CME: Options on E-Mini S&P 500 Futures ( 
ES1!)
Last week’s bloodshed of global financial market made history. Nearly all major asset classes fell into a market turmoil driven by tariffs and retaliations.
Let’s focus on the US stock market:
• Dow Jones Industrial Average dropped 7.76% in the week of March 31st to April 4th, making it the 4th worst weekly performance on record
• S&P 500 slipped 8.77%, the 4th worst week in history
• Nasdaq Composite fell 9.18%, the 2nd worst week
• Russell gave up 9.34%, the 3rd worst week
All four stock index futures were in negative territory year-to-date. On Sunday evening, E-Mini S&P 500 opened 178 points lower to 4,932, losing 17.1% YTD.
All parties ultimately come to an end. After two years of double-digit gains, the unstoppable US stock market finally cracked. As more tariffs and retaliations are expected to escalate, I am afraid that we are only seeing the beginning, rather than the end.
For stock investors, this is a good reminder of market risk, something we always talk about but seldomly pay attention to. The “return of investment” should be focusing on the repayment of your money, a safety issue. Only after that should we talk about the gain from the investment. It is a necessity to protect your portfolio to achieve long-term growth.
Trading with Options on E-Mini S&P 500 Futures
For investors with a diversified portfolio, Put Options on the E-Mini S&P 500 futures are effective and cost-efficient tools. Investors who long the stocks will lose money, should stock prices fall. Put options would gain in value, providing a hedge to the portfolio.
The following illustration shows a hypothetical example, given:
• An investor has a $250,000 portfolio holding a diversified pool of U.S. stocks
• CME E-Mini S&P 500 futures (
ES) have a contract size of $50 times the index value
• The June contract (ESM5) was quoting at 4,935 Sunday evening Friday, making the notional value of 1 contract $246,750, approximately equal to our portfolio value
• Assuming the portfolio moves closely in line with the S&P 500
• The investor wants to limit the loss of his portfolio to 12%. If the S&P 500 index is currently around 4950, a put option with a strike price of 4350 would roughly correspond to a 12% decline
Hedging trade illustration:
• The investor buys 1 put option on the June futures with the strike price of 4,600
• CME quote on that Put option is 223. As the contract is $50 times the index, the premium upfront for one put option contract is $11,150 (223*$50), ignoring any commissions
• The put premium is calculated as 4.46% of the $250K portfolio
If S&P drops to 4,200 (-15.15%) by the end of April:
• Without the put, the portfolio lost $37,879, assuming the same loss with the S&P
• The 4600-strike put is now 400 points in-the-money
• The investor sells the put and receives $20,000 (= 400 x 50)
• The loss of portfolio will be 37879+11150-20000 = $29,029
• With an E-mini S&P put protection to mitigate loss from the stock portfolio, the investor lost 11.6% (= 29029 / 250000), which is 3.5% lower than the S&P loss and with the preset loss limit
If S&P drops to 4,000 (-19.2%) by the end of May:
• Without the put, the portfolio lost $47,980, assuming the same loss with the S&P
• The 4850-strike put is now 600 points in-the-money
• The investor sells the put and receives $30,000 (= 600 x 50)
• The loss of portfolio will be 47980+11150-30000 = $29,130
• With an E-mini S&P put protection to mitigate loss from the stock portfolio, the investor lost 11.6% (= 29,130 / 250000)
As we can see here, when the S&P falls sharply, the investor will be able to cap his loss to 11.6%. In a “protective put” strategy, we would consider the option premium an insurance contract for owning stocks. If the index rises, the portfolio return would be lowered a little because of the premium upfront, that is, the cost of insurance. However, the protection is a lifesaver if the index falls.
Before jumping into action, the investor needs to run a correlation analysis using the daily value of the portfolio against the S&P 500 closing prices. Here is how:
• Some trading software has correlation feature built in already
• If not, pull 1-year daily portfolio balance and 1-year S&P closing prices, export them to Excel. Run correlation test with these two data series using Excel data analysis tool.
• Alternatively, we could drop the data into ChatGPT and ask AI to do the work for us.
If the correlation is greater than 50%, it means that S&P 500 is a good fit to hedge the portfolio. If it is not, we could try the correlation analysis using the other stock index closing prices, such as the Dow, the Nasdaq 100 and the Russell 2000. Then replace E-Mini S&P 500 futures with the stock index futures contract best fit the portfolio.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
ES1!)Last week’s bloodshed of global financial market made history. Nearly all major asset classes fell into a market turmoil driven by tariffs and retaliations.
Let’s focus on the US stock market:
• Dow Jones Industrial Average dropped 7.76% in the week of March 31st to April 4th, making it the 4th worst weekly performance on record
• S&P 500 slipped 8.77%, the 4th worst week in history
• Nasdaq Composite fell 9.18%, the 2nd worst week
• Russell gave up 9.34%, the 3rd worst week
All four stock index futures were in negative territory year-to-date. On Sunday evening, E-Mini S&P 500 opened 178 points lower to 4,932, losing 17.1% YTD.
All parties ultimately come to an end. After two years of double-digit gains, the unstoppable US stock market finally cracked. As more tariffs and retaliations are expected to escalate, I am afraid that we are only seeing the beginning, rather than the end.
For stock investors, this is a good reminder of market risk, something we always talk about but seldomly pay attention to. The “return of investment” should be focusing on the repayment of your money, a safety issue. Only after that should we talk about the gain from the investment. It is a necessity to protect your portfolio to achieve long-term growth.
Trading with Options on E-Mini S&P 500 Futures
For investors with a diversified portfolio, Put Options on the E-Mini S&P 500 futures are effective and cost-efficient tools. Investors who long the stocks will lose money, should stock prices fall. Put options would gain in value, providing a hedge to the portfolio.
The following illustration shows a hypothetical example, given:
• An investor has a $250,000 portfolio holding a diversified pool of U.S. stocks
• CME E-Mini S&P 500 futures (
ES) have a contract size of $50 times the index value• The June contract (ESM5) was quoting at 4,935 Sunday evening Friday, making the notional value of 1 contract $246,750, approximately equal to our portfolio value
• Assuming the portfolio moves closely in line with the S&P 500
• The investor wants to limit the loss of his portfolio to 12%. If the S&P 500 index is currently around 4950, a put option with a strike price of 4350 would roughly correspond to a 12% decline
Hedging trade illustration:
• The investor buys 1 put option on the June futures with the strike price of 4,600
• CME quote on that Put option is 223. As the contract is $50 times the index, the premium upfront for one put option contract is $11,150 (223*$50), ignoring any commissions
• The put premium is calculated as 4.46% of the $250K portfolio
If S&P drops to 4,200 (-15.15%) by the end of April:
• Without the put, the portfolio lost $37,879, assuming the same loss with the S&P
• The 4600-strike put is now 400 points in-the-money
• The investor sells the put and receives $20,000 (= 400 x 50)
• The loss of portfolio will be 37879+11150-20000 = $29,029
• With an E-mini S&P put protection to mitigate loss from the stock portfolio, the investor lost 11.6% (= 29029 / 250000), which is 3.5% lower than the S&P loss and with the preset loss limit
If S&P drops to 4,000 (-19.2%) by the end of May:
• Without the put, the portfolio lost $47,980, assuming the same loss with the S&P
• The 4850-strike put is now 600 points in-the-money
• The investor sells the put and receives $30,000 (= 600 x 50)
• The loss of portfolio will be 47980+11150-30000 = $29,130
• With an E-mini S&P put protection to mitigate loss from the stock portfolio, the investor lost 11.6% (= 29,130 / 250000)
As we can see here, when the S&P falls sharply, the investor will be able to cap his loss to 11.6%. In a “protective put” strategy, we would consider the option premium an insurance contract for owning stocks. If the index rises, the portfolio return would be lowered a little because of the premium upfront, that is, the cost of insurance. However, the protection is a lifesaver if the index falls.
Before jumping into action, the investor needs to run a correlation analysis using the daily value of the portfolio against the S&P 500 closing prices. Here is how:
• Some trading software has correlation feature built in already
• If not, pull 1-year daily portfolio balance and 1-year S&P closing prices, export them to Excel. Run correlation test with these two data series using Excel data analysis tool.
• Alternatively, we could drop the data into ChatGPT and ask AI to do the work for us.
If the correlation is greater than 50%, it means that S&P 500 is a good fit to hedge the portfolio. If it is not, we could try the correlation analysis using the other stock index closing prices, such as the Dow, the Nasdaq 100 and the Russell 2000. Then replace E-Mini S&P 500 futures with the stock index futures contract best fit the portfolio.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
Jim W. Huang, CFA
jimwenhuang@gmail.com
cmegroup.com/markets/microsuite.html
jimwenhuang@gmail.com
cmegroup.com/markets/microsuite.html
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Jim W. Huang, CFA
jimwenhuang@gmail.com
cmegroup.com/markets/microsuite.html
jimwenhuang@gmail.com
cmegroup.com/markets/microsuite.html
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.