E-Mini SP 500

March 20, 2008

Name: John Yackley

Company: Be Free Investments

Years Trading: 16

Favorite Movie: Mr. Smith Goes to Washington

Peak Trading Group , a division of Rosenthal Collins Group, LLC is a full service futures & options brokerage located in the Chicago Mercantile Exchange. We offer:

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Most futures traders are very familiar with the CME Group’s e-mini contracts; the e-mini SP 500, for example, has become one of the most traded futures contracts in the world.

But options on e-mini futures are also gaining in popularity. Just yesterday, March 19th, roughly 65,000 calls and 73,000 puts traded hands in the e-mini SP500 options. (Note that options on other e-mini stock index products still remain too illiquid for my tastes, so I’d say to focus on e-mini SP500 options.) What are e-mini SP 500 futures options? Like all options, they are contracts that give the buyer the right, but not the obligation, to at a certain price (the strike price) establish a position in the underlying e-mini futures. E-mini SP 500 options can be a great product for many reasons. First and foremost they are appealing to those of us who don’t like commitment. An option is like getting engaged—you can extract yourself up until wedding day; a futures contract says “I do”. Sure, you might say: “Come on, the futures are called ‘minis’ and it’s only 1/5th the size of the big SP500!” But even with this recent market pullback, which has knocked the SP500 down to 1300, a mini contract is worth $65,000; that’s the index, which is at 1300, times $50 per point. Yes, every time you buy or sell even one contract, you’re effectively going long or short $65,000 worth of stock. So, maybe shelling out a lot less to buy an option and define your risk might make sense. For example, let’s say you were bullish on the market going into the close yesterday. You could have bought an April 1300 call for $2,100. For small or beginning traders, especially, this might be a better way to get exposure to a potential snapback in the market than getting long a $65,000 futures contract in these volatile markets.

OK, those of you who are savvy and been watching the markets for a while, you might say: “Big deal, I’ve known about the e-mini options for a while. It’s not new news.” You’re right; e-mini SP options have been traded for years now and when the exchange engaged market-makers about three years ago the market for e-mini SP 500 options became very liquid, i.e., tradable. Almost all of the strike prices around where the underlying futures contract is trading have well over 100 contracts being bid or offered at anytime and the bid-offer spread is usually between one to four ticks, or less than a point.

But did you know that the CME Group recently launched a platform that invades what had been the exchange floor’s last bastion? The EOS Trader platform allows us to trade spreads—spreads on e-mini options. Yes, you can, for example, simultaneously buy and sell multiple options. You can, for example, to continue on with our above example, say I think the SP 500 will rally in the next month, but not beyond 1400. This might lead you to buy the option I mentioned above, the April 1300 call, for $2,100, but then simultaneously sell 2 April 1400 calls, for $560. This means you shell out $1,540 for the trade instead of $2,100.

How do you place such a trade? Just call your broker and place it as you would any options spread order. If you’re an experienced trader and you want to do a lot of trading in mini options, call your brokerage firm to see if they will offer you direct access to the platform. Most firms, however, do not do this yet and if they do, have minimum requirements; they want you to guarantee that you’ll do a lot of trades. Furthermore, the platform is not that user friendly. Unlike many futures-centric platforms, it is not a point-click-and-drag format—all information has to be typed in for both sides of the spread. This makes the chances of inputting something wrong and having an error much larger than if you’re trading a futures contract or a single option. So, maybe it’s best to stick with the oldest order entry method in the business. No, not the telegraph. Pick up the horn and call her in.

John Yackley
CTA, President & Strategist
Be Free Investments
www.BeFreeInvestments.com
John@BeFreeInvestments.com
(312) 604-2916

About the Author

John Yackley has been in the futures and options since 1992. He is the president and chief stategist at Be Free Investments, a registered commodity trading advisor. He is also a licensed broker. John began managing money for investors in 1995. He has two unique investment strategies that trade mainly stock index futures and options. For more information, check out www.BeFreeInvestments.com.