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Options on Micro-Futures Experience

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Options on Micro-Futures Experience

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  #1 (permalink)
Posts: 47 since Apr 2019
Thanks: 25 given, 8 received

Hi all,

I am investigating trading the new micro futures options on MES and MNQ. Kindly inform me about your experience about using options in these micro products:
Which platform is the best ? I am using AMP as my broker and use Sierra Chart for my charting but it seems it is not good in this aspect and I would try the CQG platform for options ?

What could be the account size to trade these options , how these are priced ? if the option chain ASK for a certain option is 20 - does it mean $20 dollar or is it 20 index points from the micro or there is a multiplier ?

You can provide your experience as it is a new world that typical futures for me and I would appreciate your feedback...

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  #2 (permalink)
Stockton, CA
Posts: 3 since Oct 2016
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I sell MES to scale into positions while we are at all time highs. If we drop again I will switch back to ES.

What is your interest? Day trading, systematic selling, swings,...

MES has a 5 times multiplier (from memory). So 20 points is $100. Not sure on MNQ.

I can not answer your software questions as I use IB and external software for analysis and backtesting.

Good luck.

Sent from my GM1915 using Tapatalk

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  #3 (permalink)
Posts: 47 since Apr 2019
Thanks: 25 given, 8 received

My question is regarding the New launched Options of the micro-Futures not the Futures itself.. Did anyone try it ? Liquidity , pricing , etc ?

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  #4 (permalink)
Tallinn, Estonia
Experience: Intermediate
Platform: Tradestation
Broker: IB, Tradestation
Trading: Options on Futures
Jyrgen's Avatar
Posts: 12 since Apr 2011
Thanks: 213 given, 27 received

mosalem2003 View Post
My question is regarding the New launched Options of the micro-Futures not the Futures itself.. Did anyone try it ? Liquidity , pricing , etc ?

I have traded both the MES/MNQ options and futures for a couple of months now and can share that experience. I will use random numbers to illustrate some logics. Main difference is that on the quote screen (I use IB) you could have a situation where MNQ option bid/ask spread is 30/50 while same NQ option shows 35/45. So the market makers don't show quite as tight spreads, but for execution it doesn't really make a big difference what is shown as when you try to close the trade at mid, then you will get similar execution on both MNQ and NQ closer to mid. I have noticed though that you get slightly worse price in MNQ. With the above example if I would try to sell at mid-price and then keep on moving my order down to get executed, then I can see that NQ trade was closed e.g. at 39, while in MNQ I might have to go down to 37 or 38 to get filled. So you could say that MNQ is slightly less liquid, but I would say that the difference is small enough that it doesn't matter from the perspective of being able to run your strategy.

Another variation of the above differences is that sometimes for some option/spread/strangle there could be a situation where no bid/ask is visible at all for MNQ while you can see bid/ask in NQ. Even though there is no visible bid/ask in MNQ (which can look quite scary) you can still execute the trade quite reasonably probably. Therefore I always have on my screen both MNQ and NQ option I want to trade. I observe the bid/ask and mid that I target from NQ, but enter the trade in MNQ. This way I am never trading blindly in MNQ. Once you enter your LMT order in MNQ, then usually market making algos start showing the bid/ask prices as well. From that point you continue the same way as my above example.

As a general comment MES is more liquid than MNQ and there I have not observed situations where you don't have bid/ask prices at all. Also NQ options in general are quite illiquid outside of regular trading hours, so that problem is of course not solved with MNQ. Long story short, I think these MES/MNQ products are an amazing addition. I trade around a size of 3x MES/MNQ contracts to match the size of my other positions, so for me they are irreplaceable. But of course if my size would be 8 or 9 MES/MNQ contracts, then I would consider the leap of moving over to ES/NQ due to the benefit from slightly better execution and slightly more beneficial commission structure (although basically negligible taken the size of the contracts). Hope this gives some understanding of these products.

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  #5 (permalink)
Posts: 47 since Apr 2019
Thanks: 25 given, 8 received

Thanks a lot @Jyrgen for your detailed informative feedback. It is very helpful.
My situation is that I am a mainly a Futures trader but my trading style adopts NO STOP and this is ok for me as I see Stops as one of the main illusions in trading as it works against the retail trader than working in his/her protection. The next challenge to this style that if you are still in accumulation of a position and the market didn't unfold yet and the close time is there - you need to exit your positions or you need to have the maintenance margin which is not practical at all.

Hence, I am seriously investigating adoption OPTIONs in Futures such that I solve these problems:
Still what is not clear on the weeklies on the mini Futures, do they loose their value with time significantly -- assume that I am in a trade and it took two days and the market is going to my target area, will the options still have value or they lost their extrinsic value quick in a day ?

Due to the differences and we are strike prices distant by 5 points, should we take the out of the money options ... assume my current location 3800 and I am long , should I take the out of the money option as 20 point in the direction of the trade like take a long Call of 3820 -- around 0.25 to 0.35 delta or so ?

There are very limited resources on the web and I am lucky to find an expert in options trading finally and trading it as you -- do you have any resources actually trading these products not basically to trade the mini futures which is new but in general the room or the mentors trade the options on Futures...

Also I am trying to make a decision to move from my current broker that doesn't allow selling options and move to IB account as IB allow short selling options ... but IB charge huge margin on a Futures -- for example to take a Future MES on my current broker they charge daily $40 and IB charges daily margin $800

Also the topic on Options margin is a bit confusing ...I spent a full day Yesterday with IB support and no one can explain or guide me to margins ..
My assumption if you are long an option there is no margin as u pay the full value .... assume 20 at the ASK then u pay $100 -- another good point you clarified that I should trade on limits though I noticed the scary invisible quotes on bid/ask for some strikes ... on another note, IF I sell an option to make a strategy like vertical spread, I will pay the value and at the same time they hold margin ?

Appreciate your kind expert feedback to resources on the topic to allow me such move to the options on futures as there is no simulator for options trading and even the demo trading is not very accurate...

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  #6 (permalink)
Tallinn, Estonia
Experience: Intermediate
Platform: Tradestation
Broker: IB, Tradestation
Trading: Options on Futures
Jyrgen's Avatar
Posts: 12 since Apr 2011
Thanks: 213 given, 27 received

For weeklies, I would say that 20/30 delta options from a week ago start losing value rapidly in the last day or two mostly depending on if they are close to ATM (more all or nothing situation) or deep ITM/OTM (lot of option value gone). If you buy options, I would close the option position when you get closer to maturity. Choose maturity based on strategy hold time so that the option would have time left until maturity when you exit.

To me it looks that you already have a strategy and want to implement it with options due to margin requirements. Hard for me to say what is the best solution, but if you want to take a directional bet by buying options, then my preference would be to buy ITM options (closer to actual future with lower delta) and not OTM (more like lottery ticket). Or better yet spreads where you can limit risk or create synthetic size with the exposure you wish.

Without knowing anything about your strategy, I believe that using options adds complexity and therefore must also add some value on their own that is more than just getting smaller margin requirements (e.g. buying options or a structure gives you limited risk against overnight huge event/gap risks that stops won't have; or if part of the future trade implies bet on change in implied volatility; diversifying the greek exposures that you already have in your portfolio). If you just need to reduce margin, then perhaps the risk in portfolio today is already too high. And adding unnecessary complexity is imo always bad.

As a final point on options from my experience: (1) I would strive for limited risk strategy (always think risk first!) by hedging with other options or underlying, at minimum it improves the margin requirements, (2) something that you don't have to actively trade in/out (trading costs and bid/ask spread play a bigger role for options), (3) be a seller of volatility/time value (insurance selling has a built in edge in most products) while diversifying and finding any ways possible to mitigate risk (this is why you are paid for with option premiums), (4) I prefer to be closer to ATM and manage position more to reduce tail-risk/lottery payout.

In terms of margining in options. Good brokers use SPAN minimum which is set by the exchange. IB for example calculates their own (more conservative) margin. But I trade with IB and they can be fine as well as usually you don't want to max out on margin anyways. In general with margins: (1) if you buy options then there is no margin as the premium paid is your max loss (no black-swan risk for broker); (2) if you sell option naked then the margin is as high as it gets and depends on brokers risk appetite; (3) if you trade some combination of options then usually the margin shouldn't be higher than the maximum loss (if it is limited), but it also means that it could be higher than the premium you initially paid. Other combinations would be similar to point (1) and (2).

If you want to learn more about options, I would recommend trying paper trading. This way you get very quickly feel and knowledge about margin/payouts and how the products work. Seeing real products in action brings the Greeks and theory from books to life and more real. Usually options seem to be more exciting on paper, but also have downsides that you need to experience (understanding, costs, liquidity). I have heard that ThinkOrSwim is amazing on that front (even has some backtesting capabilities), perhaps you can open a free simulation account without committing anything. If you have IB, then you can at least already see how the prices develop and what the payout structures and margins of different options would be. Regarding brokers/margins other parts of the forum probably already have better answers.

Good luck!

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  #7 (permalink)
Posts: 47 since Apr 2019
Thanks: 25 given, 8 received

Thanks a lot Jyrgen for your detailed and informative feedback. It helps a lot to understand the pros/cons of adoption of options to support my trading strategies.

I am an intra-day trader in Futures, my main analysis power is in the treasuries but cannot trade them due to the huge cost. Hence, I am trading the equities in micros as I am accumulating a position once I define a direction. For example, Assume I am bullish, I will accumulate a long position in micro options by buying each down tick -i.e a buying a stop run to the down side or momentum candle reversal in a failed auction, etc or buying each whole sale price level, etc....
In Intra-day Futures, I would hold small margin for the MES, and I don't use any stop loss rather than a protective stop 20 points away or so.. Once the trade goes into your direction , like to hit first level of liquidity at a swing high, I move the entire position to breakeven. if my average price is 3800, and the market is 5 points away, I would be my stop to 3801, 3802...
If I defined that I am reversing the trend, and the position is not yet in a breakeven, I flatten the whole position....

My main issue with this strategy was if I am accumulation at 2:00 pm EST or so and the market close will come soon and I am still not in a breakeven position, I need to hold beyond the close and ensure the maintenance margin, If I am long 10 MES, then my margin will jump to 1100X10 from 40X10 !
So how to solve that problem, I assumed that options can be a solution but I was already paper-trading the options on two brokers IB and AMP .. I found that to have a position, long an option which neat to the ITM , to pay around 30 to 50 that comes immediate from my account --- I was saying to my self, yes u pay but u can hold for a week!
When I think deeply , what is the difference for this and taking a future stop loss of 30 points to 50 points - this is very wide stop like you are trading without a stop as in my case but I will never hold a trade that would go 20 points against the direction as this is a $1000 move and the market maximum volatility usually 20 points ... so why I am holding an option ? Yes to solve my overnight margin ... hmmm, I can limit my scale to maximum 5 or 10 contracts and allow a room in my account of cash ?10,000 to mitigate the maintenance margin if needed and this is also low probability to go and pay all that money in an option ...
I discovered also that the Theta or extrinsic value of time decay is huge elements. I was holding a position for over night till the next day and it was in my direction and the final market value of option was less than what I pay though I am ITM !! So, I though it is due to the paper trading huge bid/ask and I was buying the options in an overnight session and it was very expensive but WHEN I read your comment that options is not for an active trading style, then I took immediate the decision now, that options is not for any intra-day trading. This aligns to my main understanding that it is an Hedging instrument or insurance for a long term position, so any usage out of this scheme would go against the product concept.
Now, the illusion that buying the OTM outliers as an active trading intra-day strategy is ruled out by your great clarification, then I would trade actively as Futures and think how to use Options for other non-active to long term style for Future and equity...

I would try to use it for trading commodities on weekly basis on a straddle or strangle out of the money... something like Crude Oil weekly inventory report... so you take two days before the release to buy outliers 25/30 delta at lower price and lower IV, and leave it for a less than a week when the report hits and close it out when it unfolds in certain direction or gamma scalp it during that time... in what sense, if the straddle cost is 2, then the market maker knows that the price will not go more than 2 dollars in a week and when we hit that level I start to sell or buy the underlying and close it when it comes back to the entry point to cover the straddle cost or just close when we are in a the green of the straddle...

Another way is to sell volatility or time or sell straddle of outliers less than 25 delta or even long volatility as I have read a long thread led by Ron99 here that was about selling options or selling volatility that can be switched to long volatility --Hope that this thread can continue or we can evolve it ...

The last thing in my mind is to use it for its main mode which is hedging my equity portfolio ... assume that I have 100k in a stock account then I can use the 1 NQ puts of the OTM 25 or less to hedge it and at the same time sell calls for the same value of money as I already own the stock and now have a free hedging for my equity portfolio and I roll the options every month..

Another thing is to trade the treasuries Yield curve by spreads by taking options .. assume that I need to long the NOB spread long term , then I would buy 3XZN calls and Long 1 ZB Put and leave it over the month as trading it over 4H time frame or so ... The yield curve trades has built in hedging structure as spread treasuries ...

Anyway, This was very insightful to help me stay away from active intra-day of futures' options as it is not the right way though many websites and mentors show it to traders as the right way to use options.. Thanks a lot @Jyrgen for your great clarification and information ...

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