Understanding S&P 500 Options Block Trades

Did you know that you can execute a block transaction using CME S&P 500 options where 100% of the trade can be privately negotiated, consummated and subsequently reported to CME Group?

S&P 500 option trades are often negotiated in a delta-neutral manner involving a synthetic combo.

When traded over-the-counter (OTC), this has allowed for capital commitment in a private, bilateral negotiation and has historically been an attractive method of execution.

Now, you can block trade delta-neutral, standard S&P 500 options by adding a covered future using either the Standard or E-mini futures contract at CME Group, via CME Direct.

100% of the trade can be privately negotiated, consummated and subsequently reported to CME Group – thus mitigating breakup risk.

But what is a Block Trade?

Block trades are privately negotiated futures or option trades, or combination transactions, pursuant to Rule 526, that are permitted to be executed between two eligible counterparties - which are subsequently submitted to CME Clearing through CME Direct.

Let’s look at an example. During U.S. trading hours, a hedge fund calls a volatility trading desk at a bank, requesting liquidity in the June S&P 500, 2600 calls - delta neutral against the S&P 500 June futures. By trading S&P 500 options, with their larger, $250 multiplier, the hedge fund can potentially realize lower exchange fees for this transaction.

The vol trader at the bank provides an offer to sell that client 300 options, hedged delta neutral with 30 S&P 500 futures. The parties agree to the transaction.

The bank’s CME Direct-enabled broker reports the trade through CME Direct on behalf of both parties within the 5-minute reporting requirement, which began upon agreement to the trade.

You can also block trade a covered, standard S&P 500 option spread, provided that each leg meets the block minimum threshold. Block trades on the covered, standard S&P 500 options are centrally cleared at CME Group, thus mitigating counterparty credit exposure and associated risks.

Additionally, a listed, delta-neutral covered futures and options block trade can be more capital efficient as the futures, and options on futures, could provide margin offsets and relief to charges commonly levied on OTC transactions.

You can use reduced block trade requirements and extended block trade reporting times during Asian and European trading hours to assist in managing their risk outside of U.S. trading hours.

Market participants should consult the contract specifications for additional details including block requirements and reporting information.