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TimRacette

Daytrading ES Weekly Options

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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.

 

I've been trading the weekly options of ES futures and here are some of my findings...

 

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.

 

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

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.

 

In Summary

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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