Swapping Jelly Rolls for TACOs

How to manage your SPX (and SPX look-alike) options expiration risk with Trade at Cash Open (TACO) for CME E-mini S&P 500 index futures

Cash-settled Index options, both listed and OTC look-alikes, have an interesting property at their expiration: their delta exposure vanishes precisely at the moment of expiry. Options traders often need to replace the delta of the expiring index options to preserve the Greek exposure of the overall portfolio. While it is possible to replace the delta – for example, by buying or selling CME E-mini S&P 500 index futures for the SPX deltas – it is not easy to achieve the exposure at a price that aligns exactly with the final settlement price of the expiring options.

Historically, traders managed this exposure by trading an options combination, or a jelly roll,a synthetic index future expiring with the option and another synthetic index future going the opposite direction but expiring at a later date. Effectively, jelly rolls are futures calendar spreads to recapture the price discontinuity inherent in the index options settlement price (either the Special Opening Quotation, or SOQ, for A.M.-settled options, or the closing index value for the P.M.-settled options). As the option and the front legs of the jelly roll expire, the deferred synthetic futures take effect to replace the vanished delta. Because the front leg of the jelly roll expires to the same SOQ as the option, the deferred synthetic futures is effectively priced versus the SOQ.

With the advent of Basis Trade at Index Close (BTIC) and now the Trade at Cash Open (TACO) facility for the E-mini S&P 500 futures, market participants now have arguably more efficient alternatives available to help mitigate their exposure.

TACO Transactions

TACO transactions are similar to BTIC transactions in the E-mini S&P 500 index futures. In a TACO transaction, the E-mini S&P 500 Index futures trade will be priced at a pre-determined basis to the yet to be determined opening of the cash market. Once the cash market opens, the  trades in the E-mini S&P 500 futures will be priced at the SOQ plus or minus the agreed upon basis. Effectively, this is the same trade as the options jelly roll, except that it results in just one instrument instead of a combination of 4 options positions. 

Following the expiration of the options in question as well as the nearby synthetic futures in the jelly roll, there are still two options legs in the jelly roll.  Capital requirement – especially for OTC look-alikes – could be higher than the TACO transaction in E-mini S&P 500 index futures. The latter would be commingled in the futures account and could potentially experience margin offsets against existing positions in the index futures.

If the options trader has been using E-mini S&P 500 futures for delta hedging, the TACO transaction could offset the delta hedge for the expiring options, thus reducing the capital requirement to zero.

Trading Venues and Hours

TACO trades in E-mini S&P 500, much like BTIC trades, are available for trading both electronically on CME Globex or as a block trade at a minimum threshold of 500 contracts. For each trade date, trading will terminate at 9:30 a.m. ET to coincide with the cash market open – hence the moniker.  But unlike BTIC trading, TACO trading will start at 11 a.m. ET on the previous day1.  Effectively, TACO allows options participants to button up their exposure for the next morning before they leave for the night.

Contract specs

Basis Trade at Index Close and Trade at Cash Open for E-mini S&P 500 Index futures

 

Basis Trade at Index Close (BTIC)

Trade At Cash Open (TACO)

Underlying futures

E-mini S&P 500 Index Futures

$50 x S&P 500 Index

Ticker Symbol

EST

e.g. ESTM8 results in position in ESM8

ESQ

e.g. ESQM8 results in position in ESM8

Pricing Convention

Negotiated basis plus Official Closing Value of S&P 500 Price Index

Negotiated basis plus Special Opening Quotation of S&P 500 Price Index

Tick Increment

Basis negotiated in increments of 0.05 index point (= $2.50).  Basis can be positive or negative

Trading Venues

CME Globex and Block Trades

Trading Hours

CME Globex:

Monday - Friday

6 p.m. ET prior day – 4 p.m. ET

 

Block Trade:

Monday – Friday

6 p.m. ET prior day – 4 p.m. ET

 

CME Globex:

Pricing vs Monday SOQ:

6 p.m. ET Sunday – 9:30 a.m. ET

Tuesday – Friday:

11 a.m. ET prior day – 9:30 a.m. ET

Trading halt from 5 p.m. ET – 6 p.m. ET

 

Block Trade:

Monday – Friday:

11a.m. on prior business day – 9:30 a.m. ET

 

Last Trading Day

Day prior to expiration day of E-mini S&P 500 index futures

 


  1. Except for Monday trade dates, when trading starts on Sunday 6pm ET as opposed to Friday 11 AM ET.  CME Group is working  toward a technological enhancement to facilitate trading on CME Globex  on Friday for a Monday trade date.  TACO Block trades for Monday SOQ can be submitted after 11 am ET on the previous Friday.

 

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