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Micro E-Mini Equity Options

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Micro E-Mini Equity Options Micro E-mini Equity Options • February 16, 2021 • David Lerman • Director, Education • CME Group • [email protected] Disclaimer Helping the World Advance: CME Group is comprised of four designated contract markets (DCMs), the Chicago Mercantile Exchange Inc (“CME”), the Chicago Board of Trade, Inc. (“CBOT”), the New York Mercantile Exchange, Inc. (“NYMEX”), and the Commodity Exchange, Inc. (“COMEX”). The Clearing Division of CME is a derivatives clearing organization (“DCO”) for CME Group’s DCMs. Exchange traded derivatives and cleared over-the-counter (“OTC”) derivatives are not suitable for all investors and involve the risk of loss. Exchange traded and OTC derivatives are leveraged instruments and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money initially deposited. This communication does not (within the meaning of any applicable legislation) constitute a Prospectus or a public offering of securities; nor is it a recommendation to buy, sell or retain any specific investment or service. The content in this communication has been compiled by CME Group for general purposes only and is not intended to provide, and should not be construed as advice. Although every attempt has been made to ensure the accuracy of the information within this communication as of the date of publication, CME Group assumes no responsibility for any errors or omissions and will not update it. Additionally, all examples and information in this communication are used for explanation purposes only and should not be considered investment advice or the results of actual market experience. Any information denoting past or historical performance is not indicative of future performance and no reliance shall be placed on such information. All matters pertaining to rules and specifications herein are made subject to and superseded by official CME, CBOT, NYMEX and COMEX rulebooks. Current rules should be consulted in all cases including matters relevant to contract specifications. CME Group does not represent that any material or information contained in this website is appropriate for use or permitted in any jurisdiction or country where such use or distribution would be contrary to any applicable law or regulation. None of CME Group entities are registered or licensed to provide, nor does it purport to provide, financial services of any kind in some jurisdictions, including, but not limited to, India, Korea, Malaysia, New Zealand, People’s Republic of China, Philippines, Taiwan, Thailand, and Vietnam and in any jurisdiction where CME Group is not authorized to do business or where such distribution would be contrary to the local laws and regulations. In these jurisdictions, this communication has not been reviewed or approved by any regulatory authority and access shall be at the liability of the user. Any trades undertaken in the aforesaid jurisdictions will be at the sole risk of the relevant investor and should always be made in compliance with the local laws and regulations applicable in such jurisdictions. CME Group, the Globe Logo, CME, Globex, E-Mini, CME Direct, CME DataMine and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX and ClearPort are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. Copyright © 2020 CME Group Inc. All rights reserved. Mailing Address: 20 South Wacker Drive, Chicago, Illinois 60606 CME GROUP PUBLIC © 2021 CME Group. All rights reserved. 2 The Next Step in an Amazing Journey On May 6th 2019, the Micro E-mini futures launched to an opening day volume of 310,072 contracts. Since then, 600,000,000 more micros have traded and the most often asked question was “when will options launch?” On August 30th 2020 (for trade date August 31 st ) CME Group launched options on Micro E-mini S&P 500 and Micro E-mini Nasdaq 100 futures For those new to trading or those with smaller account sizes, the Micro E-mini can provide an inexpensive way to trade options on the key benchmarks—S&P 500 and Nasdaq 100. And in the first six months since launching, volume and open interest have grown significantly CME GROUP PUBLIC © 2021 CME Group. All rights reserved. 3 Why Traders Are Migrating to Micro E-mini Options: • The Micro E-mini option contracts can benefit newer traders and those with smaller account sizes that desire trading flexibility/precision for scaling in/out of trades • Micro E-mini options have many advantages when compared with ETF and ETF options • Micro E-mini options contracts allow newer traders to reduce risk from two viewpoints: margin and dollars at risk. • Micro E-mini options contracts offer all the great advantages of our larger product suite at 1/10th the size (1/2 the size for mini WTI crude). • Micros can be used by traders, hedgers, spreaders and smaller institutions • Micro E-mini options traders enjoy around the clock trading accessibility. CME GROUP PUBLIC © 2021 CME Group. All rights reserved. 4 Micro Sized Options, Major Equity Benchmarks CME GROUP PUBLIC © 2021 CME Group. All rights reserved. 5 Growth of Micro E-mini futures Since Launch Source: CME Group CME GROUP PUBLIC © 2021 CME Group. All rights reserved. 6 The Volume is coming to CME Group…Micro Options Should Contribute to This Trend (Source: CME Group) CME GROUP PUBLIC © 2021 CME Group. All rights reserved. 7 Advantages of Trading Options on Micro E-mini Futures? Precision Trading & Add Versatility to Access Micro E-mini Scaling Strategies futures Liquidity With an underlying contract Trade long or short term views Lower premiums that settle that is 1/10th the size of the E- with a choice of weekly, end of into the liquid Micro E-mini mini products, traders can month and quarterly futures which have traded scale S&P 500 and Nasdaq expirations. Construct market over 300 million contracts 100 exposure up down with neutral, directional and/or since launch and were the greater precision. multi-leg strategies to take most successful product advantage of all opportunities launch in CME history CME GROUP PUBLIC © 2021 CME Group. All rights reserved. 8 Advantages of Trading Options on Micro E-mini Futures CME Clearing House Tax Efficiencies* Micro vs. E-mini offset and Risk & Margin offsets A trader can offset 1 E-mini CME Clearing House serves Futures options are taxed option with 10 micro E-mini to mitigate risk at the FCM according to the 60/40 rule options by instructing his/her level and client level by setting (section 1256 of IRS code). FCM to do so. The clearing and changing margin The tax saving can be house will then offset the two requirements, collecting significant for all traders no transactions resulting in a net variation margins and matter what their tax bracket. position of zero. ensuring the integrity of transactions of buyers and Micro E-mini futures and sellers Micro E-mini options allow margin offset improving capital efficiency *CME Group Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. CME GROUP PUBLIC © 2021 CME Group. All rights reserved. 9 Advantages of Trading Options on Micro E-mini Futures Liquidity* Around-the-Clock Futures Market The S&P 500 futures Trading Strength complex trades 8.7x the Futures and options on Technical levels are value of the S&P 500 ETFs futures trade nearly 24 determined in the futures, and 1.6x the value of the hours per day. S&P 500 not the underlying cash. underlying cash basket cash index is constrained by the primary US cash The Nasdaq 100 futures equity markets, and can complex trades 8.1x the only be calculated 6.5 value of the Nasdaq 100 hours per day. ETFs and 1.2x the value of the underlying cash basket 1 Non-U.S. Trading Hours are 5:00 p.m. – 8:00 a.m. CT. *Source: CME Group (as of Q2 2020) CME GROUP PUBLIC © 2021 CME Group. All rights reserved. 10 Comparing Options on Stocks vs. Options on Futures Attribute Options on Futures Options on Stocks Underlying 1 futures contract 100 shares of stock* Tick values Varies by product Generally a penny Expiration consideration Upon exercise/assignment, futures Upon exercise/assignment, stocks can have discreet expiration be held indefinitely Around the clock trading Yes No Asset class available Eq, FX, IR, Commodities Equities Liquidity Varies Varies Tax efficiencies underlying Yes No Margin/Capital efficiencies 3-10 percent of notional Borrow 50%, put down 50% Volatility Issues Differing skews put vs. calls Skew tends to price puts greater than Depending on product calls * 100 shares of certain stocks like AMZN & TSLA can cost From $150,000 –$300,000…well beyond a typical retail investor’s reach. The notional value of the micro contracts is substantially less than 100 shares of your typical stock. (Source: CME Group) CME GROUP PUBLIC © 2021 CME Group. All rights reserved. 11 Micro E-mini Options on S&P 500 and Nasdaq 100: Contract Specs* *Pending regulatory approval and subject to change CME GROUP PUBLIC © 2021 CME Group. All rights reserved. 12 Comparing the Cost of Straddles in S&P 500, E-mini S&P 500 and Micro E-mini S&P 500 (MES at 3900.50) E-mini Micro E-mini 3900 Straddle S&P 500 x $50 S&P 500 x $5 +1 March 2021 Quarterly 3900 call 90.50 90.75 +1 March 2021 Quarterly 3900 put 89.50 89.50 March 2021 Qtr 3900 Straddle 180.00 180.25 Contract multiplier $50 $5 Cost of Straddle in $ $9,000 $901.25 This illustration shows the substantial difference in cost of a straddle between E-minis and Micro E-minis.
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