What if you could manage your delta risk of expiring cash-settled options days ahead of time?

BTIC and TACO allow traders to execute a basis trade to an eligible futures contract’s underlying cash index level. Option traders use TACO and BTIC to manage the delta risk of expiring cash-settled options. Historically, these traders could only do this during the trading session immediately preceding the index’s opening or closing auctions.

But now, BTIC+ and TACO+ introduces T+ trading, allowing traders to execute a BTIC or TACO trade for a given trading session, days in advance.

While the traditional BTIC and TACO are basis transactions that deliver the outright index futures contract the same day, BTIC+ and TACO+ are futures contracts that deliver a cleared BTIC or TACO transaction on the specified delivery date.

BTIC+ and TACO+ futures will have their own product codes that are different than the BTIC and TACO product codes into which these new futures deliver.

Understanding BTIC+ and TACO+ Contract Codes

Let’s look at an example of the BTIC+ contract code. Imagine today is Thursday, November 7, 2019, and you want to trade futures against the S&P 500 official closing price for next Wednesday –November 13.

The BTIC+ contract code you would trade is ES1X913.

ES tells us this will be a BTIC+ trade on the E-mini S&P 500 futures contract, which has the contract code ES.

The number 1 immediately following ES signals that on the BTIC+ delivery date, the outright futures contract delivered will be the nearest expiring ES futures contract.

The remaining characters identify the date of the official index closing level that the futures basis will be applied to. The letter X is the contract code month for November, while the number 9 represents the year – 2019 - and the 13 represents the day of the month.

Where collectively, ES1X913 signifies that this BTIC+ contract is for the December 2019 ES future against the official close of the S&P 500 cash index on Wednesday, November 13, 2019.

In a different example, ES2X913, ES tells us this will be a BTIC+ trade on the ES future, but the number 2 tells us that on the BTIC+ delivery date of November 13, 2019, the outright futures contract delivered will be the second nearest expiring futures contract, as of that date.

Which, in this case, would be the ES futures contract expiring in March of 2020.

The TACO+ contract codes work the same way. Where in this example a TACO+ trade on EQ1F017 would deliver a front month ES future with the futures basis applied to the official index open on January 17, 2020.

EQ tells us this will be a TACO+ trade on the ES future. The 1 specifies that the nearest expiring futures will be delivered on delivery day. The letter F is the contract code month for January, while 0 represents the year – 2020. 17 represents the day of the month. When put all together, EQ1F017 signifies that this TACO+ contract is for the March 2020 ES future against the official open of the S&P 500 cash index on Friday, January 17, 2020.

Trade Example

On Thursday, November 7, you want to trade ES futures at a basis to the official close of the S&P 500 index on Wednesday, November 13, and you buy 10 contracts of the ES1X913 future at -2.0. You now have an open position of long 10, ES1X913 contracts at -2.0 that you will carry.

The following Tuesday, November 12, is the last trading day of the BTIC+ contract ES1X913. On this day, the contract’s daily settlement is -2.75.

Your final position is still long 10 contracts. Because you have a final position in BTIC+ futures contract at the conclusion of the last trading day, the BTIC+ contract ES1X913 will be converted to a BTIC transaction, namely ESTZ9 for the Wednesday, November 13 trading session –– at the last settlement price of -2.75.

Like other traditional BTIC transactions, the resultant long 10 ESTZ9 position can be traded out of, increased, or held during Wednesday’s trading session, and your final end-of-day BTIC position on November 13 will be processed as per normal.

Listings

CME Group will list two BTIC+ futures contracts on the S&P 500 index – ES1 and ES2.

The ES1 BTIC+ contract will be on the nearest expiring E-mini S&P 500 futures contract will have delivery dates such that you can trade the nearest six Monday, Wednesday, and Friday index closes, as well as the next Friday and the last trading day of the month on a forward-starting, T+ basis. This means that eight contracts will initially be listed on the ES1 BTIC+.

The ES2 BTIC+ contract will be on the second nearest expiring futures contract and will have delivery dates of only the nearest Monday, Wednesday and Friday.

For TACO+, the EQ1 contracts will have delivery dates that are the third Fridays of the next three consecutive months – aligning to the serial and quarterly a.m. cash index option expiries.

BTIC+ and TACO+ contracts will be available to trade on CME Globex and CME ClearPort and are block eligible.

Conclusion

BTIC+ and TACO+ can help option traders manage the delta of their expiring cash-settled options.

To take advantage of the benefits that T+ trading provides it is important to fully understand the underlying products being delivered and the exact dates of last trade date and the delivery date.