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Equating Futures to ETFs

Jul 19, 2016

By: Josh Fabian

All assets are not created equal. However, one asset class we do like trading here at tastytrade 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.

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