From the March 2014 issue of Futures Magazine • Subscribe!

Pricing E-mini and ETF opportunity

Volatility differences

“Calls on E-mini futures” (below) shows the call option price curves for the four index futures with the September 2014 expiration date. Because the time to expiration is equal for the calls, different volatilities are the reason for varying heights for the curves. On Dec. 31, 2013, the options market considered the Russell 2000 index to be the most volatile and, thus, deserving of the highest options valuation. Next in line is the Nasdaq 100, followed at some distance by the S&P 500 and Dow Jones Industrial Average.  

While the indexes show a considerable spread between options price curves due to volatility, the individual pairs of E-mini futures and ETFs tend to have options price curves that are almost identical. A typical comparison is shown on “E-mini vs. ETF” (below). The curves are close enough to calculate the option prices for the E-mini by using the ETF call pricing equations and vice-versa.

On Dec. 29, 2013, the SPDR S&P E-mini December 2014 futures were priced at 1816.25, or $90,812.50 with the $50-per-point multiplier. On the same date, the 1990 calls had a price of 66 option points, or $6,600. By the regression options price model, the predicted price was 66.1618 with a delta slope at the 1,900 strike of 0.510.

A delta-neutral trade, with one long futures contract against the sale of two calls, would result in 2 x 66 x $50 = $6,600 in calls, hedging one futures contract on Dec. 29. On Jan. 6, 2014, the December 2014 E-mini S&P 500 futures contract was priced at 1,801 or $90,050, for a short-term loss of $762.50. On Jan. 6, the 1,900 calls were 59, or $5,900 for a short-term gain of $700 on the short sale. The delta-neutral trade depends on decay in the options value over time to increase the spread profit as the sold calls offset losses on the futures.   

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