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Products Analyzed

Professional website about Algorithmic Trading and Market Microstructure

This section focuses on the description of products traded, main motivations for chosen them and details concerning the database used to do research. Obviously, there are many products in the investment world and different investors may have different perspectives on every of them. Personally, I am interested on e-mini S&P500 weekly options (EW1, EW2, ES, EW4, EW) which generally expires every Friday. Over 5.00, the minimum tick-size is 0.25 which is equivalent of $12.50. Below or equal to 5.00, the minimum tick-size is 0.05 which is equivalent of $2.50. The expiration for first (EW1), second (EW2) and fourth (EW4) Fridays of the month is 16:00 ET and it is the same for the End-Of-Month (EW). The monthly product (ES) has a different expiration time depending if it is a quarterly (March, June, September or December) or serial month. For quarterly months, the expiration time is exactly at the same moment as the underlying (9:30 ET). For serial months, the expiration time is at the closing time on Friday (16:15 ET). Exceptionally, the expiration time and date might changes if there is a holiday on that day. In this situation, it is better to directly looks on CME website.

Reasons for trading options on S&P500:

  • Unsystematic risk is virtually nonexistent.
  • One of the most liquid product.
  • The currency denomination is US dollar.

Reasons to prefer weekly options on S&P500:

  • As the expiration is closer, the trader only has to predict the volatility for few days ahead (including impact of news, overnight fluctuations, …).
  • The structure of the volatility can changes quickly considering important news and the passage of time. It might be an edge for traders understanding the relation between real volatility and implied volatility.
  • The price of an option close from expiration is strongly related to underlying movements (gamma) which is an advantage for traders who predict well expected volatility.

In “Derivatives & Options” section, the term real volatility defines the historical average tick change (in absolute) of the underlying, implied volatility is the volatility priced in options and expected volatility is the expected future average tick change (in absolute) of the underlying. All analysis are completed using data collected via Bloomberg software from January 1, 2013 to May, 31, 2015. The time stamp of the data is 5 minutes which cover the front month underlying and front week options. There is different type of information inside my database including time, date, day, american news, expiration, products, prices, etc. During tutorials, I am using the term “Brut Database” to describe the data collected directly from Bloomberg without any modifications. As you might already notice, I am working with in-house data for performing analysis, evaluation and back testing. One of the advantage is the possibility to include news and anticipated expiration inside models. In addition, my analysis only focus on front week options which frequently change in the same year. As an example, there is over forty different front week options in 2013.