ES/SPX covered calls

S

Sashe

Let's say I want to sell covered calls on ES using SPX calls instead of ES calls. When selling covered calls on a stock it's easy to figure out the amount of hedge i.e when buying 100 shares of a stock you'd need to sell 1 call against it.
Let's say I want to buy 100 ES @1140 and sell SPX April 1150 Calls. I dont want to use ES calls due to their low liquidity and also I'd like to use SPX options because they have European style of exercising(not called till the expiration date). The question is how many SPX calls do I need to sell against 100 ES to fully cover my position. The first thing that comes to mind is to sell 100 SPX also, but I am not too sure.
Any help would be greatly appreciated.
 
Quote from Sashe:

Let's say I want to sell covered calls on ES using SPX calls instead of ES calls. When selling covered calls on a stock it's easy to figure out the amount of hedge i.e when buying 100 shares of a stock you'd need to sell 1 call against it.
Let's say I want to buy 100 ES @1140 and sell SPX April 1150 Calls. I dont want to use ES calls due to their low liquidity and also I'd like to use SPX options because they have European style of exercising(not called till the expiration date). The question is how many SPX calls do I need to sell against 100 ES to fully cover my position. The first thing that comes to mind is to sell 100 SPX also, but I am not too sure.
Any help would be greatly appreciated.
More...

1/2 as many SPX calls... in your example you'd buy 100 ES and sell 50 SPX 1150C. I understand you argument for choosing SPX calls; but it's not haircut-friendly, the spx margin is arbitrary and not risk-based(as in the ES ops). Best to stick with 100% fungibility.

Of course, you're better off simply selling 50 SPX 1150 puts(100ES 1150P) in this example as it's arbitrage-equivalent to what you propose(cov call position).

riskarb
 
Riskarb, thanks a lot, I am gonna try to put up this position.
Also you're saying selling 50 SPX puts @1150 for my example would be the same thing that I propose? I mean is it exactly the same in terms of the premium received and the greeks?
 
Quote from Sashe:

Riskarb, thanks a lot, I am gonna try to put up this position.
Also you're saying selling 50 SPX puts @1150 for my example would be the same thing that I propose? I mean is it exactly the same in terms of the premium received and the greeks?
More...

Your welcome -- correct, a CC is identical to a same-strike, naked short put:

Long spot + short call = synthetic short put.

Identical greeks and payoff distribution. Exactly the same. Save some edge and simply sell naked puts in the same ratio you would be trading a CC-position. Be usre to use the same strike you would be utilizing in the CC.

riskarb
 
Hi riskarb, thx again for your help.
Do you know what would be the margin requirements to put up this position:
Short 100 SPX April 1150 puts at 12
Is there a formula? My broker is IB
 
Quote from Sashe:

Hi riskarb, thx again for your help.
Do you know what would be the margin requirements to put up this position:
Short 100 SPX April 1150 puts at 12
Is there a formula? My broker is IB
More...

Over $2 million. Good luck with the trade.
 
Here's a good rule of thumb: If you have to ask how much the margin is, don't do it. Not even one. You don't know enough about the risk in the situation.

OldTrader
 
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