sell NQ futures. Well, with a good broker you will not have to pay full margin for both YM and NQ. You will get a significant margin credit. Your ETF alternative is to buy DIA and short QQQ, and you are not likely to get favorable margin on this.
  • Micro equivalents. CME's micro e-mini contracts have been a huge success (MNQ volume is double that of NQ, and MES is about 70% of ES). They've brought the notional value down to a more reasonable level for the average retail trader. The MES has a notional equivalent of 50 SPY shares, with a very small margin requirement ($50 day trade--yikes--and around $1200 exchange). While SPY has the advantage of being much more granular than the ES, the MES, being 1/10 the size, serves much the same role that SPY did for those who might want a smaller size than what ES provides.

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  #27 (permalink)
 tradertool 
Los Angeles, CA
 
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Everyone is trying to copy and paste those ads from Futures' brokerage firms.

I don't care about margin. I have a portfolio margin account. I don't care about PDT. Portfolio margin works very similar to SPAn margin which is the type of margin future contracts utilize.

I don't pay commission trading stocks and ETFs. Also, TD Ameritrade allows SPY to be traded 24 hours. YES. 24 hours. It doesn't even close for a minute.

The only disadvantage seems to be the tax benefit but that is also about the same if you are considered an active trader. To me, trading future contracts places me in many many disadvantages including some closing time and paying commission. So please don't try to bring in you can make a million-dollar trading future's with as low as $1,000 attitude.

My question was never about which is a better future vs. stocks. I gave you a strategy that requires two different breeds of instruments since you can't short and long on the same instrument at the same time in the same account. If you don't understand the strategy I mentioned above, please don't reply. I am a very serious trader and do not want to waste my time listening to some BS about how great day trading future is.

Amazing, how people can't understand a basic question on strategy testing.

Do not psych yourself with a little knowledge on how day trading future contract is the best thing in the world. PLEASE.

You are very welcome to comment on strategy but nothing else like how your shoes feel good, girlfriend is pretty, and future is GREAT.

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 Sandpaddict 
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josh View Post
ES (and futures in general) have quite a few advantages. Some of them:
  • 22.75 hour trading window. SPY is available to trade 16 hours a day: from 4am to 8pm, Eastern time. ES is available from 6pm to 4:15pm, and 4:30pm to 5:00pm. Liquidity is of course less than in the core cash hours, but for any retail trader it is more than sufficient. This gives near 24 hour exposure, and is available while all world markets are trading.
  • Leverage. Let's assume current market prices. ES is 4134, SPY is 413. ES notional value per contract is 4134*50 = $206700. SPY's notional equivalent is thus 206700/413 = 500. So, 500 SPY roughly equals 1 ES. In other words, buying 500 shares of SPY at 413 and selling at 418 gives you a $2500 profit, while buying 1 ES at 4134 and selling at 4184 gives you a $2500 profit. However, those 500 shares of SPY at $413 will cost you $206,700. However, the exchange margin requirement for ES is $11,000. So, you only need $11K to take the equivalent trade in ES. And as we all know, unless you hold that during the close, your broker will let you get by with putting up only $500-$1000 for that contract. Not sensible, but possible. So, an outlay of $206K versus $1K... Now, if you have a larger account, your broker may provide portfolio margin. Maybe you can get even 10:1 for SPY, but this still is dwarfed by the 50:1 leverage that ES provides out of the box. Again, leverage is a sword that cuts both ways, so use caution here.
  • Day-trading margin. PDT rules don't allow actively day-trading SPY unless you maintain a minimum account of $25,000. This is a barrier to entry for small traders. Most brokers allow opening accounts as small as $1000 and with micro contracts (last bullet point), day trading is possible (even if not advisable for accounts this size).
  • Favorable tax treatment. If you are fortunate enough to *make* money, then you get more favorable tax treatment with futures (section 1256 contracts). Whereas short term SPY trades (held less than 1 year) are taxed fully at the short term capital gains rate (a higher %), 60% of futures profits are taxed at a long term capital gains rate (a lower %), and only 40% are taxed at the higher short term rate.
  • Ubiquity. ES is the most liquid, most heavily traded futures contract on the planet. Its primary mechanism is to hedge risk on SPX options, which are the options on the most liquid global market, the S&P 500. SPY is liquid of course, but as ES is primarily a hedging vehicle, it is the go-to.
  • Favorable spread margin. Let's say you think cyclicals/industrials are due to outperform tech due to an increased risk of rising interest rates. You work out the notional equivalents and you decide to buy YM futures and sell NQ futures. Well, with a good broker you will not have to pay full margin for both YM and NQ. You will get a significant margin credit. Your ETF alternative is to buy DIA and short QQQ, and you are not likely to get favorable margin on this.
  • Micro equivalents. CME's micro e-mini contracts have been a huge success (MNQ volume is double that of NQ, and MES is about 70% of ES). They've brought the notional value down to a more reasonable level for the average retail trader. The MES has a notional equivalent of 50 SPY shares, with a very small margin requirement ($50 day trade--yikes--and around $1200 exchange). While SPY has the advantage of being much more granular than the ES, the MES, being 1/10 the size, serves much the same role that SPY did for those who might want a smaller size than what ES provides.

Ya what he said. Lol.

That is a seriously perfect post to the question.

So yes there are MANY advantages to futures.

Thank you josh. Absolutely fantastic explanation.

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  #29 (permalink)
 Sandpaddict 
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tradertool View Post
With TD Ameritrade's free commission on stocks and ETFs, isn't better to trade SPY instead of ES? Also, TDAmeritrade allows 24 hour trading on SPY. There is no advantage in trading ES.

I am also, trying to figure out selling options (ATM straddle) 5 weekly options on SPY. Cover with 500 shares of SPY long and 1 contract of ES for short. That way I am perfectly covered for loss and pick up premiums on a weekly basis. Is this possible? Has anyone done a backtest?

Not getting into it but josh gave you more than a reasonable answer that was far from canned for the first part if your question.

You don't pay commissions. Have a massive account and don't care about leverage or taxes and can trade the SPY literally 24hrs a day.

I think you already have it figured out. As for the options strategy that seems pretty straightforward as well and there are many threads to answer your question.

So my apologies for my misunderstanding.

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 Sandpaddict 
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bobwest View Post
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.

This forum has been the single best tool I've used since I started trading 6 years ago. Turns out to be the cheapest too.

Bobwest is right (as usual). The price of admission is so low you can't afford not to.

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  #31 (permalink)
 josh 
Georgia, US
 
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tradertool View Post
So please don't try to bring in you can make a million-dollar trading future's with as low as $1,000 attitude.

I said, to quote myself, that using too much leverage was "Not sensible" and to "use caution."


tradertool View Post
If you don't understand the strategy I mentioned above, please don't reply. I am a very serious trader and do not want to waste my time listening to some BS about how great day trading future is.
...
Amazing, how people can't understand a basic question on strategy testing.


tradertool View Post
I am also, trying to figure out selling options (ATM straddle) 5 weekly options on SPY. Cover with 500 shares of SPY long and 1 contract of ES for short. That way I am perfectly covered for loss and pick up premiums on a weekly basis. Is this possible?

Are you trying to delta hedge your short straddle with both SPY and ES? I don't think you realize that you've taken a delta neutral position (assuming a -50 delta short call and a +50 delta short put), added delta with the long SPY (+1), and removed an identical amount of delta with the short ES (-1). In other words, you've accomplished nothing. You've added 1 to 0, and subtracted 1 from it. You are still left with 0. You are delta neutral.

As a scenario, imagine you've sold a weekly 417 straddle for $2 per call/put. A tail event occurs and SPY drops to 400 tomorrow. Well, you're going to have a very high position delta and well underwater, past your breakeven of 413. To reiterate, your hedge-that's-not-a-hedge will still be in place, with a profit on your ES (still a -1 delta) and an offsetting loss on your SPY (still a +1 delta). Reverse this for a move higher of course. In that case you'll be negative delta with a bit fat loss on your short calls, and your not-a-hedge still does nothing, with your SPY in profit and your ES with an offsetting loss.

Note that while you are delta neutral, you are short gamma. So, if you want to try to gamma hedge, you may consider buying a strangle, making this an iron butterfly. This should bring your gamma closer to zero and will protect against large moves. You can also delta hedge on the fly by buying the equivalent deltas as SPX goes up, and shorting as it goes down. For example, if SPY has increased and your delta is -20, you'll buy 20 SPY to bring yourself back to delta neutral. There are other ways to handle this (inversions, rolling, ...), none of which I'm an expert at, but I'm sure you are well aware of these, as a ... "very serious trader."

Another consideration here is that you're short vol. Even if SPX manages to stay within your profit zone, if implied vol spikes, you could have issues.

Another clue that your "strategy" (which isn't a strategy at all really) is doomed to fail (besides the fact that it just doesn't make sense) is that there's no such thing as a risk-free trade. You implied otherwise when you said that you would "pick up premiums" and be "perfectly covered." If you're perfectly covered, there is no premium to pick up. You can't buy insurance for less than what someone else will sell you the same insurance for. That's not how the game works. That's the nature of risk, and in your case, there's definitely tail risk, since your solution does nothing.


tradertool View Post
Do not psych yourself with a little knowledge on how day trading future contract is the best thing in the world. PLEASE.

You are very welcome to comment on strategy but nothing else like how your shoes feel good, girlfriend is pretty, and future is GREAT.

Oof, touchy.

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  #32 (permalink)
 tradertool 
Los Angeles, CA
 
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This is not a Delta-Neutral strategy. Like you said delta-neutral requires constant balancing. I normally wait until +20 or -20 to add or subtract delta. The problem with delta neutral is that you always end up chasing the move. With the current up one day and down next type of undecided market, you may end up losing a lot of money trying to balance the delta. If I want to do a delta neutral, I don't need to buy any protection at the beginning. I will just protect by controlling delta as time goes.

If you buy options to maintain delta neutral, your profit gets very narrow. If you sell more to manage delta, your risk is getting bigger and bigger.

My strategy is more like Theta scalping. I want to set up the safest way to make theta from the start. Scalp theta for 2-7 days. Let the option expire or roll every week. Rinse and repeat.


josh View Post
I said, to quote myself, that using too much leverage was "Not sensible" and to "use caution."

Are you trying to delta hedge your short straddle with both SPY and ES? I don't think you realize that you've taken a delta neutral position (assuming a -50 delta short call and a +50 delta short put), added delta with the long SPY (+1), and removed an identical amount of delta with the short ES (-1). In other words, you've accomplished nothing. You've added 1 to 0, and subtracted 1 from it. You are still left with 0. You are delta neutral.

As a scenario, imagine you've sold a weekly 417 straddle for $2 per call/put. A tail event occurs and SPY drops to 400 tomorrow. Well, you're going to have a very high position delta and well underwater, past your breakeven of 413. To reiterate, your hedge-that's-not-a-hedge will still be in place, with a profit on your ES (still a -1 delta) and an offsetting loss on your SPY (still a +1 delta). Reverse this for a move higher of course. In that case you'll be negative delta with a bit fat loss on your short calls, and your not-a-hedge still does nothing, with your SPY in profit and your ES with an offsetting loss.

Note that while you are delta neutral, you are short gamma. So, if you want to try to gamma hedge, you may consider buying a strangle, making this an iron butterfly. This should bring your gamma closer to zero and will protect against large moves. You can also delta hedge on the fly by buying the equivalent deltas as SPX goes up, and shorting as it goes down. For example, if SPY has increased and your delta is -20, you'll buy 20 SPY to bring yourself back to delta neutral. There are other ways to handle this (inversions, rolling, ...), none of which I'm an expert at, but I'm sure you are well aware of these, as a ... "very serious trader."

Another consideration here is that you're short vol. Even if SPX manages to stay within your profit zone, if implied vol spikes, you could have issues.

Another clue that your "strategy" (which isn't a strategy at all really) is doomed to fail (besides the fact that it just doesn't make sense) is that there's no such thing as a risk-free trade. You implied otherwise when you said that you would "pick up premiums" and be "perfectly covered." If you're perfectly covered, there is no premium to pick up. You can't buy insurance for less than what someone else will sell you the same insurance for. That's not how the game works. That's the nature of risk, and in your case, there's definitely tail risk, since your solution does nothing.



Oof, touchy.


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  #33 (permalink)
 tradertool 
Los Angeles, CA
 
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By the way, Thank you Josh for a good explanation of your ideas.

I was rude earlier. I just hate people trying to write off a decent topic into something like Future trading is great vs. stock. Don't buy any course, just Google. There is no holy grail. So on and on and on. Of course, Googling can find the most answers but how time-consuming can that be? It is just like saying go around the world and meet everyone, you may find the answer. To me, I rather pay money to learn decent education.

Holy grail? Who said I am looking for a holy grail? I just want to improve 1% by implementing a software or trading system. I have been trading since 1998. 23 years. I tried many things. I am glad I purchased some courses and software. I feel extremely sorry for those who stuck in Googling looking for an edge. This is why I like here so experienced people can help each other. However, many of these poor souls get very defensive about the three things I mentioned above.

Futures vs. Stocks benefits are very twisted. As I said, If you have more than 100K (Most brokers (130-150K), you can have a portfolio margin. The portfolio margin is 6:1 leverage but the margin works very differently. Companies that understand options like Tsastyworks and TDAmeritrade, the margin works like a span margin when you trade options in hedge position. It is 6:1 when you buy stocks straight.

Also if you register your account as a company, your account becomes a professional account where you get the same if not better tax treatment for trading stocks vs. Futures. Literally, all the benefits you mentioned as the benefits of trading futures all go against future like lower commission. Stock market there is no such thing as commission anymore including options for some brokers.

Last but not least, millionaires and billionaires don't trade futures that much. Like Buffett said, if you want to become rich you should hang around rich and act like rich.

Don't try to promote trading futures. Don't tell people and encourage open $1000 futures account and you can start trade 50x leverage. What are the odds of these people making money. I rather tell them to buy BA and hold 5 years. It will make 10x. Place money in SPY every month and make a 15% compound return every year. No matter how small, people have a choice to make it rich if they persist.

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