Equating Futures to ETFs
Jul 19, 2016
All assets are not created equal. However, one asset class we do like trading here at tastylive is futures. We may use them as hedges or for directional trades. Futures are efficient but not everyone can or wants to trade them. Still, even for those who don’t trade futures, monitoring them in the overnight session is useful and can help traders understand the expected impact on ETFs when equity trading resumes. After all, money never sleeps.
Before we can extrapolate how price action in futures contracts affects an ETF’s price, we need to determine notional value of futures contracts. Unlike equities, price alone does not denote the notional value of a contract. In the futures market, notional value is calculated by multiplying current price by the dollar value of a 1 point change in the future’s price, also known as the contract multiplier. For example, to calculate notional value of an E-Mini S&P futures contract (/ES), multiply current price by 50. $50 is the dollar amount of a 1 point change in the E-Mini S&P 500 future. As of this writing, that would look like this:
2148 * 50 = $107,400.
Once we have calculated notional value, we can determine how many ETF shares are needed to create a synthetic notional equivalent of the futures contract. To do this, simply divide the futures contract notional value by the share price of ETF. In the S&P futures, it would take approximately 500 shares of SPY to create a notional equivalent.
With a notional equivalent, it is now possible to determine how price change in the futures will affect the P/L of an ETF position. To do this, we use the following:
Expected P/L = Position Delta / Shares per futures contract * Multiplier
Continuing with our example in S&P futures and SPY, the equation would look like this:
(100/499) * 50 = $10.02
In other words, a one point move in S&P futures would move a notionally equivalent SPY position $10.02.
No matter your experience level, monitoring the futures market can only increase market awareness. Understanding how overnight moves in the futures will affect ETFs can only give traders a leg up when the opening bell rings. In just a few steps, we can use price change in the futures to calculate the P/L of an ETF equivalent.
Josh Fabian has been trading futures and derivatives for more than 25 years.
For more on this topic see:
Options Jive | Equating Futures to ETFs (July 12, 2016)
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.