Hello, I have been trading for several years and this last year traded options on the IWM exclusively. I had a good year and have netted about 57 points on the IWM options with an average of about 10 contracts. My problem is with my system and account size of only $50,000 I have averaged a Delta of only 55% trading options on the IWM. Thus I would like to trade the ER2 this year and just want to check my math to make sure I understand how the ER2 compares to the IWM. So here goes. 1 option on IWM = 100sh x 76.50 = $7,650 10 options on IWM = 1000sh x 76.50 = $76,500 1 ER2 contract = $100 x 765.00 = 76,500 so 1 ER2 contract = 10 options on the IWM, correct? If I trade the ER2 same as I traded the options on IWM my delta will be 1.00 rather than .55 so it makes sense to me to switch. Am I missing anything here or does it make sense to you guys as well? Thanks for your input. Bob
Depends on what the delta for the IWM options are : 1 ER2 = 100 delta + or - match that with the delta of the options you were trading for the 1 strike multiply number of contracts to reach closest multiple of 100 Eg. you were trading ATMs on IWM with 50 delta. 2 ATMs = 1 ER. 50 x 2 = 100. Another example : you were trading OTMs with a delta of 10. 10 OTMs (at that strike). = 1 ER. 10 x 10 = 100. If you were trading of a arbitrary lot number, eg. 10 lots of options, then multiply (delta) x (# of contracts) and round to nearest 100 to get your position delta, which divided by 100 would give you # of ERs needed.
Ok, I see what you are saying. From my example above it should be: 20 options on IWM with a delta of .50 = 2000sh x 76.50 x .50 = $76,500 1 ER2 contract = $100 x 765.00 = 76,500 so 1 ER2 contract = 20 options on the IWM with a delta of .50 as an equivalent trade. I guess what I am trying to get at is I think it would be better to trade 1 ER2 than have to trade 20 option contracts given that the IWM and ER2 move about the same and commisions are less for the same position on the ER2. My system is geared towards Swing Trading which average between 2 to 5 days. It looks like it should work about the same for both contracts. Thanks again.
IWM and ER2 are going to both deviate from the RUT in different ways, at different times. ER2 has a time premium, as well. So, your adjustment points may be different on the ER2 versus the IWM. Also, IWM has ALOT higher liquidity, so probably narrower spreads. Oh yes, and commissions are higher (at IB anyway) for futures options versus regular options. Just some things to consider..
For your situation, stick with what you know. There are differences to take into consideration, eg. current IV, days to expiry, magnitude of move, with options. If you are doing well, keep doing that. With that said, both ER and IWM options should work for your purposes. BTW, not to nitpick but your above example is incorrect. Don't think about the dollar amount of the contracts, but the delta amount. In your example. 20 options with a delta of 0.5 = 10 ER contracts.