Stocks versus Options versus Futures

Investors need to know the most efficient use of capital. This post compares the three roads to a long-term position in the S&P 500 stock index: ETFs (essentially a stock), options and futures. The same position-three ways to get there-which one is best? 

SPY = S&P 500 ETF and represents the S&P Micro March 2021 futures contract.

ATM Call = SPY 12/31/2020 321 Call

Source: Yahoo.com, TDA Thinkorswim, Black Scholes Option Model

This post compares the return of the S&P 500 ETF, symbol SPY, and 1 year S&P futures contract, which mirror the index, to the one year at-the-money (ATM) SPY call option. 

SPY is the "go to" analytic test as the most liquid investible index ETF (exchange traded fund). ATM calls are the most liquid, best priced, options. Year 2020 is an ideal test year for extreme market conditions.

The SPY and futures contract are buy and hold positions subject to margin calls. The option is not subject to margin calls. Returns are calculated on the initial margin, the maximum and average margin for the calendar year 2020.

The justification for purchase of each instrument can be stated as follows:

• SPY - you cannot buy an index but you CAN buy an ETF! The easiest way to buy the S&P 500 index is to buy SPY. SPY trades and is margined as a stock but trades identically to the actual index. The drawback is the $32,186 cost for 100 shares. Most brokers would only require 33% margin or so and that is why initial cost is $10K+.
• SPY 12/31/2020 321 ATM Call - The SPY closed 2019 at 321.86, the 321 strike price was that day's ATM call. The ATM is the most liquid, best-priced option. The leverage or low $2,180 cost to control 100 shares of SPY is cited as the primary justification for buying options.
• Micro S&P500 March 2021 ESH21 Futures Contract - The Micro futures contract is a vehicle for smaller investors. The higher leverage, minimal $1,003 initial futures margin requirement is cited as a justification for purchasing futures. 

Results

While notional values may differ, 2020 returns on initial cash favor futures. The low return on total cash was a result of the deep decline of index prices/bear market in March. The quick rise of indexes/bull market would have returned the additional cash when indexes recovered from their decline. Option returns split a difference between futures returns. Both dwarfed the returns of holding the ETF. This result, as all results, is just one historical data point and may not be indicative of future results.

General Conclusions

• In a bull market, futures would dwarf the returns of stocks and options. 
• In an unchanged market, the stock and futures would end unchanged and the options would expire worthless, a total loss. 
• In a bear market, the stock may do best while futures would incur margin calls and the options would expire worthless, again, for a total loss. 

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Please follow this blog by email.