A Cost Comparison of S&P 500-Related Options

Discussion in 'Options' started by ETJ, Mar 30, 2019.

  1. ETJ

    ETJ

    From the CME

    A Cost Comparison of S&P 500-Related Options
    Introduction
    When it comes to trading S&P 500 options, there are multiple products available to investors and a multitude of factors to consider before choosing the optimal product. This report focuses on transactional liquidity and compares the relative execution quality between two of the most liquid S&P 500-related options products: CME’s options on E-mini S&P 500 futures (ES) and CBOE’s options on the S&P 500 cash index (SPX). The analysis to follow shows that, on average, ES options can offer superior execution relative to SPX options by between 0.04 to 0.15 index points. In dollar terms, ES options offer cost savings of $4 to $15 per contract.

    Liquidity Framework
    Framework: A mid-sized institutional investor executes a hypothetical S&P 500 options order through a broker intermediary. The analysis focuses on those options that expire within 3 months and that fall within predefined at-the-money (ATM) and out-of-the-money (OTM) ranges. Four scenarios are considered based on type (puts and calls) and relative moneyness1. The report assumes an order size of approximately $50mm vega notional2 and uses 2018 full-year transactional data3 provided by an independent 3rd party data vendor4.

    Transaction Costs
    Transaction costs are expenses incurred in the opening and closing of the position.

    Explicit Costs: These include the commission, or fee, charged by the broker for completing the order as well as fees levied by the exchange and clearinghouse. Table 1 in the Appendix provides a general comparison of explicit costs for end customers/non-CME exchange members5. This report does not focus on explicit costs given these fees are not too dissimilar between both products. Instead, the analysis focuses on implicit costs given those are the more meaningful differences.

    Implicit Costs: Market impact6 is a measurement of execution quality that reflects the adverse price movement caused by the act of executing the order. In the simplest sense, market impact can be defined as the volume-weighted bid-ask spread differential for executing a given order. The following scenarios show that, on average, ES options offer more cost-effective execution relative to SPX options by 0.04 to 0.15 index points. This corresponds to between ~$960 to ~$2,550 in cost savings7 on the $50mm vega notional order, which equates to approximately $4 to $15 per contract in cost savings using ES options in lieu of SPX options.

    Scenario Analysis
    The following scenarios summarize the relative execution advantages, on average, for the $50mm vega notional order and the corresponding dollar savings per contract.

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    Source: OneMarketData

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    Source: OneMarketData

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    Source: OneMarketData

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    Source: OneMarketData

    [paste:font size="4"]Other Considerations

    While this analysis has focused on execution quality, there are other factors to consider when evaluating the multitude of S&P 500-related options products. Here are a few additional considerations when looking at using ES and SPX options.

    Around-the-clock liquidity
    ES options offer liquidity for nearly 24 hours of the day. Looking only at ES and SPX options, over 90% of average daily volume8 during non-U.S. regular trading hours occurs in ES options. Around-the-clock liquidity in ES options can allow investors to manage their risk and prepare for market fluctuations around-the-clock. The chart below compares S&P options on futures (OOF) and S&P cash index options ADV outside of regular U.S. trading hours.

    [​IMG][​IMG]
    Source: OneMarketData

    Capital Commitment
    Those investors who prefer to source liquidity outside of the central limit orderbook can take advantage of CME’s Options on Standard S&P 500 Index futures (SP)9, which offer 100% guaranteed capital commitment in a listed product. Meaning, 100% of the trade can be privately negotiated and consummated either as a delta-neutral or outright SP options block trade10. Because the covered SP options block trade is bilateral with no need to expose the trade to the pit, participants do not face break-up risk. Conversely, SPX options crosses must be shown to the pit, which carries the risk of the trade being broken up.

    Conclusion
    ES options offer superior execution of between 0.04 to 0.15 index points, on average, relative to SPX options. This translates to cost savings of $4 to $15 per contract. Figure 1 summarizes the results of this analysis. Investors are reminded that the results in this analysis are based on the stated assumptions and historical data. The actual costs incurred by an investor will depend on the specific circumstances of both the investor and the particular trade scenario including the instrument, option type (put/call), order size, maturity, broker fees, execution methodology, time of execution, and general market conditions, among other factors. Investors should always perform their own analysis.

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  2. tommcginnis

    tommcginnis

    All hail the CME for telling us what we didn't know:
    in periods of high overnight threat of movement, individual strikes of the SPX (which is not freely traded overnight) are cheaper than their more valuable/flexible cousin, the ES (which are traded overnight), by ~8%. :wtf:

    Jeepers! I had no idea. :cool:
    I wonder why that difference exists. :rolleyes:

    :banghead:
     
    sle likes this.
  3. sle

    sle

    CME has been trying to popularize ES options for a long time and yet CBOE is more or less winning the game (for various reasons). Also, they are missing SPYs are yet another source of S&P 500 vol.
     
    tommcginnis likes this.
  4. EvanDM

    EvanDM

    They should start with lowering their fees