Futures surrogates

Discussion in 'Options' started by Lucias, Jul 4, 2011.

  1. Lucias

    Lucias

    What are some of the general rules if I want to use the ES/futures options as a futures surrogate?

    I'm looking for a high delta over a 1 to 3 day period with little time value decay. What type of options should I be looking at? Basically I want something that moves 1 to 1 to the futures.

    I'm thinking I"d be buying at-the-money or slightly-in-the-money. Any help on how why I'd choose over the other?

    Would the ATM have a different sort of gamma profile? In TOS where can I see the actual premium I'm paying for the option?

    How much concern do I need to be of volatility changes when buying for a 1 to 3 day hold?
     
  2. Betapeg

    Betapeg

    What you want is a long-dated option with a delta as close to 1 as possible. This requires a far in-the-money (ITM) option for the high delta. So if the delta is 1 or -1 (for puts), then you'll get your 1 to 1 move on the futures contract. Long-dated options have slow time decay so you won't have to worry about it if you're just holding 1-3 days.

    You could do a trade like this.

    BUY +10 /ESZ1 1/50 DEC 11 1250 CALL @79.50 LMT

    You can buy 10 December 2011 $1,250 strike call options on mini S&P 500 futures for $39,750. The margin requirement is $45,412. The delta is 1.00 which can change of course but that's what I see currently on the option chain. It's long-dated so time decay isn't an issue. It has a delta of 1.00 which means you'll get your 1 to 1 move.

    Conclusion: Buy deltas as close to 1 (calls) or -1 (puts) as possible. Buy only long-dated options (expire in more than 6 months). That's basically it.
     
  3. Lucias

    Lucias

    Another thing is that I need to keep the margin requirements down, of course. This is the reason for using the options over the futures.

    Is it possible to create a bull spread which would drop the margin on that to something in the $200 to $500 range?

    Would an OTM call have a greater then 1 delta?