"Options on Futures" vs. "Options on ETFs"

Discussion in 'ETFs' started by nimble, May 30, 2008.

  1. nimble


    I am used to trading options on the index ETFs, SPY, DIA etc.

    Besides, leverage and liquidity, is there any difference I should be aware of while trading options on the index futures?

  2. 50_Bip


    Nope, nothing - trade at will.
  3. uhmmmm...one BIG difference if you trade options on the ES futures...they can trade after regular trading hours and depending on bid/ask the "mark" can at times be a bit crazy and not sure if it affects your margin so you do need to be careful and NEVER buy or sell except during regular trading hours until you are familiar and comfortable with trading ES or other Futures options. They are a different animal than the spy, dia or other ETF's.
  4. dmo


    Pretty similar, although keep in mind that ETF's and their options are regulated by the SEC, while futures and their options are regulated by the CFTC. In practical terms, that means different margining - on the futures side it is risk margining done by the SPAN system.

    One technical point when using an options pricing model is that futures have a cost of carry of zero, while the cost of carry of an ETF or any stock is the risk-free interest rate minus the dividends. At the moment the risk-free rate is, say 2%, while the S&P has a dividend yield that is also 2%. So at the moment, there is no difference whatsoever between the cost of carry of SPY and that of ES. But that could change.

    The foregoing paragraph refers only to the cost of carry of the underlying, which is used to calculate the forward price. The options themselves have a cost of carry of the risk-free interest rate, regardless of whether they are options on stock, ETFs, or futures.
  5. nimble


    Thanks for the responses. I am mainly selling in the money credit spreads, one or two contracts. 1-2 trades a month. Won't be looking at it after hours.

    Options pricing model is out of my league. Interest rate has never been one of my options evaluation criteria. Always based on the charts and time to options expiration.
  6. Barry-Or


    By options on the ES do you mean options on OEX?

    Or, are there options on the ES or the ER2?

    Do any of the options brokers do them?

  7. nimble


    Futures options for ES is what I had in mind.

    ThinkOrSwim recently started trading futures options for ES. Tradestation offers futures options through RJO, but the trading interface is lacking I heard. Interactive Brokers also allows options on Futures. Unsure about its facility.
  8. IB's Optiontrader is a good platform for ES options. They are extremely liquid and easy to do, and you can also see SPY options on the next tab. A notable difference will be how the options are settled at expiration. If you don't go to expiration then the only difference will be the value of the contracts and the favorable SPAN margining.
  9. ess1096


    Options on indexes (not ETFs) fall under the 60/40 rule at tax time. That in itself is a big difference, in your favor.

    The following was cut from a website, so use it as a guide only and ask your accountant.............

    Broad-Based Index Options
    If you trade index options, or other non-equity options such as on bonds, commodities or currencies, the results of a sale are treated differently.

    For example, options on the SPX, OEX, and NDX are not directly or indirectly related to a specific equity (stock), but are exchange-traded options of index stocks. These are subject to the provisions of IRS Code Section 1256, which states that any gains or losses from the sale of these securities are subject to the 60/40 rule (60% of gains and losses are long-term and 40% are short-term, regardless of how long the securities are held). Non-equity options are usually reported on IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles).

    Please see our Broker Support page for a complete list of index options marked by TradeLog as section 1256 contracts.

    There have been many conflicting opinions as to whether QQQQ, DIA, and SPY options should be treated as section 1256 contracts or not. Since these do not settle in cash, as do most section 1256 contracts, some suggest that these are not section 1256 contracts. Others feel that they meet the definition a a "broad-based" index option and therefore can be treated as section 1256 contracts.

    The IRS is not clear on on this, so we defer to the tax professionals, such as Robert A. Green, CPA. On his www.GreenTraderTax.com web site, under the Securities vs. Commodities topic, Green defines these as securities, and not section 1256 contracts. See: Securities vs Commodities under the sub-heading "Securities traders pay higher taxes."

    As always it is best to contact your tax professional for advice before arbitrarily categorizing your index options trades.