A New Tool for Trading Around Economic Reports

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Options on futures can be an ideal method to maximize capital efficiency and minimize risk.  Key strategies include hedging, futures replacement and managing portfolio exposure.  The new Micro E-mini option contracts on both the S&P 500 (MES) and Nasdaq-100 (MNQ) will provide participants another tool to express their views on the equity market.

MES and MNQ will allow greater granularity and precision at a much lower capital cost than regular E-mini options.  These option contracts are one-tenth the size of E-mini option contracts, just as the Micro E-mini futures are one-tenth the size of regular E-mini futures, and will settle into Micro E-mini futures.

Trading options on futures during economic news releases, especially the major ones like CPI, PPI, Fed meetings and unemployment data, is often useful to active traders looking to trade the volatility and movement in the marketplace.  Options allow for different strategies that let a trader define the risk and reward.

Here are a couple examples of how the new Micro E-mini options could be used ahead of upcoming economic reports:

Hedging Ahead of Unemployment

Let’s say a trader owns five E-mini S&P 500 futures but wants to hedge the position ahead of an upcoming unemployment report.  With E-mini futures trading $3,500, a trader using E-mini options could purchase five E-mini S&P 500 September 3400 puts for a price of $29 each. Since the contract multiplier for E-mini options is $50/contract, the cost would be $1,450 to hedge each future or $7,250 to hedge all five. 

However, if the trader owned five Micro E-mini S&P 500 futures and used the new Micro E-mini options to hedge his position, the cost would be significantly lower. Since the contract multiplier is only $5/contract, the total cost would be $725 ($29 x 5 x $5).

Positioning Ahead of a Fed Meeting

Let’s assume a trader wants to enter a long Nasdaq position ahead of the next Fed meeting, but does not want the expense of purchasing either E-mini or Micro E-mini futures.  As of the end of August, with the Nasdaq-100 trading approximately 12,100, the trader could initiate the following bullish call spread:

Using Micro E-mini Nasdaq-100 options, the trader could buy the 12,500 call and sell the 13,000 call for a price of $98. At $2/contract, the total cost would be $196 and the trader would have upside exposure above 12,500.

Defining Risk and Reward

The above examples could apply to virtually any scheduled economic release or event. The major reports like unemployment and Fed meetings are generators of market activity. 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 will allow traders to initiate identical strategies to E-mini option strategies but with one-tenth the cost.  That is a major development for active traders.

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