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E-mini S&P500 futures - buy underlying & put option

  • #1
  • First Post: Edited Nov 9, 2008 7:48am Nov 8, 2008 11:48pm | Edited Nov 9, 2008 7:48am
I just thought about the idea of buying 1 contract of the E-mini S&P and buying 1 options put contract. I believe I have the following correct:

EX:

Buy 1 underlying contract at 1150
Buy 1 put options contract at 1150 minus 5 point premium

If the underlying goes up 50 points then a profit of 45 would be made after put premium.

If the underlying goes down then I am protected by the put and will close out underlying when put contract expires and the result would be about break-even.

Is this a correct assessment of how this works? I just watched a video on CME futures options and the light bulb went off in the old head.
  • #2
  • Nov 9, 2008 7:42am Nov 9, 2008 7:42am
Quoting Pip Chaser
I just thought about the idea of buying 1 contract of the E-mini S&P and buying 1 options put contract. I believe I have the following correct:

EX:

Buy 1 underlying contract at 1150
Buy 1 put options contract at 1150 minus 5 point premium

If the underlying goes up 50 points then a profit of 45 would be made after put premium.

If the underlying goes down then I am protected buy the put and will close out underlying when put contract expires and the result would be about break-even.

Is this a correct assessment of how this works? I just watched a video on CME futures options and the light bulb went off in the old head.
Sounds like a very good idea. Better than a stoploss where your loss is a hard fact whereas with a put option you still can make money...Deep in the money options worth more so I guess should be right. I am also playing around with these ideas. One thing I know that it sounds to me a lot more professional approach....

You just need a broker.

Regards
BR
.
  • #3
  • Nov 9, 2008 9:45am Nov 9, 2008 9:45am
You can also sell a call above that to offset some of the cost of the put - this is named a "collar" - it limits your potential gain, but reduces your cost.
  • #4
  • Nov 9, 2008 12:55pm Nov 9, 2008 12:55pm
Does the option price move lock step with the underlying asset? If so, this seems to be a great strategy. It would limit the downside risk to just the premium of the option and the upside potential is limitless. I need to investigate futures options in more detail. They even have these options available for EURO FX & USD/JPY. Does anyone see the potential here or am I just missing something. I could hardly sleep last night thinking about the information presented in the video I watched. Very exciting stuff!
  • #5
  • Nov 9, 2008 1:31pm Nov 9, 2008 1:31pm
An at-the-money option has a delta of about .5 - that is - it will move about 50% as much as the underlying. The further out of the money the lower the delta. The further in the money the higher the delta, but I doubt it would reach 1. The underlying (ie futures contract) has a delta of 1.0. Some brokers platforms show these numbers live (sinkorswim, interactivebrokers, etc). There is plenty of opportunity for creativity in putting these spreads together, maybe even to the point of getting a "free" trade, but you must watch the commissions.
  • #6
  • Nov 9, 2008 4:15pm Nov 9, 2008 4:15pm
free training on this stuff at info @ commoditytradingschool . com (and I have no connection with them)
  • #7
  • Nov 11, 2008 4:22am Nov 11, 2008 4:22am
what is the difference between this strategy posted here and buying a call option ??

if you buy a call you win if underlying is going up minus premium....if it goes down you lose the premium...just like you mentioned...am i missing something ?

plus if you have to wait until expiration (european style option that is) you might have a great run before the expiration but as you know anything can happen and you can't liquidate your position any time.

don't ever forget the premium...5 points in options compared to (what is it in SP500 - 1 point ?) a lower futures commission can be a lot. the good thing about options is that you don't have to worry about the pitfalls of human nature...greed, fear, hope and so on
  • #8
  • Nov 11, 2008 7:35am Nov 11, 2008 7:35am
lumesh: Not sure I can answer your question totally. Different strokes for different folks. Some people deal only in options. To be good at it one must understand time decay and volatility. One problem now with outright contracts is the margin on a mini is now over $6000! Too much volatility as of recent makes the spreads too wide. Lots of ways to combine them - but I would prefer the index options over futures options if I traded them (due to more volume, less cost, etc).
  • #9
  • Nov 11, 2008 7:50am Nov 11, 2008 7:50am
From my own experience of trading options over a number of years, it is difficult to make money on Purchased Options unless a large move happens realatively soon after their purchase.

IMO IF you are going to trade futures you are better keeping it simple and work on finding a methodology that suits your personality AND makes you some ticks....good luck!
Trading Levels with WRBs
  • #10
  • Nov 11, 2008 7:58am Nov 11, 2008 7:58am
Quoting Kenz987
free training on this stuff at info @ commoditytradingschool . com (and I have no connection with them)
Those videos halfway down the page are great. Thanks for the site.
  • #11
  • Nov 11, 2008 8:56am Nov 11, 2008 8:56am
Quoting Kenz987
lumesh: Not sure I can answer your question totally. Different strokes for different folks. Some people deal only in options. To be good at it one must understand time decay and volatility. One problem now with outright contracts is the margin on a mini is now over $6000! Too much volatility as of recent makes the spreads too wide. Lots of ways to combine them - but I would prefer the index options over futures options if I traded them (due to more volume, less cost, etc).

hi,

i somewhat understand you but can you explain the difference between buying the underline in futures market and "hedging" it with long put or just buying a call ?

isn't margin for mini dow a little less ? nevertheless why go with options if increased volatility increases ones premium ?
  • #12
  • Nov 11, 2008 8:57am Nov 11, 2008 8:57am
IMO IF you are going to trade futures you are better keeping it simple and work on finding a methodology that suits your personality AND makes you some ticks....good luck![/quote]


yap, that is my way of thinking too
  • #13
  • Nov 11, 2008 8:38pm Nov 11, 2008 8:38pm
Well I just found out my idea in the 1st post is called a "Long Synthetic Call" according to last training video. Need to go watch the rest of it to see how it works.
  • #14
  • Nov 12, 2008 3:21am Nov 12, 2008 3:21am
Quoting Pip Chaser
Well I just found out my idea in the 1st post is called a "Long Synthetic Call" according to last training video. Need to go watch the rest of it to see how it works.

i rest my case
  • #15
  • Last Post: Sep 9, 2010 10:14am Sep 9, 2010 10:14am
This strategy will work if you buy the correct number of Options to hedge the underlying Futures contact.

if you are LONG on E-mini ES =delta is 1
so you need to buy buy a PUT option At the Money ATM,ATM money option will have a delta of 50 % or 0.5 Delta
to find the number of Options you have to calculate the hedge ratio.

if you are LONG one E-mini ES this give 1/0.5.
where 0.5 is the ATM money Delta
and 1 is the number of FUTURES contract to hedge

1/0.5=2 so you need to buy 2 PUT Option ATM.
Br,
Emmanuel.
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