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June 11, 2013

Day Trading ES Weekly Options: An Alternative to Futures

Every so often a new product comes out that opens a new door to opportunity.

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.

Electronic index futures such as the E-mini’s (ES, YM, NQ, and TF) allow us to take advantage of price fluctuations tick by tick in the broader indices.

ETFs have changed the way we group baskets of stocks together, allowing us to trade a variety of companies within one instrument.

Options enhanced our ability to mitigate risk, by limiting downside and (in certain cases) allowing for unlimited upside potential. One of the drawbacks to long options trading has always been theta, or time decay.

An Alternative to Futures

Just like futures, options expire. The difference, as your option contract get closer and closer to expiration the value can begin to decrease dramatically (this can either work in your favor if you’re on the short side, writer of the option or against you if you’re a buyer of an option).

That brings us to options on futures, more specifically weekly options on futures. At first glance you might think that weekly options would be extremely risky due to their short expiration, but let’s consider them for another purpose, day trading and short term swing trading using the ES weekly options.

If you’re new to options or futures or options on futures here’s a guide from the CME outlining some of the basics of options on futures.

Weekly Options on Futures

Weekly options on futures provide a nice alternative to straight up day trading futures, let’s have a look:

What are the benefits?

  • No futures account needed
  • Limited risk (when buying weekly options)
  • Pattern day trade rule does not apply*

* The pattern day trade rule states that if your account is less than $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.

Another positive to trading weekly options is that (thanks to the option Greek: Delta) going long options increase in value quicker as they move in your favor, and decrease in value slower as they move against you.

ES Options on Futures Theta

I use thinkorswim® (now powered by TDAmeritrade) for my charts and stock/options/options on futures trading. Click here to open an account.

What are the negatives?

  • Short time to expiration
  • Harder to set limit orders in anticipation of entry or target

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.

ES Options on Futures Trade Grid

Be sure to adjust your quantity accordingly and make sure to play around with them in SIM mode before you attempt trading them live.

Uses for ES Weekly Options

  • Short term price swings (intraday and 1-3 day fluctuations)
  • News plays
  • Insurance or hedge against other positions

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.

Capital Requirements and Cost Structure

Options on futures act just like any other stock option; the slight difference is the cost structure.

A traditional stock option controls the equivalent of 100 shares of that stock, thus the cost (less commission) for buying one $7.50 option is $750 or 100x the option bid/ask price.

For ES options on futures however, you’re not controlling 100 shares of stock. The cost (less commission) is only 50x the option bid/ask price. Thus an $7.50 option only costs $375.

ES Weekly Options Captial Requirement

Which Strike to Buy?

Looking at the option trade grid, which option strike will give you the best bang for your buck? One idea is to pick a strike at the money, meaning a strike right around the current price (one strike in or out of the money works too).

Another idea and the method I prefer is to look at the option deltas. If we have a setup on the ES 15-min chart with the distance between the 50% and 61.8% yielding 2 points, we can look to the delta to give us an idea of what our risk will be.

ES Weekly Options Using Delta

For every point the E-mini ES moves, the weekly option contract will move the value of half the delta (approximately). So if we look at an option with a delta of .50 we can estimate that a 2 point move against us will yield approximately a $50 loss.

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. Looking out to the -23% target will give us an idea of our risk/reward.

If you’re new to options or futures or options on futures here’s a guide from the CME outlining some of the basics of options on futures.

Why I think they’re neat

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.


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About Tim Racette
Tim Racette is a day trader of 15+ years in the E-mini futures and swing trader of stocks. Mountain biker, lover of the outdoors, and explorer. Tim is an ASU Sun Devil and a Chicagoland Native now living in sunny Scottsdale, AZ.
  1. 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. If you have specific questions for them Max can give you a hand, his email is maxt@s5trading.com, he’s the senior broker at S5 and the one I work with (along with Anthony and FT).

        • Hey Tim:

          OptionsXpress also has Futures Options. Their order entry platform is pretty slick and allows contingency orders. I just opened an account with them and am quite pleased with their customer service…..real fast & friendly.
          Take care,

  2. Since I listened to a NinjaTrader presentation on ATR (Av. True Range) on their YouTube channel, it occurred to me that options on the NDX or SPX would be a good way to do it. But I did not realize that optins on the ES or NQ, etc. were day-tradeable. If that is true, that is rather amazing. However, you need about as much money in your account as trading actual futures. Then a couple of days ago, I saw a CNBC ad from Nadex exchange. WoodiesCCI had promoted them a year or two back about when PFG blew up (they were also recommending that lousy outfit!) so I did not look into it much. But if you know your levels you can do hourly or daily binary options. You’re not going to double your money with any trade, but you might be able to grind out 20-30%.
    Another good thing about options in general is that the psychology is more manageable (less likely to get freaked out!) You take a position, and are more likely to stick with it.

    • Okay, I forget my main point! Nadex options are only about $50 per contract I believe, so it is certainly more “scalable” than index or futures options which are generally 10-20 X more expensive for a delta of 50%.

  3. Excellent article. answers lots of questions even the exchange doesnt answer. like it lots.
    thanks man

  4. Hey Tim, great article!

    Got a question – do ES weekly options have a big amount of time decay between the close at 16:15 Central Time and Globex opening at 17:00 Central Time or is time decay fairly even throughout the entire 23 hours that ES futures options trade for?


  5. Just like monthly options, it’s slow at first and speeds up towards expiry. I’ve mostly traded weekly options on an intraday basis, but in the money options will have less time decay priced in than far out of the money ones. For that reason I don’t buy far OTM options (weekly or monthly).

  6. Informative article, though when I’ve traded ES futures options(in the money) they have taken forever to fill.

    If you look at the Dec 12 ES expiry there is typically very low volume traded near the money vs huge volume 20-30pts out of the money.

    Do you have this issue or do you simply place mkt orders?

    Also, why trade ITM futures options when QQQs are much more liquid with tighter spreads? Is the leverage much higher for one vs other?

    • I typically look for the option contracts that do have higher volume, and yes trading the SPY, QQQ, or IWM is a great option as well, options on futures are still pretty new.

  7. Tim,

    thank you for your sharing. Just read on CME web site that ES weekly options are European style (excerpt and link below). It means that with ES weeklies sellers don’t have to worry about assignment : ) It’s not the case with SPY, QQQ, IWM. Am I correct?

    Warm regards, – Artu

    PS Excerpt and link:

    ‘European-style options can be exercised only on the option’s expiration day. This reduces some of the uncertainty for option sellers, as they cannot be assigned prior to expiration (American-style options can be exercised and assigned at any time up to expiration).


  8. About how much initial capital is required to start out with es futures options per contract? Thx in advance…

    • That’s a tough one Chuck. The nice thing with options is that with as little as a few hundred bucks you can put on a position, however if that’s all the money you have then trading becomes WAY more stressful. So for example having $5000-$10,000 of trading capital with $250,000 in longer term investments might be a good balance, it’s different for everyone though. Depends how the $ makes you feel when you’re in a trade.

  9. Difference Between Options Trading And Futures Trading | optionstrading February 10, 2016 at 6:01 pm Reply

    […] Day Trading ES Weekly Options: An Alternative to Futures … – Day trading the ES options on futures provide a low risk way to take advantage of the markets short term price fluctuations. […]

  10. Does Td Ameritrade Do Binary Options - binaryoption April 5, 2016 at 5:12 am Reply

    […] Day Trading ES Weekly Options: An Alternative to Futures … – Day trading the ES options on futures provide a low risk way to take advantage of the markets short term price fluctuations. […]

  11. Hi Tim.

    Any link suggestions where I can get more info on the mathematics of an /Es options trade? So far everything I’ve found has added to the confusion.


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