If you are already trading options on stocks, you can use those same strategies for options on futures – as an option is an option, regardless of the underlying.
- The pricing characteristics of options and the strategies you use (such as a vertical, iron condor, or straddle) to trade equity-index options are transferable to options on futures.
- The same basic math applies to both equity-index options and options on futures. Option prices are calculated using the same basic inputs—price of the underlying, days until expiration, prevailing interest rates, implied volatility—and the risk profile graphs look the same too.
Below is a comparison between Options on Futures and Options on Equities/Indices
|
Options on Futures |
Options on Equities-Indicies |
|
|---|---|---|
|
Diversification |
Access to a wide variety of asset classes such as energies, interest rates, agriculture, stock indices, currencies and metals |
Can trade options on companies in different sectors or different indices |
|
Capital Efficiency |
Uses Span margin which evaluates trades using a risk-based model |
Uses Regulation T margin |
|
Trading Hours |
Trade virtually 24 hours a day, 6 days a week |
Trades from 8:30am-3:15pm CT* |
|
Day Trading |
No Pattern Day Trader rule |
Pattern Day Trader rule applies** |
|
Expiration |
Settles to underlying future or cash |
Settles to underlying equity or if index option to cash |
*Equity options trade until 3:00 pm CT, Index options trade until 3:15 pm CT
**You are considered a Pattern Day Trader if you place 4 day trades or more within a 5 day period and must maintain an account balance of $25,000 or more. TD Ameritrade does not recommend, endorse, or promote a "day trading" strategy, which may involve significant financial risk.
Options on the E-mini S&P future (/ES) give traders exposure to the same S&P 500 index as do options on SPX. Let’s take a look at two examples…
|
Sell 2 /ESU7 July 2425 Put |
Sell 1 SPX July 2425 Put |
|
|---|---|---|
|
Price* |
$3.40 |
$3.40 |
|
Credit Received |
$340.00 |
$340.00 |
|
Margin Requirement |
$8,290 |
$46,671 |
*Market prices as of July 13, 2017. For illustrative purposes.
**Multiplier for /ES is $50 x S&P 500 Index
As you can see from the graphs below, the risk profile looks the same for the SPX and /ES trades.
SPX:
/ES:
While options on futures and equities share many common traits, there are key differences between the two that every trader must know before incorporating option on futures into their portfolio. Although a call and a put have the same general function and strategies behave in the same manner, there are additional characteristics of options on futures you need to be aware of.
- Options on futures are priced off of the underlying future while options on equities are priced off the underlying stock.
- Depending on the product, options on futures either settle directly into the future or settle into cash; equity options settle into the underlying stock and index options settle into cash.
- Equity options are American-style (which means they can be exercised at any time) whereas index options and options on futures can be American-style or European-style (which means they can only be exercised upon its expiration date.)
- Because Options on Futures are based on and settle into the underlying Futures contract, the tick size or dollar value per tick will vary with the underlying future. Equity Options, however, have a standard 100 multiplier.
- Contract specifications vary for futures products and it’s important to know those (you can learn more about those here www.tdameritrade.com/futures)
Now that you’ve learned some of the basics about options on futures, consider testing them out in PaperMoney.
Greater leverage creates greater losses in the event of adverse market movements. Futures trading is speculative, and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products. If you’re interested in learning more about futures, it’s important that you expand your investing education before you make investments. Examples provided for illustrative and educational use only and are not a recommendation or solicitation to buy, sell or hold any specific security or utilize any specific strategy. Futures and futures options trading services provided by TD Ameritrade Futures & Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify.TD Ameritrade, Inc., member FINRA/SIPC. © 2021 TD Ameritrade. Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC).