Everything I Need to Know Before Buying E-mini S&P 500 (ES) Options

carrer

carrer

I am new to the options world and I hope someone could shed some light to me.
I am adopting options to protect my downside, protect myself from flash crashes especially as I am a swing trader and I only spend a couple of minutes a day to trade, would definitely miss the crash if it were to happen.

Here is the scenario:
Current ES price = 2260
Option strike price at 2260 = $76

Here are my questions:

1. How much does a contract cost?
Is it $76 or $76x100?

2. When is the expiration of the option?
From the link below, it's a Jun 2017 futures options. So, I am assuming it will expire of the 3rd Friday of June?
And it's American, so I could exercise it whenever I wanted?

3. How to incorporate broker's fees?
According to OptionExpress, its commission is $12.95. Is it per trade basis or per contract basis?


Thanks.


Reference: http://www.cmegroup.com/trading/equ...uotes_globex_options.html?optionExpiration=H7
 
If your post constitutes what you consider "everything I need to know" then the market is going to enjoy taking your money off you.

I mean feel free to ask questions on here, that's what this place is here for, but the three you posted are "Dummies 101", you shouldn't have to ask them if you have done even the most rudimentary of reading up on options !

Re: "options to protect my downside" : Its not that easy, otherwise everyone would be doing it.

Get a few books, do some paper trading... otherwise you're going to get yourself into a whole heap of trouble.
 
1- the multiple for ES options is $50-it is listed on the CME website.
2-ES options come as monthly, weekly, end of month and wednesdays-your platfrom should provide days to expiration and you need to learn the symbology
3-ask your broker

You are not ready to do your first trade yet.
 
Once you get your most-basic basics down [as per the above responses], make a profit/underlying graph of the sort you see with every options book. (Look up Russell Rhoads and follow his lead.) Map out what will happen as the ES gains 1%, and loses 1%.

What you will find is that the underlying ES will have a 45° line, showing 1|1 loss-or-gain as the ES rises or falls. BUT[!!!] the PUT option which you purchased as insurance will have a swooping line (except at expiration) that will have much less of an angle (to offset the 1|1 ES loss) -- a victim of delta mostly, theta increasingly, and vega eventually. (Learn, learn, all'us be a'learnin'.)

If you can't graph it, do NOT trade it.
 
When I dabbled in this, I found the SPY options more appealing. First of all, they are more liquid I would say. Of course, you can't trade them 24hrs though, so this may be an issue. What I used them for was day trading, simulating the ES, with less leverage, and for this, it worked quite well. Simply choosing the closest weekly expiry with a strike price very close to the actual price, and simply buying calls or puts to go long or short. I can't recall the exact numbers, but trading 2 options was about 1/5 ES contract. (ie. If ES moved 4 points, hence $200, my SPY options would have gained about $40 or so.)

Commissions of course is a bit of a bitch because with ES, getting 1 tick profit means you make about $8, but 1 tick profit with options is $1, and your commissions are more than that,so you're actually down and not up. The price to buy or sell was about $1.50 or so, but there were discounts for multiple options, unlike the ES which is the same price for multiple contracts..

In terms of spread, often it was just 1 tick, but you have to watch out for this and focus on limit orders to enter and exit. But all in all, it works great. Instead of risking $100 for the ES trade if I was going to risk 2 points, it could be just over $10 if I used options instead.

The most you will also ever lose when buying options is the cost (price x $100), so you're talking $100 to $200 max, if like I say you're buying a close expiry for the weekly that is ATM.
 
carrer said:
I am new to the options world...I only spend a couple of minutes a day to trade.

Your statement "And it's American, so I could exercise it whenever I wanted?" tells me that you don't know some very fundamental information about the various kinds of options that are tradeable and the difference between American and European style options and, more importantly, that the E-mini S&P 500 (/ES) Equity Index Options on Futures options can be either European or American style. The quarterlys (March Quarterly Cycle (Mar, Jun, Sep, Dec) are American, the End of Month, Weekly and Weekly (Wednesday) are European style.

I recommend that you visit the CME's website, in general, and the E-mini S&P 500 Options Contract Specifications page in particular to learn more about the /ES options contracts. Here's the link http://www.cmegroup.com/trading/equ...optionExpiration=8019-F17#optionProductId=138

As a new options trader you need to spend more than a "couple" of minutes a day to learn about options in general and the E-mini S&P 500 (/ES) options in particular.

I suggest that you start by reading a few book about options and how they work.
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carrer said:

Here's a partial list of books that I keep in my library;

-Option Pricing & Volatility (2nd Edition)..Sheldon Natenberg

-Options as a Strategic Investment (5th Edition)..Lawrence G. McMillan

-The Complete Guide to Option Selling: How Selling Options Can Lead to Stellar Returns in Bull and Bear Markets (3rd Edition).. James Cordier and Michael Gross

- Options, Futures, and Other Derivatives (9th Edition)..John C. Hull

- Getting Started in Options (8th Edition).. Michael C. Thomsett

- Option Spread Trading: A Comprehensive Guide to Strategies and Tactics..Russell Rhoads

- Trading Weekly Options ..Russell Rhoads


In addition I would visit, at a minimum, the following websites to help further your education;

The Options Industry Council
http://www.optionseducation.org/en.html

The Options Clearing Corporation
http://www.optionsclearing.com/

Chicago Board Options Exchange (CBOE) Education Center
http://www.cboe.com/learncenter/

Chicago Mercantile Exchange Education Center
http://www.cmegroup.com/education.html

Financial Industry Regulatory Authority
http://www.finra.org/

National Futures Association
http://www.nfa.futures.org/

Wikipedia
https://en.wikipedia.org/wiki/Option_(finance)

There's also a number of magazines available on the newsstands (e.g. Barnes and Noble, Books A Million, etc.) that feature articles and columns about options and how to analyze/trade them. They include;

Modern Trader (was, until 2015, Futures and still is on the Web)
http://www.futuresmag.com/

Technical Analysis of Stocks and Commodites
http://www.traders.com

Barron's magazine
http://www.barrons.com

I would also recommend that you partake of some other Internet based educational resources such as;

ThinkMoney magazine (online and mostly options oriented)
https://tickertape.tdameritrade.com/thinkmoney

TastyTrade (videos and discussions about options)
https://www.tastytrade.com/tt/home

Finally, as to commissions and fees/expenses you need to talk to you broker. In addition to the broker's fee for making a trade there are are also exchange and regulatory fees that have to be factored in. Interactive brokers charges a fee of $0.70 (70 cents) per options contract. In addition you have to pay a regulatory (NFA) fee of .0407 per contract and a CME/Globex fee of a few cents on each trade, etc. The fees were as of last Fall, they may have changed since then.

Best Regards

Steve
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Gotcha said:
When I dabbled in this, I found the SPY options more appealing. First of all, they are more liquid I would say. Of course, you can't trade them 24hrs though, so this may be an issue. What I used them for was day trading, simulating the ES, with less leverage, and for this, it worked quite well. Simply choosing the closest weekly expiry with a strike price very close to the actual price, and simply buying calls or puts to go long or short. I can't recall the exact numbers, but trading 2 options was about 1/5 ES contract. (ie. If ES moved 4 points, hence $200, my SPY options would have gained about $40 or so.)

Commissions of course is a bit of a bitch because with ES, getting 1 tick profit means you make about $8, but 1 tick profit with options is $1, and your commissions are more than that,so you're actually down and not up. The price to buy or sell was about $1.50 or so, but there were discounts for multiple options, unlike the ES which is the same price for multiple contracts..

In terms of spread, often it was just 1 tick, but you have to watch out for this and focus on limit orders to enter and exit. But all in all, it works great. Instead of risking $100 for the ES trade if I was going to risk 2 points, it could be just over $10 if I used options instead.

The most you will also ever lose when buying options is the cost (price x $100), so you're talking $100 to $200 max, if like I say you're buying a close expiry for the weekly that is ATM.
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Very interesting...thanks for the info.
 
Honestly you should go to the optionseducation website and start watching videos and start reading some basic guides like Options for Rookies is a great book to start, also you really should learn how Margin works, read and understand the Characteristics and Risks booklet.
http://www.optionsclearing.com/about/publications/character-risks.jsp

Really get a good understanding about all the basics before even thinking about a trade. You can make a mistake that can wipe out your account because of a misunderstanding.

BTW: I prefer the CBOE product (SPY options) over the CME products
 
Gotcha said:
When I dabbled in this, I found the SPY options more appealing. First of all, they are more liquid I would say. Of course, you can't trade them 24hrs though, so this may be an issue. What I used them for was day trading, simulating the ES, with less leverage, and for this, it worked quite well. Simply choosing the closest weekly expiry with a strike price very close to the actual price, and simply buying calls or puts to go long or short. I can't recall the exact numbers, but trading 2 options was about 1/5 ES contract. (ie. If ES moved 4 points, hence $200, my SPY options would have gained about $40 or so.)

Commissions of course is a bit of a bitch because with ES, getting 1 tick profit means you make about $8, but 1 tick profit with options is $1, and your commissions are more than that,so you're actually down and not up. The price to buy or sell was about $1.50 or so, but there were discounts for multiple options, unlike the ES which is the same price for multiple contracts..

In terms of spread, often it was just 1 tick, but you have to watch out for this and focus on limit orders to enter and exit. But all in all, it works great. Instead of risking $100 for the ES trade if I was going to risk 2 points, it could be just over $10 if I used options instead.

The most you will also ever lose when buying options is the cost (price x $100), so you're talking $100 to $200 max, if like I say you're buying a close expiry for the weekly that is ATM.
More...

Actually that is not correct. Unless you call your broker and explicitly provide a no exercise instruction you can lose more if on a Friday night your long option is a cent or more in the money and your long option position is exercised automatically. You can end up short a lot of stock or long a lot of stock over the weekend.

So you have to close out the position or call your broker and tell them you do not want to exercise your long option position.

http://www.cboe.com/learncenter/concepts/beyond/expiration.aspx

What is "automatic exercise" of an option?
The Options Clearing Corporation has provisions for the automatic exercise of certain in-the-money options at expiration, a procedure also referred to as "exercise by exception." Generally, OCC will automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money, and an index option that is $.01 or more in-the-money. However, a specific brokerage firm's threshold for such automatic exercise may or may not be the same as OCC's.
 
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