An Introduction to Trading Futures

let's do it Tony ready Fester um futures today that's correct is it funny that we just had to golf a little a little tangent about futures and then all of a sudden were right back to it on the positive side they are an amazing product the basis behind futures is you want to talk about something that's a very clean single tick wide marketplace that allows you to get in with kind of get in and out with great leverage and tons of liquidity that's the beauty of it if they could just get their act together and make it simpler to use that'd be awesome sure what are some of the main benefits of futures well first of all they are the first they're the market leader with respect to direction so everybody runs to the futures market because you can get in for the the one-click you can yes you can accomplish the most with the least amount of capital in the shortest period of time so that's what it's about that's the low margin requirement correct they have the lowest margin requirements given the amount of notional equivalence and intraday they're even lower and the constant Delta and are an effective instrument to hedge portfolio risk because you don't have that that variable that options have which is premium time decay correct in the futures markets the cost of interest rates which is carry and the and the cost of dividends are are known upfront and they're embedded into the prices all built in okay so that's the benefit of futures they are easy to access the easiest access to rational play and then the market leader they have extremely low margin requirements relative to the amount of notional and they're also even lower intraday and then they are a constant Delta it's always a hundred that's right so the next slide what's the notional value of a future the notional values can no show value controlled by one futures product is equivalent I'm sorry the dollar value controlled by one futures product one futures contract is equivalent to its notional value to determine the notional value we multiply the dollar amount of a one point move in the future by price of the future so let's look at the ESPYs for example there 1662 a one-point move in the future is $50 so to figure out the notional value take $50 you multiply it by 16 62 and that comes up with right around 83 grand right around 83 grant so 50 times 16 60 is about 83 grant correct if you want to look at the Nasdaq it's $20 a point and the Nasdaq is currently trading for 3125 so you take 30 125 you multiply it by $20 a point and the notional the notional value of the future is about sixty two thousand fifty bucks we're actually gonna do that in the next slide for you I know I'm just gonna take you to just say you get this and in the Russell it's a dollar point so for example it's trading for 1038 so the notional value is you know a hundred a hundred and three thousand dollars one hundred three thousand AR and ten okay let's go to the next slide there you go so es it's $50 a point the price is sixteen when we wrote this 1650 project and the notional value e two thousand seven seventy five the Russell just like I said it's four points higher today but that's the notional value the right hand side and then gold for example the price is 1375 it's a dollar point and so the current notional value is one hundred one hundred dollars hundred point it's a one hundred thirty-seven 550 correct so that's how much money you're actually controlling when you're trading any one of those futures now what we exist what we're just talking about a minute ago is if everything was a hundred dollars a point it would just be so much easier correct there just be so much easier but it's not hmm so we deal with you know it's always been I mean but it's always been like that it's always been and why has it always been that way because different different crowds protected their franchise that's all it is and all we're trying to say is you know I think about it like almost a little bit like the EU the European Union and think about it before they created the euro every one of these every country every even small country large country they had their own currency right and every every time you went from one country to other country you'd have to change all the currency over and you'd have to try to figure out all the exchange rates that's all it is so and and also they said somebody said wow let's and these are countries but think about how much easier it is to move a single exchange than seven countries they can't agree on anything right I mean there's never been whatever in seven or nine European countries to agree on a single currency is fascinating they could do that faster then that then the futures exchange is going to agree on a single on a single multiplier yes you it's good point listen you can move nine countries that haven't talked in a hundred years it's a thousands years yes whatever it is from off their own currencies which give them kind of all that recognition and you get them onto onto a euro currency and the flipside of is we can imagine us right that's right the flip sides we can't confirm we can't change a single futures exchange crazy let's go next slide Wendy futures expire well futures expiration differs from product to product some expiring underlying instruments and others into cash you can roll your futures to gain more duration and that spread is priced around a basis just like options so generally some features expire monthly some features expire quarterly certain features you have to roll quarterly and other futures like just like it says in here some features expire into the underlying instrument and some into cash correct it's like if you have monthly S&P futures they expire into the instrument if you have quarterly S&P futures they expire into cash so that works and when you roll a future all you're doing is essentially closing out your front month position and reopening the next movie established in the same time you're just paying the interest and dividends upfront correct it's already all built in are you paying the cost to carry up front right exactly um and we would never take anything into expiration if it didn't settle for cash of course you do not want your boatload I mean was there was the one to I I have one time I've been very public about this story one time I took delivery of silver how easy was that it was the biggest pain-in-the-ass ever and i would never do it again and I would tell nope everybody never ever to do it but I want to buy silver it was three dollars and 87 cents an ounce and I felt like I'm holding this and I would never do it again let's go next slide do you sell it over for under four I've never sold it look you still have it somewhere just can't find it I don't know where it is right but from 1987 I think I lost it that's the one downside I think you lose it but from 1987 the first silver ever bought was advertised the story a Ponzi scheme the test rate I'm sitting in our clinic firm going back this is 1983 1983 1984 maybe I just started to make a little bit of money I didn't know what to do with all that money well I wasn't all this money but I didn't know what to do silver was trading for seven dollars and fifty cents an ounce I had been collecting silver coins since I was a kid I used to go from bank to bank and put the coins and you know whatever try to whatever was I tried to so I was a little familiar with silver so I figured you know what at seven dollars and fifty cents an ounce now remember when I was in 1979 when I graduated college silver which I had say Vince I was a kid traded up to $50 an ounce on the hunt brothers you know when they tried to corner the market right so I had about I think about $50 worth of like silver coins I still had and I sold him and I got like a thousand bucks form or something I don't remember exactly what it was mmm I think I got like 950 bucks for something that I thought was worth like a hundred bucks my coin collection started my trading with five thousand that was basically all my coin clicks well I had left was these silver coins which I think I sold for 950 bucks 1979 all that went through my head was wow this thing just traded 50 bucks it's seven can only go to zero well now it's four years later and I'm trading on the floor and I'm starting to make a little bit of money and maybe it's 1983 and we're sitting up in the clearing firm this guy this guy who I knew just as another trader but I didn't know everybody was a grifter back then like you're just you know he's a he's a place value from that hoity-toity Connecticut area there where everybody you know has like some trust fund behind them so sure god I was learning pretty fast yeah so you had thought that the carny had given you a good like base of what a grift it should have been but so I'm watching these guys you liked it too much and you just wanted some more so I'm watching these guys play a little backgammon which was a big game down there for money and I'm watching them play because I didn't how to play backgammon I'm watching play a little backgammon and this one guy says hey I'm buying some silver do you want to buy some silver and I'm like what is that what do you mean buy some silver they're like well this guy you know he's like I got friend he's in the silver business he sells just silver bars yeah I'm like in it sounds cool ago he goes how much do I go I'll buy I'll buy you know seventy five hundred hours worth hmm I'll buy ten there they had to buy him a thousand ounces but it comes in ten bars so so there were seven dollars and fifty cents an ounce huh and he goes okay here goes sign this blah blah blah who's like one page I mean this let me prick your finger put a little blood on it there you go you go see yours you'll have your silver within a month the actual bars we gotta order them I didn't know the whole thing I go order I'm got a prison so make them so now Silver's trading at 575 an ounce it just kept going down and or six dollars now six dollars males let's say and I just paid seven and a half a month earlier sure so I get my silver nice okay so I tell a buddy of mine who I just made friends with whatever I just bought the silvers like that's a great day now it's always six this guy's still selling it right now six degrees still sell of course so now it's six dollars okay and he's raised now like I'm the only person there that paid 750 but I got my silver all these other people see me get the silver they want some cuz it was like delivered to the office and it's heavy as hell the whole deal it's like where do we walk around was $35 silver carrying out to my car in a box you had somebody carry for you no way you could think you know back then I had to carry myself now I have the guys like you but then so so I go out and all these other guys saw me get silver so they all ordered from this because they wanted silver bars cause they're cool looking hmm so they all made that was a good week or whatever was they all made it money so like 10 guys older silver from this guy I got nothing to do with this okay I just took my delivery you got 10% you know nothing so so so and I think he did it just like to show he was paying it off so now silver goes from $6 so you got legitimate bars they're real yeah oh I thought you were gonna tell me that they were fake no gets the whole deal they're beautiful and Oh silver went down that's why he delivered it that's why exactly just to make it so now summer goes from 6 to 750 nobody like it's your silver nobody ever got there so they all got ripped off yeah but he was a scam yeah if it goes down you get paid because they're all a baby because I bought at 750 they bought it for 6 dollars and they never legitly with it six dollars the whole thing was a scam that's awesome this whole the whole thing and even paying me was kind of part of the scam sure sure that's awesome because not only did he keep the they never got anything they the dream alive and they can't you know so easy to pick traitor off because they don't they don't want to they got so much stuff in their closets they don't wanna say anything right of course that so they don't like they never said a word to anybody they didn't like turn the guy you know whatever makes a good sense it looks like guy kept like 60 grand I hate the idea that you got paid but I got paid I think that yeah yes or they call you luck box this is like 1983 mmm you had affect them to whatever anyway let's keep going so what are the margin requirements for futures well it varies by broker and by clearing firm the amount required for an overnight position is often higher than intraday trading also the clearing firm can raise the requirement without noticing let me change this a little bit and make this just a little more accurate little more clear the amount required for an overnight position is set by the exchange and that's minimum the minimum set by the exchange and that never varies mm-hmm in other words every brokerage firm has the same overnight minimum requirement now your brokerage firm can require more overnight but they can't go less so if they say the overnight requirement for the ESPYs is $5,000 then it's $5,000 minimum everywhere right some firms if they're really nervous can raise that to six or seven thousand if you don't like it go to a different firm but the minimum is the same intraday firms can charge whatever they want to charge they can charge 200 hours if you want intraday even though it at the close if you want to hold a position overnight it's 5000 but intraday you can charge whatever you want when we ran the brokerage firm we charged one quarter so if the overnight requirement was 5000 we charge 1250 and and people are like well other firms charge 500 I'm like I don't care what they charge that is the number that makes us comfortable and if you don't like it then go to the other firm the reason we charged more because we had a lot more capital so if you're an affirm with like billions and billions of dollars then you can you know you should feel more comfortable your money I mean you're trading with a couple hundred dollars or a couple thousand dollars you want to go to the firm that has the cheapest intraday requirement go ahead that's not those are the firm's that all go out of business right those are the firms that scare the living crap out of me I would never trade futures products and put any money in account with a firm that didn't have a strong balance sheet and all they did is futures there's just not enough regulatory oversight and I'm not getting into the whole regulatory side but you saw what happened you saw what happened futures regulatory stuff wit you saw it happen with MF Global you saw what happened with pfg you saw what happened with rep Co you have to be crazy to be at a futures only firm that doesn't have a lot of capital I don't know any features only firms that have a lot of capital so I think you're crazy to be their futures only firm pure act don't make that mistake and and again here are the current TDA requirements these are the overnight requirements which are the same obviously for an exchange level correct let's go next slide those are not negotiable entry dais how could smaller accounts trade futures well virtually every correspond virtually every major commodity has a corresponding liquid ETF that tracks the same movement in fact as you've heard us say a million times near the es you know the es is is the equivalent of 500 deltas or ten at the money options so you can get to one you can get to one-tenth the size if you want to good by understanding the various pairs relationships you can buy or sell ETF sis to stimulate to simulate any portion of a futures contract ETFs are the great alternatives to trading futures contracts the difference with futures is they give you that 24-hour access and they also give you kind of it's it's a little it's a little easier it's that single click logic um that in and out single click logic that that kind of makes it it's a lot easier yeah so that's why we use them we use them as an underlying I think they're they're an amazing product I think they could be and they trade 24 5 so you take advantage of the market movement on their own there's a 97% chance you're gonna go out of business using them combined with everything else it is a lifesaver for us sure and how think about how many products can be like that where on their own that basically kill you and if in shot it's not even a 50-50 shot you can't compete with all the transaction fees and the bid s differential everything else on their own it's virtually impossible trade futures and be successful as a combined with the rest of your portfolio it's a monster entity let's go the next slide just showing you the share equivalent of each one and we've done this many times and we'll continue to do this so 500 shares for EF thousand shares for for IWM and gold a thousand shares and you can see the at the money call options too one future and that's only assuming that that's a 50 Delta option that's so 50 Delta's 10 50 Delta options is 500 Delta's which is the theoretical equivalent at the time of the trade correct so you can get 1 xx the size of a TF feature + 1 xx the size of a gold future by just trading on one lot of options long or short very good good last slide what is the roll over day and when should you roll a future the roll over day is one week is when we change what is the active month to the next expiration cycle for liquidity reasons look to roll over as soon as possible as the roll over approaches to ensure that your positions remain in the liquid contracts so for example today is the rollover day for today's the day we start the new futures contracts about our bonds and today there still may be more SEP bonds trading but as every day goes on the DS bonds will take over in SEP buns will slowly fade away um see right now it's still trading mostly set right even though the even though the active one is what even though the front month is now that's right Dease and because there's because they're still three days left in the role of a process everything else those numbers will will probably be the same within two days but the markets still want one one oh yeah right on each one yep no worries you might as well trade the new product very good good stuff that

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Id: zwVdDA4WJ7Y

Length: 16min 55sec (1015 seconds)

Published: Mon Aug 26 2013