Short term
Trade view / 22 September 2016 at 13:21 GMT

A bullish-to-neutral strategy in S&P 500 E-minis

Product Manager Futures and Options / Saxo Bank
Denmark
Background

With the Federal Reserve leaving interest rates unchanged, it seems like investors are back in with equities/left with little choice to get some yield. 

Appetite is back on judging by the 7.5% spike in gold mining stocks yesterday. On the last product, we sold a put spread on GCZ6 (for more details check out the webinar). 

E-minis

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Source: Saxo Bank 

For this bullish-to-neutral strategy, we will use options in the E-mini underlying future (ESZ6). Moreover, we are adding the secret weapon of time decay (theta) to collect on some premium. 

This is a 10-point wide vertical put spread and we would benefit in two ways: the index rallies further or the index stays at the current level and closes above 2,150 at expiration. 

We are using the end-of-the-month (EOM) options which provide good liquidity.

To keep the risk limited, we are simultaneously going to purchase an insurance with a strike price of 2,140. The buy and sell of these options creates a credit, money paid out, of $2.25/contract or $112.50 ($50 contract size).

short put
short put
 





























 




Source: Saxo Bank

Management and risk description

Note that these are end-of-month options with eight days to expiration and are European-style, as opposed to the quarterly options which are American-style. 

This means that a trade cannot be assigned before expiration. Just like in the standard contracts, the contracts are physically settled with the underlying E-minis futures. 

We will plan on closing out of the spread the day before. 

Parameters

Underlying (ESZ6) price at  2165.50

Sell 1 ESZ6 (EOM) 2150 Put @ $9.00
Buy 1ESZ6 (EOM) 2140 Put @ 6.75
---------------------------------------------------------
Net Credit       $2.25 ($50) $112.50 per contract

Maximum gain at expiration = Net credit of $2.25 (112.50)
Maximum loss at expiration = Difference of Strikes -  Credit  or 10-2.25 = 7.75 x $50 or $387.50
ROR = 29%

Entry: the entry above is inside the B/A, work the order.

Stop: no stop.

Target: collect at least $100.

Time horizon: seven days.

— Edited by Michael McKenna

For more on contract options click here.

Non-independent investment research disclaimer applies. Read more
23 September
Market Predator Market Predator
@Georgio: Re: "We are using the end-of-the-month (EOM) options which provide good liquidity." is this common characteristic, valid for all Options?
23 September
Market Predator Market Predator
@Georgio: I hope it wasn't mention in WOW41, but I'll replay during weekend anyway.
23 September
Georgio Stoev Georgio Stoev
not all products (equities, index, futures) have options with non-standard expiration such as weekly, monthly, quarterly and so on. With EOM we looked for just that - liquid option, short time frame, european-style
23 September
Market Predator Market Predator
Perfect!

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