An option on an S&P 500 futures contract gives a trader the right, but not the obligation, to buy or sell the underlying futures contract at a certain price by an expiration date. Like stock options, these instruments allow investors to tailor their strategy, whether speculating on prices, hedging against potential losses, or capitalizing on volatility.
Key Takeaways
- Options on S&P 500 index futures are popular and widely used by investors, speculators, and hedgers.
- The underlying asset for S&P 500 futures options are futures that track this benchmark index, which is settled for cash instead of the index's stocks.
- The E-mini S&P 500 options have a 50x multiplier, so a one-point move in the index generates a $50 change in the contract value.
What Are Options on S&P 500 Futures?
Investors new to futures must know the option specifications and index futures. Unlike stock options, where the underlying asset is a company's share price, futures options are based on a futures contract with its dynamics. Historically, traders used options on full-sized S&P 500 futures contracts to speculate on market moves.
In 2021, the Chicago Mercantile Exchange (CME) discontinued the standard-sized S&P futures with a notional value of around $250,000. The CME opted for the smaller E-mini S&P 500 futures, one-fifth of the exposure at around $50,000 notional per contract. When investors refer to “S&P futures options,” they mean options that trade on these E-mini contracts. There are also Micro E-mini S&P 500 Index futures, which offer one-tenth the exposure of the E-mini version.
S&P futures options can be calls or puts. A call option gives the holder the right, but not the obligation, to buy the underlying S&P futures contract at a strike price any time before the option expires. Traders buy calls when they expect the S&P 500 to rise. Call options increase in value when the underlying futures contract price trades above the call strike price. Put options give the holder the contractual right to sell S&P futures at the put’s strike price before expiration. Traders aim to profit from puts when they anticipate the S&P 500 will fall in value.
While options on futures like the S&P 500 provide leverage and flexibility, they also come with defined expiration dates, time decay, and other dynamics that traders must consider.
Choosing Options
Flexibility: Options allow a more customizable trading strategy than buying long or short future positions. Strategies like spreads can help traders focus on matching predictions for specific prices and volatility.
Hedging: Portfolio managers and other professionals may use S&P puts to help protect long stock portfolios against sudden or unexpected market declines and mitigate risk.
Leverage: Options provide leverage that magnifies gains and losses on the underlying S&P future price movements. Traders can enjoy amplified profits with less upfront capital than directly buying/selling futures.
Speculation: Traders aiming to wager on S&P 500 moves in a period can use call options, providing tremendous upside if a trader predicts and times the market direction correctly.
S&P 500 Futures vs. Options
S&P 500 futures are contracts that obligate the holder to buy or sell the S&P 500 index at a preset price on a given date. They are standardized, traded on the Chicago Mercantile Exchange (CME), and are settled in cash. S&P 500 futures are often used to hedge or speculate on the movements of the U.S. stock market.
Options on S&P 500 futures are contracts that give the buyer the right, but not the obligation, to buy (for a call option) or sell (for a put option) the underlying S&P 500 futures contract at a specified strike price and expiration date. They are also standardized and traded on the CME with a cash settlement.
Investors can also trade options on the S&P 500 index exchange-traded fund (ETF), which gives the buyer the right, but not the obligation, to buy or sell the SPY ETF, which tracks the performance of the S&P 500 index at a specified strike price and expiration date. ETFs trade like stocks and are often more accessible for ordinary investors than futures or options on futures.
Comparing Investments
The table below details the differences in trading in , the options on those futures, and options for the SPY ETF. Futures contracts require a margin, while options contracts cannot be traded on margin.
| S&P 500 Futures vs. Options on S&P 500 Futures vs. Options on the SPY ETF | |||
|---|---|---|---|
| Features | E-Mini S&P 500 Futures | Options on E-Mini S&P 500 Futures | SPY Options |
| Definition | Contracts to buy or sell the S&P 500 index at a future date at a predetermined price. | Contracts that give the right, but not the obligation, to buy or sell E-mini S&P 500 futures at a set price before the contract expires. | Options that give the right, but not the obligation, to buy or sell the SPY ETF (which tracks the S&P 500 index) at a set price before the option expires. |
| Underlying Asset | S&P 500 index | S&P 500 futures contracts | SPY, an ETF that tracks the S&P 500 index |
| Market Focus | Hedging and speculation on the overall market direction of the S&P 500 index. | Hedging and speculation with leverage on the future price movements of the S&P 500 futures. | Investment and hedging strategies directly related to the price movements of the S&P 500 index, through the SPY ETF. |
| Trading Venue | Futures exchanges (e.g., CME) | Futures and options exchanges where S&P 500 futures are traded (CME) | Options exchanges (e.g., CBOE) |
| Settlement | Cash settlement is based on the index value at expiration. | Cash settlement, but the outcome is based on the value of the E-mini S&P 500 futures contract. | The exchange of the underlying SPY shares upon exercise, unless traded out or expired. |
| Contract Size | Standardized (e.g., $50 times the index) | Standardized, based on the futures contract it is derived from. | Standardized, typically 100 shares of the SPY ETF per option contract. |
| Tick Size | The minimum price movement is set at 0.25 index points, equal to $12.50 per contract. | Matches the tick size of the underlying futures, reflecting minimal price changes in the option's value. | Typically $0.01 per share for the SPY option, translating to $1.00 per contract. |
| Liquidity | High, due to the broad market interest in the S&P 500. | Varies, but generally less than the underlying futures due to the added complexity. | High, as SPY is one of the most actively traded ETFs, making its options widely used. |
| Margin | High, allows control of large positions with a relatively small capital outlay using margin. | Options premium must be paid in full. | Options premium must be paid in full |
| Risk Level | High, due to leverage and the potential for significant losses w/margin calls. | Moderate, has limited downside but they can become worthless if the futures price does not move beyond the strike price by expiration. | Moderate to low, depending on whether the option is bought (where risk is limited to the premium paid) or sold (where risk can be more significant). |
Benefits
Futures offer the ability to hedge against market volatility. Investors can protect their portfolios from adverse movements by taking positions opposite those in the market. Additionally, S&P 500 futures provide substantial liquidity, ensuring that positions can be entered and exited with minimal slippage.
The high leverage in futures trading allows for capital efficiency. Traders can control large positions with a relatively small amount of capital. The futures market is accessible almost 24 hours a day, offering the flexibility to respond to global economic events as they unfold.
Options on S&P 500 futures offer advantages distinct from trading the futures directly, allowing traders to structure positions to their risk tolerance and market outlook. Options on S&P 500 futures offer a cost-efficient way to gain exposure to the S&P 500 index. Buying an option requires a smaller initial investment than the margin needed for a futures contract. Traders can control the same amount of exposure with less capital, beneficial for hedging purposes.
Risks
Trading S&P 500 futures comes with significant risks. The leverage that amplifies gains can also magnify losses, potentially resulting in losing more than the initial investment. This aspect of futures trading underscores the importance of risk management strategies, such as using stop-loss orders to limit potential losses.
The value of an option is influenced by the underlying futures price, volatility, time decay, and interest rates. This means it's harder to predict how changes in these factors will affect option prices and, by extension, trading outcomes. The value of an option also decreases as it approaches expiration because of the eroding time value.
Even if the market moves in the anticipated direction, the option’s value might not increase enough to result in a profit. This contrasts with futures, where no time decay factor directly impacts the contract's value. While the upfront cost of purchasing an option is lower than the margin requirement for a futures contract, this premium is a sunk cost that is lost if the option expires worthless.
How to Trade Options on S&P 500 Futures
Step 1: Gain a solid understanding of options and futures
- Learn the terminology and mechanics of how these instruments work
- Get a foundation of knowledge to make informed trading decisions
Step 2: Set clear trading goals
- Decide on a strategy of hedging, speculating, spreading, income generating, etc.
- Have a strategy in place to guide which contracts to trade
Step 3: Choose a broker
- Choose one that offers futures, options, and tools for analysis
- Get approved for trading on margin, futures and options
- Qualify based on account funds - if not, SPY options may be available
Step 4: Develop a risk management plan
- Determine position sizing and stop-loss levels
- Set profit targets to manage potential losses and gains
Step 5: Learn and adapt
- Review strategies and stay informed on market developments
- Adjust approaches as necessary based on evolving conditions
Example
Successful traders regularly review their strategy, stay informed about market developments, and adjust their approaches when needed to align with the evolving market environment. Let's take a closer look at S&P futures and options prices by looking at the S&P futures product information, presented in Table 1.
| Table 1: S&P Futures Product Specification | ||||
|---|---|---|---|---|
| Futures Contract | Contract Value | Tick Size | Delivery Months | Last Trading Day |
| E-Mini S&P 500 | $50 * price of S&P 500 | .25 in premium = $12.50 in notional value | March, June, September, and December | Thursday prior to the third Friday of the contract month |
S&P E-mini futures trade in ticks of 0.25 points worth $12.50 each, so a full point equals $50. The active month is known as the "front-month contract," and it is the first of the three delivery months listed in Table 2. The last trading day for all S&P futures contracts is on the Thursday before expiration, which is on the third Friday of the contract month.
| Table 2: Settlement Prices | ||||
|---|---|---|---|---|
| Contract | High | Low | Settlement | Point Change |
| June 2024 | 4385.75 | 4380.00 | 4390.50 | -65.00 |
For example, the June S&P futures contract in Table 2settled at 4390.50. The point change of -65.00 equals a gain of $3,250 per single contract (-65 × $50 = $3,250). It is worth noting that the S&P futures and the S&P 500 stock index will trade almost identically, but S&P futures will trade with a slight premium attached.
Let's turn to some corresponding options, where there is a uniformity of prices between the futures and options. That is, the value of a $1 change in premium is the same as a $1 change in the futures price. This makes things easier.
Below are the strike prices of some puts and calls trading on the June 2024 S&P futures. As expected for stock put and call options, the delta in our examples below is positive for calls and negative for puts. Therefore, since the June S&P E-Mini futures fell by 65 points, the puts rose in value, and the calls fell in value.
:max_bytes(150000):strip_icc()/eminioptions-c8a2a64cc63f47fcab749baead93b8c0.jpeg "Trading Options on S&P 500 Futures (1)")
Can Investors Buy Options on the S&P 500 Index?
Yes, investors can buy options on the index directly. They can also buy options on the SPY ETF, which also tracks the S&P 500 index.
Is It Cheaper To Trade Options Instead of Futures?
The cost of trading options versus futures depends on the size of the position, market conditions, and the specific strategy being used. Options may require a lower initial capital outlay since investors typically only pay the premium to buy the option. Futures can often be bought on margin, reducing the initial outlay, but may require adding money to an account if the market moves against the investor.
When Were S&P 500 Futures Options First Introduced?
S&P 500 futures were first listed in 1982 on the CME. This marked a significant milestone in financial markets, offering investors a new way to hedge against market volatility or speculate on the future direction of the overall market. E-mini futures were introduced in 1997. Options on S&P 500 futures were introduced several months after the original futures contracts, in 1983, on the CBOE.
The Bottom Line
While there are many ways to trade using these options, many traders prefer to be net sellers of options. Whether individuals prefer to buy or sell stock options using either simple spreads or more complex strategies, then can easily adapt many of their favorite strategies to S&P options on futures.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
CME Group. "Conclusion of Standard S&P 500 Futures and Options Trading."
CME Group. "S&P Index Futures and Options on Futures."
CME Group. "Equity Index Options on Futures."
R. S. Johnson. "Derivatives Markets and Analysis." John Wiley & Sons, 2017. Pages 230-246.
U.S. Securities and Exchange Commission. "Investor Bulletin: An Introduction to Options."
R. S. Johnson. "Derivatives Markets and Analysis." John Wiley & Sons, 2017. Chapter 7.
CME Group. "E-mini S&P 500."
R. S. Johnson. "Derivatives Markets and Analysis." John Wiley & Sons, 2017. Pages 230-246.
CME Group. "2017 Product Anniversaries."
Reuters. "Timeline: Key dates and milestones in the S&P 500's history."
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Guide to Futures Trading
Introduction to Futures
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