In June 2021, CME Group enabled block trading for E-mini S&P 500 (ES) options for the first time. Option blocks provide participants with confidentiality while trading, reduced slippage, and a flexible means to hedge large S&P 500 equity index exposures. As a result, ES option blocks have achieved steady growth and continue to afford greater opportunities to trade CME Group’s robust suite of ES futures and options.
When CME Group’s standard S&P 500 options were delisted in September 2021, ES options became the options contract of choice for managing risk on the Index. In the past year, ES options have averaged over 647,000 contracts in volume each day. Furthermore, the opening of option block eligibility in June 2021 has allowed traders to execute block trades using ES options for the first time.
Since then, ES options block activity has achieved solid growth, with nearly 75,000 contracts in average daily volume (ADV) in October 2021.
Given the deep liquidity in ES options, option blocks provide market participants more ways to access this liquidity and express their opinion on the S&P 500. In fact, ES option blocks have traded nearly 3 million contracts in cumulative volume since June 2021.
As a result of this growth, ES option block volume is now around 8% of total ES option volume and this share continues to grow upward.
Given the ample liquidity of ES options, it is no wonder why ES option blocks are gaining momentum in the marketplace.
Features of trading ES option blocks
Options already provide participants with great flexibility when trading. Option blocks, however, build on this flexibility by allowing participants to place larger trades in a privately negotiated environment. ES option blocks are a multifaceted product in that they combine the benefits of trading at CME Group with those of option block strategies, thereby creating a unique product offering.
ES option blocks, along with all Equity Index contracts traded at CME Group, have the following key features:
- Capital efficiency and central clearing: Margin efficiencies can be realized by transacting ES option block trades at CME Group, where many traders maintain underlying delta hedges and positions. Additionally, futures and options could provide margin offsets and relief to charges commonly levied on OTC transactions (e.g., Basel, RWA, SLR).
- 24/7 trading: Traders have risk management flexibility around the clock.
- No breakup risk: Traders have the benefit of directly dealing with a single counterparty, providing greater efficiency.
- Complementary E-mini S&P 500 ecosystem: Market participants have access to complementary products at CME Group to manage dividend exposures and total return swap exposures, which present the opportunity for additional risk management and margin efficiencies across strategies.
Block trades also offer the convenience of privately negotiating a trade with a selected eligible counterparty as well as the ability to efficiently execute a large transaction. Furthermore, ES option blocks offer participants trade security through CME Clearing.
ES option blocks can be executed as part of a delta-neutral transaction. This means that traders can use ES futures to execute a covered, delta-neutral block trade in ES options and, as a result, experience zero slippage between their option blocks and the appropriate hedge. These delta-neutral ES option blocks may provide a more capital-efficient listed alternative to OTC combos.
Trading ES option blocks can also offer operational efficiency since traders are no longer required to manage distinctly different liquidity pools for blocks and on-screen trading. Additionally, no ISDA or CSA documentation is required when trading a covered futures and options block trade at CME Group, meaning reduced paperwork for participants.
With a variety of expirations, traders should have their needs met when trading ES option blocks. Specifically, on any given day, there are 43 ES option expiries, with such expiries spanning five years, as illustrated below.
Trading ES option blocks provides a unique value proposition and traders can achieve numerous capital and operational efficiencies when adding ES option blocks to their portfolio.
About ES option blocks
E-mini S&P 500 options have a $50 multiplier and a minimum block quantity (MBQ) of 250 contracts per option leg. Option block trades at CME Group are 100% privately negotiated and reported to CME ClearPort via CME Direct (CMED). Customers can also utilize ‘Directed Request for Quote (RFQ)’ functionality to send orders to trusted counterparties, offering consolidated audit trail and workflow.
Lastly, traders have access to basis trade at index close (BTIC) functionality, quoted as a basis to a given day’s cash index closing price, which can help options traders manage delta exposures.
The below graphic provides a snapshot of how ES option blocks have recently been traded at CME Group.