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Options Jive

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Equating Futures to ETFs

Options Jive

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Futures are highly efficient trading derivatives and should be on the quote page for every trader. While they may not be suitable for new traders, who can trade smaller using ETFs (Exchange Traded Funds) they are still excellent measures of how the market moved overnight. How can traders convert the moves in the futures market to their ETF positions and approximate where the ETF will be at the open and what will happen to their P/L?

The first step is to determine the Notional Value of the Futures contract. The Notional Value for a stock or an ETF is simply the price per share. When dealing with Futures one must multiply the current quote by the Futures multiplier (obtained from the size of the contract). A table of the notional value of some of the most actively traded Futures (/ES, /NQ, /GC, /CL, /ZB) was displayed. The table included the current quote, the multiplier and the resulting notional value for each.

The second step is to determine how many shares of the corresponding ETF equate to one Futures contract. These are basically static numbers for many ETFs. The Equivalent Shares equals the Future’s Notional Value divided by the price of the ETF. Some ETFs experience a drag. Tom noted that we kept discussion of the Contango drag out of the equation but for those interested the Market Measures from June 3, 2015: Oil ETF (USO) | The Drag explained how drag works. A table of the shares per Future were displayed. The table showed the Future, underlying ETF, future notional value, ETF quote and shares per Future. Tom and Tony demonstrated that by using ETFs you can trade the equivalent of ¼ of one future.

The third step is to calculate the expected P/L. This will tell us what the move in the Future should mean for our ETF position. A table displayed the calculation for the expected P/L from a one point move in the Future. The table included the ETF, an example of a position Delta, number of shares, the appropriate Futures multiplier and the expected P/L for a 1 point move in the underlying Future.

Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the key takeaways and a step by step guide on how to estimate a change in P/L from the move in Futures as well as the importance of how watching Futures can improve your overall Market Awareness.

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