Stock Options vs Futures Options

Hi Joe,

I've attended some time ago the IIG webinar and it opens my eyes to the advantages of selling options.

But I've found a lot of webpages on the internet where are listed the many benefits of selling Commodity options instead of Stock options (higher return, lower margin requirements, more liquidity, more premium far OTM..)

In the IIG webpage on your website is written:

"In 2007, we began to sell price insurance on shares, which we had been doing with spreads on futures for many years. We almost always made excellent returns. However, selling price insurance on shares produced even better returns..."

I will be very happy to know what do you think about this topic.

There are two key features of selling options on stocks, that cannot be done with futures.

1) If you are put the stock, you can at least collect a dividend during the time you own the shares. You collect nothing if you are put a commodity option.

2) Even more important: Stocks do not have expiration dates. With futures, both the option and the futures contracts have expiration dates, which makes it very difficult to roll when needed. A company may go out of business or have its stock delisted, but unless that happens, a company does not expire.

Otherwise, I have nothing against selling options on futures. I don't believe there is any profit advantage to either one. Futures contracts are much more valuable in terms of money, but that can be easily equalized by trading more stock options. In reality, futures do not have any higher return than stock options. Stocks are far more volatile than futures, so if there is a return advantage, I would give the nod to stocks.

It's true that futures generally have lower margins, because with futures, margins are computed, whereas with stocks, margins are usually fixed. However, I've seen margins on futures options go to 100% at a time when the market was crazy. I've never seen that with stock options. The same formula for futures options that make them generally lower than 20%, can also cause the margin to be higher for a commodity than for a stock.

About liquidity: Options on futures are far from being as liquid as options on stocks. And the liquidity extends to many distant expiration dates. Liquidity may be better on some futures, but definitely not for deferred months, and definitely not for futures that are not heavily traded. If you look at the liquidity for options on the ES, it cannot compare with the liquidity on the SPY. On Friday, the volume for SPY was more than 62 million shares. The volume for ES was 1.6 million contracts.

ES 1.6 x 250 stocks = 400 million shares

SPY 62 x 100 stocks = 6,200 million shares

More premium for OTM options? Remember, a futures contract represents a lot more money than a stock, so naturally the premium is larger, but you can do more options to make up the difference. In other words, if you equalize the premium based on size, there is no more premium for a futures contract than there is for a stock.

I wish I knew how to make an example to show you, but my math skills are very poor. I will make an attempt below, but I have no idea if my example is valid.

A corn contract as of Friday was selling for $3.69 per bushel. There are 5,000 bushels in a corn contract, so a corn option represents $18,450. I don't know of any stock that is selling for $18,450, but if we look at AAPL which was selling on Friday, around $210 per share, it would require approximately 9 stock options to equal 1 futures option in terms of dollars.

AAPL at the money option $18,900 (closest I could get)

Corn at the money option $18,450

An at the money December 370 put last traded at 7/8, or 0.875 x 5000 = $4,375 premium.

Nine AAPL December 210 option contracts last traded at $13.15 x 9 = $11,835.

For an equivalent face value, AAPL offers more premium than Corn, but please don't take this as gospel truth.

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