Last updated on June 6th, 2025 at 01:05 pm
The world of futures trading is one that is fast-paced. The success of every trader as he or she plays in the volatile market will depend on the ability to manage the risk around the key market events properly. One of the tools the traders use to do it is a Trade at Cash Open (TACO) mechanism. TACO is a very special way to trade a particular kind of futures, which works to the initial plan of the trader never changing their mind due to the price which is the official opening rate.
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Buying a TACO Trade is the most common way a trader can be dealt with. Besides, the purchasing is the most common method used in this type of work when everyone goes home. Another way is to buy an ASOQ a day earlier, then come back home, and sell it to everybody. This is not always used by traders but can also be done.
The Background and Evolution of TACO Trade
Futures traditionally play an important role in the hedging and speculation activities of professional traders and institutional investors. Traditional futures contracts either use prices of settlement or close, have more general time frames, and may thereby expose the traders to the dangers of unexpected high volatility or price changes at the very moment of opening the market.
The Chicago Mercantile Exchange (CME) saw this gap in the market and quickly built TACO, a system that is so intuitive that it allows the trader to buy the futures contracts on the stock index at the exact opening price. The TACO initiative was mainly advantageous for traders who dealt with the most popular equity index futures for instance E-mini S&P 500, Nasdaq-100, and Russell 2000.
With TACO, the market entrants have the possibility to fix the prices according to the official start thus ensuring that no more hidden costs and a fair mechanism will be available to them for the management of those exposures of the morning session — a time that is important for traders who have long-term positions or who have options that come to expiration at the market open.
How Does TACO Trade Work?
TACO is based on market participants entering into contracts for the purchase or sale of futures through the mechanism of the Special Opening Quotation (SOQ) of the cash market. The SOQ is a calculated official price of the cash index opening level.
Let’s make the idea clear by providing an example: If we take the S&P 500 and assume that the SOQ is 4,200 then a trader may apply a TACO trade to buy a future of +2 points from the ground. Doing so produces the price of 4,202 points as regards the actual futures of the transaction (4,200 + 2). It is critical to note that this price is derived from the official market open, thus, a person can easily conduct a hedging or speculative operation skillfully.
One can open TACO transactions way before the market cash opens enabling the market participants to take an early course of action in mitigating their risks and getting in the best possible position for the open of the day.
Why Traders Use TACO
Due to very good reasons, it is evident why TACO Trade has become the choice for serious market players:
- Elaborate Risk Management at Market Opening: The opening of markets can be full of surprises, for example, through the announcement of news, macroeconomic data, or geopolitical events that might have occurred during the night. By using TACO, traders can determine the value of their derivative exactly on the opening market price, thus diminishing the unknown gaps in the prices.
In addition to the safety-offering abilities at the market open, TACO suits busy traders who are particularly active in the opening of the market. Another advantage of SOQ-based trading is that the first few trades can set a trend for ensuing market prices and thus provide early traders with an opportunity for massive profits. The biggest benefit of TACO is, it gives the traders guaranteed refining of the trade prices and assured elimination of any risks that might arise from the opening of the market, hence a good decision for a speculative or hedging strategy. Future transactions made by TACO can be used as instruments for the determination of the early opening of the stock market in order to obtain the maximum profit in the transaction. Every morning, all stock market dealers have to set the SOQ in order for them to have an early warning to act as a hedge if the situation in the market is not favorable. On the other hand, if a market dealer is optimistic and the market prices are not matching his views, he has to quickly act to protect himself.
- Managing Options Delta Risk: The opening prices of the underlying indexes decide the success or otherwise of the options contracts outstanding with or without a predetermined amount of time to the expiry of the contract. TACO allows market participants to manage these delta risks perfectly, thanks to a direct approach, especially those dealing with an array of large option positions.
- Improved Price Transparency: The process of futures trading being tied to the SOQ officially and through TACO leads to trades occurring transparently, that is, at a mark-to-market benchmark, which deals with the problem of slippage and uncertainty as well.
- Flexible Trading Hours: One of the major benefits of TACO is that trades can be made a few hours before the opening to the cash markets, and this, in turn, allows the traders to be able to get the latest global market news or developments that have occurred overnight before the start of the U.S. market day.
TACO+ — Extending the Advantage
TACO+, which CME has brought out based on the positive reception of TACO, permits basis contract trading a few days in advance of opening cash markets. By doing so, traders are better positioned to execute basis contracts across different periods, thus the need to manage the evolving risk or to hedge more complicated options portfolios will suit this extension.
TACO+ makes traders’ lives interesting as it becomes possible for them to decide on their positions well before the market opens, that is, they could set aside the required number of contracts way before market day, locking in the basis prices for their future trades, thereby further smoothing their task of inventory management.
Who Benefits From TACO Trades?
Both TACO and TACO+ are the preferred instruments for:
- Hedge Funds and Asset Managers: They can precisely control their portfolio risks at the opening prices.
- Equity Swap Traders: They can precisely but with ease hedge their market-on-open exposures.
- Index Option Traders: As they need to match at market open the delta risks that options expirations impose entirely.
- Proprietary Traders and Market Makers: Working hard to gather the most benefits from the seconds that matter at the very beginning of the stock exchange session.
