- The futures market is where the volume, price discovery, and technical levels in the S&P 500 occur.
- Options on E-mini and Micro E-mini S&P 500 futures offer deep pools of liquidity, via either on-screen execution or private negotiation, around the clock.
- E-mini S&P 500 options on futures are now block eligible, allowing institutions to more effectively hedge risks.
- Futures portfolio margin is more capital efficient than securities margin.
- Physical delivery is more effective for many strategies.
1. The futures market is where the volume, price discovery, and technical levels in the S&P 500 occur.
E-mini S&P 500 futures (ES) trade $314 billion notional per day – 56% greater than the notional value traded amongst 500 underlying index constituents, and ~10 times the value traded across S&P 500 ETFs. Recently launched Micro E-mini S&P 500 futures (MES) trade $15.6 billion notional per day, contributing further to liquidity1.
While the cash index is only calculated for 6.5 hours daily, E-mini S&P 500 and Micro E-mini S&P 500 futures are available 23 hours a day; more notional value is traded in E-mini S&P 500 futures before the US cash market opens than is transacted across all S&P 500 ETFs over the course of an entire day.
Additionally, technical levels are defined in the futures, not the underlying cash market. Trade options on the product that global investors are utilizing to manage their risk around the clock.
2. Options on E-mini and Micro E-mini S&P 500 futures offer deep pools of liquidity, via either on-screen execution or private negotiation, around the clock.
Year-to-date E-mini S&P 500 options ADV is over 646K contracts2 and a variety of option expiries are available to suit hedging needs. For short-term needs, market participants can access expiries spanning weekly contracts on Monday, Wednesday, or Friday. Additionally, end-of-month and quarterly expirations are accessible for mid-term needs.
To address long-term market hedging, new expiries were added during June 2021. Now traders have access to Week 3 Friday expiries spanning 13 consecutive months. Additionally, quarterly contracts are available through nine quarters, spanning the first two years, and December contracts are available for years three -five.
Options on Micro E-mini S&P 500 Futures were launched August 31, 2020 to enable traders to fine-tune exposure. YTD ADV is 7.2K, a 17% increase compared to 2020 volumes2.
Liquidity during the US overnight hours3 continues to grow, as options on E-mini S&P 500 futures traded an average of 92K (15% of daily volume) contracts during Non-US trading hours YTD in 2021.
Together, over 43 expiries are now available. Traders can access contract codes for Bloomberg here.
3. E-mini S&P 500 options on futures are now block eligible, allowing institutions to more effectively hedge risks.
E-mini S&P 500 futures options became block eligible in June 2021, with a minimum block quantity of 250 contract per leg. This new block execution capability allows market participants to access deep pools of liquidity for a given expiry and strike, via private negotiation with trusted counterparties.
Liquidity seekers can access liquidity for large-sized transactions without information leakage and slippage, whereas liquidity providers can avert break-up risk associated with execution at other venues. Over 1.5 million contracts have traded within the first four months of block eligibility. Now participants can block E-mini S&P 500 futures as part of a delta-neutral strategy with E-mini S&P 500 options on futures to gain greater capital efficiency.
4. Futures portfolio margin is more capital efficient than securities margin.
Clients can achieve considerable margin savings by netting options on futures with offsetting futures hedges. Portfolio margining results in a single performance bond requirement and daily variation margin adjustment. Capital efficiencies are furthered by the physical settlement into the underlying future that requires substantially less margin/capital than trading the cash securities basket at expiration.
5. Physical delivery is more effective for many strategies.
The delta of options on futures remains constant through expiry. In-the-money options deliver into physical futures positions while out-of-the-money contracts expire “worthless.” In-the-money cash index options will never physically settle, forcing investors to replace the expiring delta with new index positions which creates slippage risk on the execution.
Futures options expire to a 30-second VWAP of the underlying future – a “clean” price completely contained within the futures complex.4
Weekly and end-of-month options are exercised automatically providing greater certainty for investors by removing the risk of abandonment or contrarian exercise.
1Data through September 30, 2021
2Data through October 15, 2021
3Overnight hours are defined as 5:00pm CST – 8:30am CST
4The only exceptions are the American-style quarterly options, which expire against the underlying futures Final Settlement Price.