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Index options vs futures options


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Index options vs futures options

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  #1 (permalink)
Gothenburg Sweden
 
 
Posts: 37 since Jul 2019
Thanks: 36 given, 15 received

Hi,

I have a beginner question regarding options trading that I am just starting to look in to.

I'm looking into high probability option trading strategies such as the iron condor. I would like to trade non-equity options and I have a question regarding index and futures options.

Let's say I want the underlying to be S&P 500. I was thinking about trading the index options (SPX) but there is also the ES futures options. Is there any benefit or major difference in using the futures option instead of the index? Is one of them "better" than the other when using iron condor or spread strategies?

Any help would be greatly appreciated!

Best regards

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  #2 (permalink)
Long Island, NY
 
Experience: Advanced
Platform: TOS & Tastyworks
Broker: TD Ameritrade
Trading: Equities, index options and futures options
 
Bookworm's Avatar
 
Posts: 174 since Apr 2010
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ES futures and the SPX move almost tick for tick which means any strategy should create very similar results. Both are 1256 contracts and get favorable tax treatment. The ES options are half the size of the SPX options and have different underlying expiration months while SPX options are based on the cash index. There are also differences in exercise between the two which usually don't affect you unless you hold to expiration. ES options also use SPAN margin which is usually lower than SPX margin unless you have a portfolio margin account with your broker. There will also be a difference in fees and commissions which vary from broker to broker.

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  #3 (permalink)
Gothenburg Sweden
 
 
Posts: 37 since Jul 2019
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Bookworm View Post
ES futures and the SPX move almost tick for tick which means any strategy should create very similar results. Both are 1256 contracts and get favorable tax treatment. The ES options are half the size of the SPX options and have different underlying expiration months while SPX options are based on the cash index. There are also differences in exercise between the two which usually don't affect you unless you hold to expiration. ES options also use SPAN margin which is usually lower than SPX margin unless you have a portfolio margin account with your broker. There will also be a difference in fees and commissions which vary from broker to broker.

Thank you for your reply!

Great, so not too many differences then. Tax reasons don't really matter to me as I am not an US citizen. I am thinking maybe the index options would be more easy and straight forward as it doesn't involve futures with different expirations. However I am unsure about the expiration differences. I know both are european style options and I assume that for each 1 ES option that expires in the money you will aquire 1 long/short futures contract. I know that the index is cash settled but I am unsure on how much cash would be needed if I let it expire.

So my question is basically this: which one of the 2 options would require the most money in my account if I would let the options expire in the money?

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  #4 (permalink)
Long Island, NY
 
Experience: Advanced
Platform: TOS & Tastyworks
Broker: TD Ameritrade
Trading: Equities, index options and futures options
 
Bookworm's Avatar
 
Posts: 174 since Apr 2010
Thanks: 65 given, 166 received

Unless you are very familiar with the rules and risks of the different contracts and series then it would be wise to stay away from expirations. ITM Non quarterly ES options expire into futures positions and there is pin risk to be aware of too. ITM SPX options expire as cash settlement but the AM options carry overnight risk since they expire to a special Friday morning settlement that can often be very different from the close on Thursday which is the last trading day.

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  #5 (permalink)
Las Cruces, NM
 
Experience: Advanced
Platform: Tradestation, MC, NT
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Trading: Liquid futures contracts
 
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Bookworm View Post
ES futures and the SPX move almost tick for tick which means any strategy should create very similar results. Both are 1256 contracts and get favorable tax treatment. The ES options are half the size of the SPX options and have different underlying expiration months while SPX options are based on the cash index. There are also differences in exercise between the two which usually don't affect you unless you hold to expiration. ES options also use SPAN margin which is usually lower than SPX margin unless you have a portfolio margin account with your broker. There will also be a difference in fees and commissions which vary from broker to broker.

@Bookworm, If you want to trade options of the S&P 500, which one do you choose: the ES futures option, SPX options, or the SPY options? what are your considerations?

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  #6 (permalink)
Long Island, NY
 
Experience: Advanced
Platform: TOS & Tastyworks
Broker: TD Ameritrade
Trading: Equities, index options and futures options
 
Bookworm's Avatar
 
Posts: 174 since Apr 2010
Thanks: 65 given, 166 received

I trade both SPX and ES options (which are half the size of SPX) depending on the size of the position I want to put on. SPY options are 1/10th the size of SPX and don't get 1256 tax treatment but if you want smaller risk than even the ES options then they serve the purpose. The SPY options are sometimes affected by the SPY dividend so you need to know the rules. The new micro ES futures will soon have options as well which will be 1/20th the size of the SPX and get 1256 tax treatment. There is an option out there to match your risk tolerance which is the main consideration since they are all very liquid and move together.

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  #7 (permalink)
Gothenburg Sweden
 
 
Posts: 37 since Jul 2019
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Bookworm View Post
I trade both SPX and ES options (which are half the size of SPX) depending on the size of the position I want to put on. SPY options are 1/10th the size of SPX and don't get 1256 tax treatment but if you want smaller risk than even the ES options then they serve the purpose. The SPY options are sometimes affected by the SPY dividend so you need to know the rules. The new micro ES futures will soon have options as well which will be 1/20th the size of the SPX and get 1256 tax treatment. There is an option out there to match your risk tolerance which is the main consideration since they are all very liquid and move together.

Do you by any chance know if the XSP options (1/10th of SPX) are liquid enough to trade?

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  #8 (permalink)
Long Island, NY
 
Experience: Advanced
Platform: TOS & Tastyworks
Broker: TD Ameritrade
Trading: Equities, index options and futures options
 
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Posts: 174 since Apr 2010
Thanks: 65 given, 166 received

CBOE show XSP options doing an average daily volume of well under 30,000. That is way below what I would consider a liquid marketplace. For reference, a slow month in SPX is an ADV of just under a million and a busy month is more than double that.

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  #9 (permalink)
Market Wizard
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There is one further difference betwenn ES options and SPX options, that might or might not be relevant for you: ES options can be traded during the overnight session.

Best regards, Myrrdin

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