Copyright [oceanwp_date] by Anthony Crudele
Micro Futures can be a great tool for investors to get a more precise hedge on their portfolio. In this video I chatted with the Director of Education at CME Group, Dave Lerman about using Micros to hedge a portfolio.
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Here’s an Example:
A trader purchased an out-of-the-money, E-mini S&P 500 call option. As you know, the underlying future for this option is the E-mini S&P 500 futures contract (ES).
The ES futures contract has a multiplier of $50. Whereas, the Micro E-mini futures contract (MES) has a $5 multiplier – making it 1/10 the size of ES.
The trader wants to hedge her delta exposure because the market has rallied since she purchased the call. She does not want to close out her long call position, but she does want to lock in some potential profit.
The option is now in-the-money with a 60 delta. For the one call option, this is a delta of .60, or 6/10, of one ES contract. To get delta neutral and lock in that profit she would need to sell 6/10 of the underlying futures contract, which is the E-mini S&P 500.
However, there is no way to sell a fractional ES futures contract.
Until now. With Micro E-mini S&P 500 futures, traders have access to a futures contract that is 1/10 the size and 1/10 the delta of ES. This means that 10 MES contracts give the trader the equivalent delta, or exposure, of one ES contract.
Our trader, who needed to sell a delta of 0.60 ES contracts can now do this by selling six MES futures.
Now that she is delta neutral and has protected her profit regardless of the market direction, her long call position with a 60 delta is offset by her short, six MES futures.
There you have it, precision delta hedging using the Micro E-mini S&P 500 futures contract.
Past performance is not indicative of future results. Neither Anthony Crudele nor his guests guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment discussed on this website or on the show. Strategies or investments discussed may fluctuate in price or value. Investors may get back less than invested. Investments or strategies mentioned on this website or on the show may not be suitable for you. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned on this website or on the show. Before acting on information on this website or on the show, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.
Information in this post came from CME Group.
If you enjoyed this video here are more videos on the Benefits of Futures:
Pattern Day Trader Rule Doesn’t Apply To Futures