Using Options as a Proxy to Establish E-Mini S&P 500 Futures Shortlist Positions with Good Values


In case you are looking for methodology of getting short the E-mini S&P 500 Futures, you don’t have to look any further than the E-mini S&P 500 Option for a great solution. Like always, execution is very important when one is establishing their position in the options. Implied Volatility Curve in S&P provides traders with an opportunity of enhancing the profitability’s likelihood by creating a position that meets the profile of risk reward. One might not be interested in establishing short position after the sell-of in December 2, 2015, but the strategy would remain available whenever the need will arise.

On a daily basis, structure of the Implied Curve of Volatility has decreasing levels of Implied Volatility for the upside Calls and increasing levels of Implied Volatility for the downside Puts. The structure allows the pricing to be less expensive for the Put Spreads as compared to the pricing for the Call Spreads of similar level. For the traders who are interested in getting short Stock Market, they can simply sell Call Spread of their choice and purchase Put Spread of their choice and establish Short Position which they like. As there aren’t any dividends in E-mini S&P 500 Future Contracts and options are directly priced off Future Contracts, establishing position is easy without having to worry about dividend risk.

E-Mini S&P 500 Futures Shortlist Positions 1

We have demonstrated a couple of examples of strategy below. First one is for December Futures that is going to expire soon. Average Price of Call Spreads is shown on the left of the chart; it is calculated through Offers and Bids in E-mini S&P 500 Options. Same information is provided on the right side for Puts.

E-Mini S&P 500 Futures Shortlist Positions 2

December trading was at 2079.75 when the snapshot price was taken. 2080/2085 Call Spreads were priced by the market at 2.88. And 2080/2075 Put Spreads were priced by the market at 2.00. When one sees the likelihood of S&P going lower vs. higher, about 50 percent, pricing discrepancies are enormous. One will imagine that Put Spread and Call Spread at the same Future Price will have a similar value, but because of Implied Volatility Skew, it’s not the case.

A number of ways exists for structuring the strategy but its available because of the nature of Implied Volatility Curve. The prices of execution for any strategy can vary, but theory that is behind it is unchanged. Second example gives us the same information for January Options Expiry.

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