Premium on SPY vs ES

Discussion in 'Index Futures' started by durcom, Feb 22, 2010.

  1. durcom


    Newby question...

    I have been trading iron condors on SPY for
    a while.

    I have been looking at trading options on ES instead
    for lower commissions, fewer contracts etc.

    I am wondering why there is such a large
    difference in premium quoted for ES instead
    of SPY

    For example, the march 2010 115 call
    on SPY is currently trading at 46 cents

    The march 2010 1150 call on ES is selling
    for $3.90

    The SPY has a multipler of 10 (1/10 S&P x
    100 shares) whereas ES has a multiplier of 50
    so I would expect the premium on 1 ES contract
    to be around 5 times the premium on SPY,
    but it is about 8.5

    What am I missing?
  2. 1) You were expecting a value of 0.78 instead of 0.46? (5 x 0.78 = 3.9)
    2) The difference in values, (0.46 versus 0.78) or (3.9 versus 2.3) has to do with "cost of carry" or the premium between the S&P cash versus the S&P futures. Variation between the dividend rate and the borrowing rate produces the difference in premiums. There shouldn't be an advantage with one option over the other option. That's what you were missing. :cool:
  3. durcom


    oops! I'm so embarassed!

    Forgot about the differences in the multiplier!

    Guess the easiest way to "normalize" the comparison
    is to divide the premium of ES by 10 (SPY is 100
    multiplier on the premium vs. ES 50, and there
    is 5 times the risk on ES vs SPY ($50 vs. $10) for
    every dollar move in the index...

    so done that way I would receive the equivalent
    of .39 on ES vs. .46 on the SPY...which makes
    the SPY the better deal (ignoring dividends, commissions etc)

    thanks for the info...
  4. That's what you are still "missing". :(
  5. durcom


    I was trying to figure out if there was a substantial premium
    advantage to using futures options on ES instead of
    options on SPY that would make it worth
    my while to switch from trading options on SPY to trading
    futures options on ES...

    (I don't have a futures account so I'd have to set
    all that up which would be a hassle)

    There doesn't seem to be a significant difference in
    premium for me to justify the switch...

    commissions can be a factor, but for the small # of
    contracts I trade, and because I use a low cost
    broker (IB) that is not a big issue...

    if there are other issues to consider, let me know,
    otherwise I think I'll stick with the SPY's...