Options can be useful in prepping for earnings season for a few reasons.  They provide position and risk management flexibility, can limit downside risk, manage event risk and help to efficiently use capital. 

Market-neutral, directional or multi-leg trades can be used with several equity index options contracts. Since September, that has included the new Micro E-mini options on the E-mini S&P 500 and the E-mini Nasdaq 100.

These smaller-notional contracts provide greater versatility and granularity in helping traders manage event risk and navigate periods of volatility.

Here are a few possibilities that a trader can use depending on their particular estimate of earnings:

If a trader owns E-mini S&P 500 futures and wants to hedge the position ahead of earnings, he could potentially buy puts or put spreads to hedge the position.  A put option allows the owner the right to sell the underlying futures contract at the strike price.  Additionally, if the trader wanted to take a bearish position in the S&P 500 index without owning the E-mini S&P 500 futures contract, he could purchase Micro E-mini S&P 500 put options at a fraction of the cost of purchasing S&P 500 E-mini options and without the exposure of simply shorting S&P 500 futures.

Another strategy to partially hedge a long S&P 500 futures position ahead of earnings would be to sell calls or sell call spreads.  When you sell a call, you receive premium in exchange for being obligated to buy the futures contract at the strike price if the owner of the call option exercises his right.  This is a common strategy (covered call), which is a short out-of-the money call against a long position in the underlying.

If a trader wants to have upside exposure to the Nasdaq he could purchase Micro E-mini Nasdaq 100 call options or call spreads ahead of earnings with the expectation of an overall rise in the index.  The benefit to purchasing call options rather than purchasing E-mini Nasdaq futures is that they cost a fraction of the future itself and the risk is limited to the amount paid for the contract.

Micro options have shown great appeal since launching in late August. That’s not a surprise given their price of just 1/10 of the standard E-mini. Over 314,000 contracts traded across these indices through October 22, including 11 straight sessions of record volume in Micro E-mini S&P 500 options as we entered the heart of earnings season.  

They are based on an extremely liquid underlying futures market.  Micro e-mini S&P 500 futures and Micro e-mini Nasdaq 100 futures traded a total of 291 million contracts through September.

Whether trading options on futures for purposes of hedging or speculating, a trader can define risk and reward using different option strategies.  The new Micro E-mini option contracts allow traders to initiate identical strategies to E-mini option strategies but at a lower cost.  That is a major development for active traders, and earnings season is proving to be a strong use case.