Answer "Of The Day"

By Craig Bewick
FEB 18 2021

Thanks to everyone who participated in yesterday’s first “Question of the Day” in In FOCUS.  We had a great response to the question and we had more correct answers than incorrect answers but every option (A through D) was represented. Today, we’d like to take the opportunity to explain the answer.  As a reminder, the question was as follows:

This morning, the March E-mini S&P 500 Futures Price was 3,912.5, the March E-mini S&P 500 option had 30 Days until Expiration and the ATM volatility was 17.6%. 

If, 5 days from now, the futures price remained at 3,912.5, the ATM volatility had fallen to 14.0% and there was no change in the options skew, which of the following positions would most likely have gained in value if initiated today?

A.  Long 3,910 Straddle (Long 3,910 Call, Long 3,910 Put)

B.  Short 3,900/3,850 Put Spread (Short 3,900 Put, Long 3,850 Put)

C.  Long 3,890 Put

D.  Long 3,920/4,000 Call Spread (Long 3,920 Call, Short 4,000 Call)

The correct answer is B.  The key to this question is that we isolated the impact to the time value of the position (theta) and the volatility of the position (vega).  By holding the futures price constant we removed any impact that a potential price move in the underlying would have on the position and by holding the skew constant, we removed the argument that otherwise could have been made that the Calls may have gained relative to the Puts or that options closer or further from the money might have gained or lost relatively more. 

Therefore, this question came down to whether the position was net long or short option premium or, in other words, net long or short Vega, which is the sensitivity to implied volatility.  (In fact, some refer to being long premium or long Vega as being “long vol” or “long volatility”).  The positions represented by A, C and D were net long options premium and net long Vega and therefore, had a negative Theta and Vega values which means that they tend to lose value as the Days to Expiration and volatility decline (all else equal).  Answer “B” represents a position that is net short option premium (premium was collected, not paid) and would tend to gain as days to expiration and volatility decline.  We used a QuikStrike pricing tool to generate the beginning and ending theoretical values of these four positions that you can see in the image below.  Note that we represented a net premium paid with a negative sign and a net premium collected with a positive sign to try to illustrate the hypothetical P&L of these positions.  Further, we used both points and dollar value equivalents.  Finally, though we used E-mini Options in this example, CME Group also lists Micro E-mini Options on S&P 500 and Nasdaq-100 so we included the hypothetical premium paid or collected on the Micro-sized options. 

Thank you again and please look out for the next Question of the Day which will be included in In FOCUS sometime before the end of February.  Everyone who submitted answer “B” will be entered in a random drawing and the winner of the gift certificate will be notified shortly. 


Craig Bewick has spent 25 years in futures and options markets, starting at CBOT and CME working in risk management, regulatory, technology, product management and client development. 

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