Faceoff: SPX Options vs. E-mini Options

03/21/2012 7:00 am EST

Focus: OPTIONS

Josip Causic

Instructor, Online Trading Academy

While there aren’t clear advantages to trading S&P 500 index options over options on S&P futures, there are two distinct differences that option traders must understand, writes Josip Causic of Online Trading Academy.

A question that puzzles some traders is what are the advantages of trading options on the S&P 500 futures versus the S&P 500 cash-settled index? After searching for that answer myself, I concluded that although they do appear to be very similar, there is a subtle difference between the two. This article does not advocate trading one over the other, but instead aims to explain the contrast between the two.

Let us first show the similarities. The figure below shows the option chain for the S&P 500 cash-settled index. These options are European style, and they also have weeklies.

chart
Click to Enlarge

As can be observed, at the time of writing this article, I had an iron condor on SPX, so I want to use the premiums from this options trade as the point of comparison against the options on the E-mini S&P 500 shown in Figure 2. There is very little difference in premiums because the option pricing formula is still the same.

chart
Click to Enlarge

Not only is the premium similar, but also, their expiration dates are within a couple days of each other, and they both have weekly options.

Now let us move on to the differences. The main differences between the two are the expiration styles and trading hours. First, the options on the S&P 500 cash-settled index are European style, as pointed out earlier, while the options on the E-mini S&P 500 are American style.

Second, the options on the S&P 500 futures trade beyond normal trading hours. This fact can be easily verified by going to the CME Group Web site and clicking on the third tab from the left (Equity Index).

If you hover your mouse over the Equity Index Tab, it lists in orange lettering US Index Futures and Options (CME). The very first line in blue reads E-mini S&P 500 (Dollar). Click that and it will bring you to the Quote page. Right next to Quotes is Contract Specifications. There are two tabs underneath Contract Specifications: Futures and Options.

When on the tab for Options of the E-mini S&P 500, we can clearly see the options trade Monday through Thursday from 5 pm to 3:15 pm Central time. The big institutions know this crucial piece of information (the extra long option trading hours) that is so deeply buried in the "library" of the CME Group data. They use it and abuse it, because Figure 2 shows the open interest on the weekly call and put options is there, and it is not the retail traders that have created the liquidity. Nope. Read more, watch less television.

Although the premiums in the cash-settled S&P 500 options are very close to the E-mini S&P 500 options, there are subtle differences between the two. The E-mini S&P 500 options are American style, have longer trading hours, and they do trade overnight. Keep that in mind when choosing between the two.

For more on this subject, visit the OTA Web site.

By Josip Causic, instructor, Online Trading Academy

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