Synthetic Futures Spreads

Real Money

Real Money

How about one of you sick equity options gurus run me through how I can lever up a spread like NQ/YM. I am thinking go long QQQ calls and short DIA puts?

I'm a futures guy and I like having leverage but this options strategy is kind of intriguing. Can you scalp this? Would this be capital efficient?

Please assume $100,000 USD and portfolio margin @ IB (Reg-T margin if you prefer) if you would be so kind.

Thanks
 
Real Money said:
...how I can lever up a spread like NQ/YM. I am thinking go long QQQ calls and short DIA puts?
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Writing the spread as NQ/YM implies you want to go long NQ and short YM.

If this is the case, then you would buy long calls in NQ and long puts in DIA(not short).
If you mean that you are bullish on both the NQ and YM, then you would go long calls on both.

The main difference in doing this with options rather than pure futures is the Greeks - theta and vega can work against you heavily during times of high volatility.

Normally, there isn't much of a margin requirement on long options positions on stocks, but as these will be options based on futures, there will be margin involved. How much margin? You'll have to check before placing the trade, and this will then determine whether the strategy is an efficient use of capital.

Other than spreads, if you have an opinion on the direction of a future then you could do a synthetic - eg. if you think something is going up, then buy the future and a put option for protection - this is very margin efficient (as your loss is predefined) and hence can give greater ROI.

FYI - yesterday I went long the Euro futures and bought puts. Will aim to close if/when the Euro rises to 1.12 or therabouts.
 
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I don’t trade futures and not at a computer right now to look at options, but if you’re looking for some type of arbitrage on the divergence/spread between two separate but related instruments then:
a) https://www.investopedia.com/articles/trading/09/gold-silver-ration.asp
“This requires the purchase of puts on gold and calls on silver when the ratio is high and the opposite when the ratio is low. The bet is that the spread will diminish with time in the high-ratio climate and increase in the low-ratio climate.”

b) You could try selling OTM calls on more expensive underlying while buying OTM calls for an equivalent underlying value of the underpriced underlying - to end up with credit. Hopefully the price won’t go up on neither and you’d pocket the difference/credit, or if both underlyings do go up, you may end up with being short the overpriced underlying while being long the underpriced underlying.

c) Both above strategies could be played both ways up & down with calls and puts, which could result in a sort of a box spread (aka box) on two underlyings. Box itself can theoretically be used for arbitrage on a single instrument, but such opportunities no longer exist, while possibly a box could be used for the non-riskless spread you’re trying to arbitrage. This (possibly) could mean buying a call spread on one instrument and selling the same width call spread (or buying put spread) on the other instrument. The Investopedia article/strategy above may actually build such a box over time, but there may be a way to do this instantly. I’m just not looking at a computer right now to think through the details.
 
Hey thanks for the answers so far. At present, I trade the NQ/YM spread at this ratio:
Long 2*NQU19
Short 3*YMU19

This is about $304,164.40 LONG and $388,290 SHORT. This is not an arbitrage, it is a relative value trade. I am trying to understand if a similar type of trade is possible using a position of

Long QQQ Calls and Short DIA Puts. << Synthetic Futures Spread.

You can see that if I just tried to trade the cash stocks in a similar ratio this would become very capital intensive. Therefore, can options provide a similar leverage to this trade?

My math would suggest that initiating a position

Long 32 ATM CALLS QQQ
Short 15 ATM PUTS DIA

with the same expiry would give me a similar exposure to the above. To the comments above, I am bullish on both indexes when buying the spread (if that makes sense). The equity options are much more liquid (AFAIK) than the Futures Options. Thanks.
 
ffs1001 said:
Writing the spread as NQ/YM implies you want to go long NQ and short YM.

If this is the case, then you would buy long calls in NQ and long puts in DIA(not short).
If you mean that you are bullish on both the NQ and YM, then you would go long calls on both.
More...

From my (naive) understanding, the long call gains intrinsic value as the short put loses it. This allows you to buy the synthetic future and have manageable exposure based on the size of each leg.
 
Wow I think I just figured this out. I would have to do a Long Call/Short Put in QQQ while at the same time Short Call/Long Put in DIA. Now, balancing the legs is another thing entirely...or is it?
 
REDP1800 said:
u must not really believe its going up if buying a put also..what is time frame on a trade like this
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If you buy a call on NQ .and sell a put on YM both are bullish. If you buy a call on NQ and buy put on YM you have a bullish position hedged with YM pit assuming you developed some workable ratio between the two.

Unless you explain better what you mean you will not receive real help...
 
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