Turning $9,333.62 into $24,558.62 Trading ES Options


On June 2, 2017, I bagged a winning trade of over $15,000 solely by trading options on futures, namely ES (Emini S&P 500) futures options.

Buying $5,000 Worth of Options

One of my favorite methods of making money with options is buying calls. Yes, all of the writers at The Options Bro enjoy writing premium (no pun intended), but when the time is right, we LOVE to buy it. The biggest problem that new options traders run into when buying options is buying options premium that’s too expensive.

Never buy option premium that’s jacked up due to implied volatility! We can’t stress this enough! This basically applies to all put options that are far OTM.

Buying far out-of-the-money puts that are inflated due to high IV is a recipe for losing all of your money. Although the price of far OTM options may rise temporarily, the probability is still mathematically higher that they will ultimately expire worthless. Hence, I mostly look to purchase the ATM calls. In this trade, the ATM calls were trading at a significant discount to the ATM puts solely because of volatility. 

Stay ATM with Limited Time Until Expiration

For this particular trade, I purchased 30 at-the-money calls on the Emini S&P 500 futures with 1 day until expiration for a total value of about $5,000. Why did I buy options on futures instead of buying SPY or SPX options? All three instruments track the same asset, the S&P 500.

I like ES futures more because they trade throughout the night; I can close out my position anytime. And because I initiated this trade on Thursday and planned to hold it into expiration on Friday, I wanted to be able to close the whole thing out in case the market moved against me overnight. SPY options stop trading 15 minutes after the market closes. Although SPX options trade during the night, it’s tough to find a broker that allows SPX options trading during off-exchange hours. Merrill Lynch, Goldman, etc. all offer this extended trading to clients, but for 99% of retail traders, it’s just far easier to trade the ES.

In terms of timing, the time left until expiration was 1 day for this trade. This meant that if ES didn’t rally by the next day, I would have lost $5,000. This was highly risky.

Having said that, the cards were in my favor. The calls I purchased were really cheap because IV was low, and I wasn’t paying for time (theta) I didn’t need.

My outlook for the trade matched the time until expiration.

Buying ES Futures Options

I scooped up the $2,425 calls for $3.45 each. It took a few minutes to get filled on my order, but my net position was 30 contracts.

Futures Options Work Differently

Because futures options work differently than stock options, 30 contracts at $3.45 is only $5,175 worth of premium. If this were 30 contracts of SPX or SPY, for example, 30 x $3.45 would result in $10,350 worth of premium. This is a very important distinction between futures options and stock options. EVERYBODY PAY ATTENTION.

ES futures trade at a multiple of 50, not 100. Furthermore, 1 ES futures contract correlates to 1 ES futures options contract. For stocks, 1 options contract equates to 100 shares. This is not the case for futures options.

The other thing to watch out for with futures options are the damn fees. For this trade, I paid $16.80 in exchange fees alone and another $55.50 in commissions to my broker…and that’s just for one side of the trade.

It is paramount to always look for ways to reduce your fees. Call you options broker and ask to negotiate commissions based on your trading activity. Do whatever you can, because in the long-run paying high fees will hurt your account.

We love brokers like Ally Invest because they both permit futures options trading and they charge the lowest fees in the industry.

However, tastyworks is even better for futures options trading. 30 futures options with tastyworks only costs $37.50 ROUNDTRIP! I paid $55.50 with a different broker for one side (effectively $111 roundtrip)- ridiculous! All closing trades, including futures options trades, are free at tastyworks. If I would have used tastyworks for this trade, I would have instantly saved $18!

tastyworks, yes it really has a lowercase “t”, is the only brokerage in the world that has free closing trades for futures options. They are unequivocally the best choice for advanced derivatives traders. There are only a few brokers in the US that offer futures options trading, and the ones that do, namely TD Ameritrade and Interactive Brokers, are full of hidden fees and auto-liquidating nightmares.

Trade Futures Options w/ Free Closing TradesGet started on tastyworks’ site and save on every trade

The Problem with Expiring ITM Options

As we have talked about in some of the options strategy articles, the markets for in-the-money options, especially at expiration, can be horrible. This was the case for my 30-lot of calls. Although I was trying to close out the position with 2 hours left until expiration on Friday, nobody was hitting my ask.

As you can see from the photo above, the calls were in-the-money by about 14 handles ($14.00) at expiration. A fundamental understanding of options pricing tells us that these 30 $2,425 contracts that are $14 in-the-money at expiration ought to be worth approximately $14.

However, this was not the case! I placed several limit orders to sell the 30 contracts at $14.00 and even $13.75 and didn’t get filled on either order.

With the Emini futures trading around $2,439, it would be foolish to sell the calls for less that the intrinsic value, which would be $14.

How I closed the Calls Like a True Trader

Instead of placing a limit order to sell the in-the-money calls, I place a limit order to sell the underlying asset. I placed an order to sell 30 ES futures at $2,439, and of course with my luck, the market moved down by two ticks and that order didn’t get filled either.

I adjusted the order to $2,438.75 and voila, my order was filled. As soon as the order to sell 30 ES futures was filled, my P/L stopped moving around in my account, because this trade effectively closed out the position; it was a full hedge.

I locked in my profits and got the true intrinsic value of the calls, which I am glad I did. Shortly after I sold the ES futures, the market sold-off. Had I not closed out my position by hedging, the minor sell-off would have cost me thousands because this position was so highly leveraged at expiration.

Lessons Learned

There are a couple key takeaways from this trade:

Don’t purchase far out-of-the-money options and expect them to expire in-the-money.

It’s often easier to make money buying calls as opposed to puts because there is less implied volatility.

There is no sense in paying for time in options that you don’t need.

When the time is right, take your profits and run!

The point of sharing this trade is to educate and hopefully inspire any current and aspiring options traders. It is possible to make money buying options, just like it is possible to make money selling options. There is a time and a place for both strategies.

Having said that, the key to this winning trade was knowing the specifics of ES futures options and options in general, i.e. not closing out ITM options for less than intrinsic value and closing out the position before expiration. Had I not closed out the position before expiration, it would have resulted in a maintenance call of  to avoid a maintenance call of$138,600, because the clearing firm would have purchased 30 long ES futures. To avoid a maintenance call of a cool $100k, I decided it was best to close out the position. Also, if you took nothing else away from this article, know this: being a profitable options trader takes a lot of determination, an understanding of the market, and frankly, a little bit of luck.

At The Options Bro, we try to be as candid as possible and share stories of trades that will be helpful to our readers. If you have a good trading story that you’d like to share with screenshots or pictures, let us know at [email protected]

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