Cant really see the advantage of E-Minis versus Stock Options or Stock Index Options

A

abenyukh

Perhaps someone can explain the flaws in my thinking.

First, e-minis claim tax benefits because of 60/40 rule where 60% is taxed at Capital Gain rate while 40% is taxed at personal rate.

How exactly is that an advantage. I am in the 30% tax bracket, so it is better i think to have the entire amount taxed at the capital gain rate which i think is like 25% or less.

Next, from what i can tell, and i am very new to Eminis, just been doing some research online, you need approx $3500 in your account per contract.

Now assuming i had $3500 in my account and i bought 1 contract of ES, I would bank $50 for each point the ES goes up.

With stock options, lets take an $2 call, for the same $3500, i can buy 17 contracts giving me a $1700 gain for each point it goes up. No i realize stock options or even index options don't move nearly as quickly as ES, but to get the same $50 gain i would only need the option to move 3 cents higher (.03) thats only 3/100ths of a point.

Again, i re-emphasize, i know almost nothing about e-minis except what I wrote above, so what i am hoping is that you experts out there can please correct my potentially flawed thinking and tell me where i went wrong and that the ES is actaully a better vehicle.

I just dont seem to see the advantages. I hope i am missing something.

Please no hate responses telling me how stupid i am or how i dont know anything because i already know that i know almost nothing. I only know what i read on cme.com and what Interactive Brokers help desk told me)

Also, one last point. CME website says that options on futures requires NO margin and that all i do is multiply the premium by $50 and that is the cost of 1 contract of the option. Interactive Brokers says i need that same $2000 margin for options on futures. Who is correct?

Again, thanks for reading and i hope to get some great responses to my questions!

Thanks All!!!!

THIS BOARD IS GREAT!
 
The 60/40 tax treatment on futures is advantages as compared to trading stocks short term ( short term stock trades are not given capital gains treatment, but are taxed as ordinary income. )

As far as how much you could "potentially" make trading various instruments, Try focusing on how much you can lose.

with only 3500, i would stick to swing trading stocks from a broker with low commissions such as IB.

good luck
 
Quote from abenyukh:

With stock options, lets take an $2 call, for the same $3500, i can buy 17 contracts giving me a $1700 gain for each point it goes up. No i realize stock options or even index options don't move nearly as quickly as ES, but to get the same $50 gain i would only need the option to move 3 cents higher (.03) thats only 3/100ths of a point.
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What about the B/A Spread?
On the entry, for instance...
If you lift the Ask, you are already out the spread.
If you sit at the Bid, and wait to get hit, the market may have already moved against you.

How about the cost of the trade?
Using IB, its $17 to enter, and $17 to exit.
This assumes you use Smart Routing.

How about the option not moving in .01 increments?
No explanation required.

How much exposure are you getting to the underlying with the $2 Call?
Need more concrete information from you.
 
Fan,

I thought all stock trades (short term or long) were taxed as capital gains? Can you possibly point me at a link that says otherwise? My accountant must not know this, i'd like to show him something if you know of the top of your head.

Hard Rock,

What do you mean by exposure? (sorry, i am fairly new, so some terminology i dont know)

Thanks guys for replying so quickly. I do appreciate the feedback!
 
Quote from abenyukh:

With stock options, lets take an $2 call, for the same $3500, i can buy 17 contracts giving me a $1700 gain for each point it goes up. No i realize stock options or even index options don't move nearly as quickly as ES, but to get the same $50 gain i would only need the option to move 3 cents higher (.03) thats only 3/100ths of a point.

I just dont seem to see the advantages. I hope i am missing something.
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Superiority depends on what you want to do.

If you want to take a long-term position on the indexes, options are better. If you are short-term, you can't beat the futures.

Advantages of Futures:
1. Bid/Ask spread. That $2.00 call you mentioned will immediately drop .50 the moment you buy it. (Today the SPX April 975 calls are 1.20 Bid and 1.70 ask) This means you are down about 25% the moment you open your position. That is a huge disadvantage. (BTW I do know you can "shave" that bid/ask spread a bit, but the principle remains the same, but in so doing you cannot set a meaningful stop-loss order)

It takes a significant move in the market just to overcome the bid/ask spread and bring you up to break-even, never mind give you some profit. Just a slight move in the wrong direction, and your position is down 50%!!!

On the other hand, the S&P e-Mini contracts have a one tick ($12.50) Bid/Ask spread. It barely affects the trade, specially if you are targeting 2-5 pts. (Not a big move.)

2. Delta will kill you in options. That $2.00 option you mentioned has a delta of .08! Simply put, the option is going to increase .08 for every 1.00 move in the underlying market. So, you buy it now for $1.70, with the market at 837, you can currently sell it for $1.20 (bid). That means the market needs to move up 6 points before you are even back to zero! Then you need another 5 or 6 points to give you a .50 profit! That means you need to have twelve point move in your favor to make any money! Guaranteed recipe for failure.

With futures, you buy now at 837, market moves up 6 points, you sell and have $300 profit per contract. You can set a stop to control your risk and limit your loss if you are wrong. That is trading.

3. Margin. If you, as you suggested, sunk $3,500 into $2.00 calls. It would take just a few points of adverse movement in the S&P and your $3,500 would be looking more like $1,500. (I haven't even mentioned time decay!)

But, if you went the futures route and opened an account with $3,500 in it, you could theoretically make 20 straight losing trades with a stop-loss of 2 pts ($100) before your account got down to $1,500. (excluding commissions) Are your chances better of hitting the big one with maybe 2 or 3 option trades or 20 futures trades?

Officially the margin is $3,500 per contract (e-Mini S&P) but there are brokers who will let you trade with $500 per contract. That's good because you keep most of your money somewhere else, so you don't go and blow it in one stupid trade. When your account balance drops below $1,000 they freeze it until you bring it back up to at least $2,000.

My friend, the real winners in the options game are the Market Makers who sell you that call for $1.70, and turn right around and buy it from someone else for $1.20. The retail customer is the big sucker in that game. Don't play it until you really need to. Don't be the babe in the woods!

Prosper,

kp
 
i wouldnt make the decision on what i trade on the tax you pay. it is unlikely you will make enough with a small account to worry about taxes. you need to figure out a way to get profitable before you need to worry about taxes.
short term stock trades are taxed at your ordinary income rate. so if you are in 30% bracket thats what your rate would be.
 
60/40, 60 is taxed at long term cap gain rate/40 is taxed at short term cap gain rate

you are correct, for the same amount of money you have more leverage with options and complete limited risk

many if not most prefer the futures to the options due to the absence of time premium and the tighter spread

but for an out and out directional do or die market call, the options would be your best bet (with emphasis on the word bet)

time is a factor, time to already start looking at the June (M) options

If you think the time premium on an option is ridiculously high, all you have to do is turn around and short it to someone who thinks it is fairly priced.
 
Abenyukh,

Which vehicle to trade is a very personal decision, but the tax treatment favors the e-minis hands down. Capital gains and losses are produced by the buying and selling of capital assets. Securities in general qualify as capital assets. Here is the difference between e-minis and options. The e-minis are what the IRS considers regulated futures contracts (Sec. 1256). All positions are treated as though they were sold the last day of the tax year and regardless of holding period 60% of any gain or loss is considered to be long term with the 40% to be short term. Long term capital gains get favorable tax treatment (20%) while short term capital gains are taxed as ordinary income. Now options would be treated as short term capital gains in most cases and higher ordinary income tax rates would apply.

You might want to think about risk managment with only $3500 of capital.

Good Luck
 
One more thing to think about...most options expire worthless.

Futures are hard to trade...options are a lot harder.

My friend, judging from your questions, you ain't quite ready for this...
 
Quote from tampa:

One more thing to think about...most options expire worthless.

Futures are hard to trade...options are a lot harder.

My friend, judging from your questions, you ain't quite ready for this...
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Maybe he's not ready, but at least he's asking questions.

When I started, I had no idea a forum like this existed.

kp
 
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