The Multifaceted World of Equity Options: A Dive into Utility

One of the main attractions of equity options is their leverage. With a small initial investment (the option premium), a trader can control a much more prominent position in the underlying equity index. This leverage comes at a cost (the premium paid), but buying calls or puts outright also has a limited-loss benefit. There are times in my risk-focused trading process when there is only a tiny amount of risk left in my futures portfolio where I will take advantage of the leverage in equity options. If I have a strong trade that triggers, but my total risk capital per trade isn’t available, I will buy call spreads or put spreads rather than outright calls or puts to lower the cost of the overall trade and harness the leverage that equity options provide.

Equity options are rife with strategies tailored for different market conditions. From straddles and strangles to ratio spreads and condors, these strategies can exploit market volatility, stagnation, or anticipated directional moves, allowing investors to position themselves optimally.

In 2022, when the markets were coming off their October lows, I bought several call butterflies in the E-mini S&P 500 options and the E-mini Dow. A call butterfly is when you buy one out-of-the-money (OTM) call, sell two further OTM calls, and buy one even further OTM call, all as one combined trade. These trades achieve maximum profit when the options expire, and the underlying future is precisely at the center call strike of the butterfly. The risk is limited to the premium paid for the entire trade. Some were profitable, and some were not, but I was able to craft a strategy that fit my theory at the time. The markets would rally, but the turnaround risk was still excessive.

CME Group Equity Index options* are known for their around-the-clock liquidity. Deep and liquid markets mean trades can be executed efficiently without causing significant price distortions. This liquidity ensures traders can enter or exit positions quickly and with less slippage than illiquid markets.

Sometimes equity options are used for speculating. When used correctly, equity options on futures offer a risk-controlled environment for expressing a speculative opinion for those with a higher risk appetite. Traders can take positions based on their predictions of market direction without buying the underlying futures contract. This approach allows for potentially high rewards, though it’s essential to remember that speculation can come with significant risks, even in equity options, depending on the structure of a trade.

This list is by no means the complete book of advantages of equity index options, and certainly, reading this piece doesn’t make you an options expert. But perhaps it’s triggered you to want to explore where this particularly clever and useful tool could fit into your active trader toolbox.

*For more on CME Group Equity Index options, watch ‘OpenMarkets Exchange of Ideas: Why Are Equity Traders Using Shorter-Dated Options?’ featuring Tim McCourt, Global Head of Equity Index and Alternative Investment Products at CME Group.