Day Trading ES Weekly Options: An Alternative to Futures (2024)

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.

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.

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.

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.

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.

April 27, 2016

As a seasoned trader and options enthusiast with extensive experience in both futures and options markets, I've witnessed the evolution of trading instruments since the 80s. The integration of computers into the trading industry marked a significant shift, leading to the creation of various products designed to cater to the needs of traders, from speculation to risk mitigation.

Electronic index futures, such as the E-mini’s (ES, YM, NQ, and TF), have allowed traders to capitalize on price fluctuations in broader indices, with the ability to monitor these changes tick by tick. Exchange-Traded Funds (ETFs) have revolutionized how we group baskets of stocks, enabling us to trade a diverse range of companies within a single instrument. Options, on the other hand, have enhanced our risk management capabilities by limiting downsides and, in certain cases, allowing for unlimited upside potential.

The article introduces an alternative to traditional futures trading, specifically focusing on weekly options on futures. This innovation provides a unique opportunity for day trading and short-term swing trading using options linked to the ES (E-mini S&P 500) contract. Here's a breakdown of the key concepts discussed in the article:

Weekly Options on Futures:
- Benefits:
  - No need for a futures account.
  - Limited risk when buying weekly options.
  - Exemption from the pattern day trade rule for futures accounts.
- Positives:
  - Going long options increases in value quicker with favorable price movements.
  - Decreases in value slower with unfavorable movements, thanks to the option Greek: Delta.
- Negatives:
  - Short time to expiration.
  - Challenges in setting limit orders due to the rapid expiry.
Uses for ES Weekly Options:
- Short-term price swings (intraday and 1-3 day fluctuations).
- News plays.
- Insurance or hedge against other positions.
Capital Requirements and Cost Structure:
- Options on futures have a cost structure different from traditional stock options.
- ES options on futures cost 50x the option bid/ask price (not controlling 100 shares of stock like traditional options).
Which Strike to Buy:
- Consider selecting a strike at or near the money.
- Alternatively, use the option delta to determine risk and strike price, especially in relation to chart setups.
Risk Management and Strategy:
- Evaluate risk based on the distance between chart levels (e.g., 50% and 61.8%).
- Use option delta to estimate potential losses with each point move.
Advantages of ES Weekly Options:
- Low-risk way to day trade 15-min and daily levels.
- Suitable for traders without a futures account or those hesitant about trading futures.

In conclusion, the ES weekly options present a compelling opportunity for traders to engage in day trading and short-term strategies with minimized risk, all while leveraging the price swings in the E-mini S&P 500 contract.