Can I buy an option to buy a short CFD or short futures contract position?

Hi there,

Is it possible to buy an option to buy a short CFD or short futures contract position?

If that makes sense... ?!

Thanks.

TPI said:

Hi there,

Is it possible to buy an option to buy a short CFD or short futures contract position?

If that makes sense... ?!

Thanks.

Click to expand...

options is a derivative, CFD is also a derivative

so you want to buy a derivative of a derivative?

a derivative is based on some underlying asset

so having derivatives based on another derivative negate the point and so I don't think it exist.

ROE said:

options is a derivative, CFD is also a derivative

so you want to buy a derivative of a derivative?

a derivative is based on some underlying asset

so having derivatives based on another derivative negate the point and so I don't think it exist.

Click to expand...

That's true, and this might be a silly question to ask!

But I was wondering if you could pay a small option premium to later enter into a short CFD or short futures contract position before an option expiry period.

And thus by doing this not have to be exposed to initial margin and daily variation margin requirements on a short CFD or short futures contract position until the optimal entry time.

I am new to all this so I might be way off the mark here!

ROE said:

options is a derivative, CFD is also a derivative

so you want to buy a derivative of a derivative?

a derivative is based on some underlying asset

so having derivatives based on another derivative negate the point and so I don't think it exist.

Click to expand...

There are many derivatives of a derivative. All futures options are derivatives, of derivatives. A lot of ETFs/ETNs have options that are derivatives of derivatives^3 and/or more.

To OP: Depends on what market you trade, for ASX - don't bother. For US - Yes look for futures options, for example if you want to buy the option to a short futures on the S&P 500, consider futures put options on the S&P emini, symbol ES on most platforms.

minwa said:

There are many derivatives of a derivative. All futures options are derivatives, of derivatives. A lot of ETFs/ETNs have options that are derivatives of derivatives^3 and/or more.

To OP: Depends on what market you trade, for ASX - don't bother. For US - Yes look for futures options, for example if you want to buy the option to a short futures on the S&P 500, consider futures put options on the S&P emini, symbol ES on most platforms.

Click to expand...

Thanks minwa,

I am in ASX shares.

Any reason why not to bother for ASX shares, is it not available or too costly?

Additionally I am aware of a couple of CFD providers that offer CFDs on options over index futures. In effect these CFDs are a derivative of a derivative of a derivative, (or as an earlier poster might choose to express it: derivative^3).

Upon doing a cursory comparison of international and Australian offerings, I am inclined to agree with Minwa's perspective.

How about VIX futures options...... a derivative of a derivative of a derivative of a derivative.

wayneL said:

How about VIX futures options...... a derivative of a derivative of a derivative of a derivative.

Click to expand...

If we search long and hard enough we'll likely find an example of derivative ^x for every occurence of x in the set of natural numbers!

TPI said:

That's true, and this might be a silly question to ask!

But I was wondering if you could pay a small option premium to later enter into a short CFD or short futures contract position before an option expiry period.

And thus by doing this not have to be exposed to initial margin and daily variation margin requirements on a short CFD or short futures contract position until the optimal entry time.

I am new to all this so I might be way off the mark here!

Click to expand...

If you are looking to hedge a long position, in Australia, options are offered on the underlying cash index (ASX 200). You can obtain exposure to these options via your CFD provider.

If you are buying an option, the worst drawdown you can have is the premium. If you are buying, this will equate to the margin you are expected to stump up in the first place. So that's your maximum cash draw.

There are CFDs on the ASX200. These are either on the cash underlying or the futures on these. At the expiration of the options, the futures also expire for the same series. That is, the June options will expire on the same day as the June futures. There is a specific calculation that takes place to determine the settlement price which is used for both. I imagine you are not considering the ultra short maturity stuff like 5 minute binaries etc.

These contracts are all cash settled. Even if you were holding the underlying option itself, choosing to exercise it means you get cash (if in-the-money). You never get the actual underlying. If you buy an option via CFD, you do not get the ability to exercise. All you can do is sell (which is actually the best thing you can do if you want to close the position because at least you are preserving so-called time value). You can then use the cash received to stump up margin for a short CFD. This is the closest method of getting what you want. The key downside is that you are crossing the spread twice. That's expensive for options.

So, if you want to hedge a long position, you can buy CFD Put Options on ASX200. You will need to select a maturity and an exercise price. If the market finishes at a level below the exercise price at expiration, you will receive a return on your investment and, if you wish, can apply this to purchasing a short CFD of a type that you think is appropriate (ASX Cash or a derivative thereof). This is essentially what you have enquired about, but closing the options at maturity. It offers better 'value' because you hold to maturity and do not cross market maker spreads on exit...just on entry.

That I can tell from what you are saying, there is no reason why you would want to exercise early for the purposes of using any proceeds to acquire a short CFD position of the same maturity. It seems more sensible if you were to hold to maturity and then acquire a short position in (the next series of) CFD cash equities or related futures.

Correction to my earlier post: Index options on the ASX cannot be exercised early. If you wish to close your exposure, it can only be done via selling the position. As mentioned, this is actually more sensible anyway and in line with the function of the CFDs which attempt to mirror the performance of these options.

DeepState said:

Correction to my earlier post: Index options on the ASX cannot be exercised early. If you wish to close your exposure, it can only be done via selling the position. As mentioned, this is actually more sensible anyway and in line with the function of the CFDs which attempt to mirror the performance of these options.

Click to expand...

What about options on ETFs that have been established to track the index? Could any of those perchance be exercised American style?

cynic said:

What about options on ETFs that have been established to track the index? Could any of those perchance be exercised American style?

Click to expand...

A search on the ASX master list of options does not reveal that there are options over the IOZ (iShares MSCI 200) or STW (State Street SPDR ASX 200). These are the most patronized ETFs for both of these monster organisations in relation to Australia. I draw the conclusion that there are no options on the other ETFs if there are none on these ones in this jurisdiction.

That is not the case offshore where options definitely exist on ETFs.

CBOE offers American style options over a bunch of ETFs.

TPI said:

Any reason why not to bother for ASX shares, is it not available or too costly?

Click to expand...

Options on ASX CFDs just spells an uphill battle. With liquidity and spread and dealing with CFD providers, I just wouldn't bother.

Re: Can I buy an option to buy a short CFD or short futures contract position?,

Market maker spreads on index options in Australia are definitely wide relative to those available on index futures in larger markets.

Nonetheless, if you wish to protect your Australian shares portfolio, the tightest hedge is either the options on the stocks themselves or, as you have questioned/queried, the ASX index. The problem mostly lies in the cost effectiveness.

If trading via CFD, you will generally pay full freight on the spread. I use IG and I believe that DMA is not available over options.

However, the CFD options are just windows into the underlying markets. I have dealt in those in very substantive volume. This is what I discovered along the way.
+ The options spreads on the cash index are much wider than the effective spread. That is, the shown spreads are actually not very relevant. They are just there so an allocated market maker can say that they are meeting their obligations.
+ The index options market is actually quite deep. There is actually stacks of liquidity available for an individual, let alone an insto book. The trouble is that you don't actually see it on the screen until you or someone else actually wants to initiate a trade. Then they all come out like cockroaches in the dark.
+ You can access this directly via your broker or online account where you directly control price and volume of your bid (given you want to buy puts).
+ you will find that placing orders at mid-point will attract flow. You might have to tickle it over the mid-point to get set quickly. But you will find volume for index options. The further away that your strike is from the prevailing price (as a guide, it does not actually work like this exactly) the more aggressive you will need to be.
+ Hence, if you want to do this, avoid buying CFD index options and just go to the underlying directly. You buy the options in the same way...that is, the price you pay is the maximum loss. You just get a better price (before brokerage).
+ The above statements are very true for large volume trades. As you move towards very small trades, the brokerage becomes more important relative to the spread and it may swing the whole thing back to the CFD...in which case, you must really really want protection.

If you 'jelly hedge' via use of other index options on the basis that they are decent proxies for your portfolio, you will still incur brokerage and effective liquidity might only be very marginally better for retail size. Nonetheless, it is something to consider.

I guess the reason you would do all of this is that you have a short term view that the market will correct and you don't want to realise your capital gains parcels. That would be fair enough and the total costs we have discussed then need to be compared against the alternative of partially or completely liquidating your portfolio and buying back in again at a future date, including an allowance for tax impact.

DeepState said:

So, if you want to hedge a long position, you can buy CFD Put Options on ASX200. You will need to select a maturity and an exercise price. If the market finishes at a level below the exercise price at expiration, you will receive a return on your investment and, if you wish, can apply this to purchasing a short CFD of a type that you think is appropriate (ASX Cash or a derivative thereof). This is essentially what you have enquired about, but closing the options at maturity. It offers better 'value' because you hold to maturity and do not cross market maker spreads on exit...just on entry.

Click to expand...

Thanks for your detailed post RY.

I am still trying to digest what you have said - I have some gaps in my knowledge here that make it hard for me to follow everything on this topic!

When you say CFD Put Options on the ASX200, how are these different to regular Put Options on the ASX200?

Is this about cheaper brokerage/spreads??

btw I opened a demo IG Markets account last week.

Thanks.

Re: Can I buy an option to buy a short CFD or short futures contract position?,

DeepState said:

I guess the reason you would do all of this is that you have a short term view that the market will correct and you don't want to realise your capital gains parcels. That would be fair enough and the total costs we have discussed then need to be compared against the alternative of partially or completely liquidating your portfolio and buying back in again at a future date, including an allowance for tax impact.

Click to expand...

Spot on RY, it is about CGT, but also as I am relying on dividends to fund some borrowing costs and fund future living expenses (so would rather not sell the underlying asset generating the income stream itself).

And also about getting timing decisions right, as if I completely/partially liquidate and pay CGT, I need to also time my re-entry into the market correctly to make the whole process worthwhile.

And doing this would require me to enter a period of very actively monitoring my portfolio and markets in general to do so (and with no guarantees I have any special ability to do so in the first place), and which doesn't suit my passive approach (eg. if I am on extended holidays during this period!).

minwa said:

Options on ASX CFDs just spells an uphill battle. With liquidity and spread and dealing with CFD providers, I just wouldn't bother.

Click to expand...

Ok thanks for the feedback minwa.

DeepState said:

Correction to my earlier post: Index options on the ASX cannot be exercised early. If you wish to close your exposure, it can only be done via selling the position. As mentioned, this is actually more sensible anyway and in line with the function of the CFDs which attempt to mirror the performance of these options.

Click to expand...

I think this ASX SPI 200 Index Option on the underlying ASX SPI 200 index futures contract allows exercise before expiry?:

http://www.asx.com.au/products/equity-options/options-contract-specifications.htm#SPI200

TPI said:

Thanks for your detailed post RY.

I am still trying to digest what you have said - I have some gaps in my knowledge here that make it hard for me to follow everything on this topic!

When you say CFD Put Options on the ASX200, how are these different to regular Put Options on the ASX200?

Is this about cheaper brokerage/spreads??

btw I opened a demo IG Markets account last week.

Thanks.

Click to expand...

Hi TPI

The CFD put options are basically a 'window' into the underlying ASX Put options. When you transact with IG, they go into the market immediately and enact the position. The spread that IG will show will be the sum of the market maker spreads in the underlying ASX and also an allowance for brokerage.

You will probably find that the brokerage levels are fairly similar. What will be different is the spread. IG will cross the spread in order to give effect to your order. I do not believe you can get DMA on this instrument so you can't sit at midpoint or something similar.

If you trade the underlying directly via a broker on an online share account, you do not have to cross the spread. As previously mentioned you will find that the 'effective spread' is actually much narrower than the spread shown on screen and transacted via IG.

TPI said:

I think this ASX SPI 200 Index Option on the underlying ASX SPI 200 index futures contract allows exercise before expiry?:

http://www.asx.com.au/products/equity-options/options-contract-specifications.htm#SPI200

Click to expand...

Hi TPI

Please see below a screenshot from IG showing information for the Sep 2014 5150 Put on the Aust Equity market:



Please notice in the top left, the contract is labeled "Australia 200 5150 Put...Sep 14".

The label is essentially saying that the option is over the physical index. This is also by far the most liquid options sequence in the market. Also, options over the SPI and Index essentially converge to the same thing, so you only need one sequence to conduct most reasonable hedging activity anyway.

Now, referring to the link you sent through for index options over the physical, you will see that the Exercise Style is European. That means it cannot be exercised early.