spreading futures and ETF, how to be price neutral?

Discussion in 'Trading' started by FastandFurious, Jul 30, 2009.

  1. when spreading between the front month futures contract versus the corresponding ETF, how do you weight the spread to be dollar neutral? For example, ESU9 versus SPY.

    Also, when spreading dow future versus Emini, how do you weight the spread to be dollar neutral?
  2. ?....the value of one futures contract divided by the price of one share of the corresponding ETF should give an approximate number of shares to have versus each futures contract. That way, you have "x" dollars of one thing versus "x" dollars of the other thing giving you your "dollar neutrality". :cool:
  3. you look at the contract size.. multiply that by the cash index price for both and divide one into the other depending on the ratio you are looking for?
  4. According to CME, the contract size for Emini is "$50 x E-mini S&P 500 futures price"

    Let's just say that the ESU9 settled at 984.50 and SPY closed at 98.81 (Actual settlements of 7/31/2009)

    so with the information above,
    Notional value of Emini is: $50 * 984.50 = 49,225
    Value of SPY is the closing price = 98.81

    4922.5/98.81 = 498.19

    ....so I need 498 shares (500 shares for simplicity) to hedge 1 Emini contract?

    Eminis move in .25 ticks and a .25 move is $12.50 per 1 lot while SPY move in $.01 and 500 shares at .01 is only $5.00

    confused here...
  5. 1) Correct and correct. What are you confused about?
    2) Each "dime" move in the SPY is the same as one "handle" in the eMini, $50.
    3) The SPY moves one penny at a time. The eMini moves "2.5" pennies at a time. :)
  6. nravo


    Guys, I'm curious. What is the value in being dollar neutral in, say, ES and the SPY? Trying to capture theta with options, more safely? Tax benefit, trading one side in a tax-deferred account, taking losses in the non-tax-deferred? Curious.
  7. trade the actual spread.
  8. nravo


    Didn't think there would be much of a spread between those two instruments, unlike say two different futures contracts or stocks that have have a more measurable correlation. You have the carry and not much else, right? Educate me, seriously.
  9. 1) You could do a basis trade between the two if your access to the exchanges is fast enough.
    2) Because of the different tick sizes, you could attempt to leg into pairs-trades for pennies at a time if your trading fees are low enough. Either way, it's a tough way to earn "lower-risk" money. :cool:
  10. Shouldn't you consider Cost of Carry as part of the "ES" price when comparing to the SPY?
    #10     Aug 3, 2009