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Every so often a new product comes out that opens a new door to opportunity. Behold the lower risk alternative for day trading futures, giving traders with smaller accounts the ability to take advantage of the bigger price moves. Day trading the ES options on futures provide a low risk way to take advantage of the markets short term price fluctuations. Since the 80s when computers began their takeover of the trading industry a variety of new products have been created for traders to speculate, hedge, and insure against risk.
One of the drawbacks to long options trading has always been theta, or time decay. Just like futures, options expire. 25,000 you may only make 3 day trades in a 5 day period. Futures accounts are exempt from this rule, along with weekly options on futures. Because of the option pricing structure, if you purchased a weekly ES call option on Monday and price moves in your favor, but you hang on until Friday the option has the potential for expiring worthless. In other words, not only do you need to be correct on the direction of the move, the move also needs to occur within a rather quick window of time.
For this reason weekly ES options make for a great day trading opportunity. It also requires a little more effort when placing orders since it’s not just a matter of clicking on the price ladder. Below is an example of the options trade grid in Thinkorswim. Be sure to adjust your quantity accordingly and make sure to play around with them in SIM mode before you attempt trading them live.
Just like futures, day trading the ES weekly options on the 15-min chart allows for some great intraday opportunities. We can also use the ES weekly options to enter on the daily chart. For ES options on futures however, you’re not controlling 100 shares of stock. Looking at the option trade grid, which option strike will give you the best bang for your buck? Another idea and the method I prefer is to look at the option deltas. 2 points, we can look to the delta to give us an idea of what our risk will be.
So if we look at an option with a delta of . This method of deriving our strike price from the option delta is a much better way to manage our risk. Looking at the distance between the 50 and 61. 8 gives us a starting point. The ES weekly options provide a low risk way to day trade the 15-min and daily levels. For traders without a futures account or hesitant about trading futures, these can be a great way to control risk, while still taking advantage of the short term price swings in the ES.
He is also a Chicago-land native, competitive mountain biker, adventurer, and ASU Sun Devil. What’s your opinion of trading options versus futures? Thanks Tim, great insight on this product. One question, other than TD Ameritrade, what other brokers offer trading of options on futures?
Hi Lucas, besides TD Ameritrade, Stage 5 Trading also offers options on futures. I just wrote a blog post about them you can find on the home page. Their order entry platform is pretty slick and allows contingency orders. But I did not realize that optins on the ES or NQ, etc.