Futures Option Trading | Index Futures Options | 5-13-19

so if you're already an active trader utilizing options in the equities market and you're trying to make the leap over into the futures market understanding index futures options may be a goal for you stick around you all right well good morning everyone John McNichol here and welcome to futures option trading index futures options for March 13th 2019 been off the saddle there for about two weeks on some military duty you'll be back for the next two weeks and then I'll be gone again for about another month there but appreciate everyone's support there and whether you here live or listening to the archived session hopefully you're learning something new each and every week like to put a shout out to mr. Mike Follette for covering down on some of these futures option sessions here hopefully you're learning a lot from him good morning you Ricardo Chuck Paul for zod Scott thanks for being with us here let's go ahead and take care of disclosures and we'll get right into it remember found presentation is for educational purposes only and not a recommendation or an endorsement of any particular investment or investment strategy past performance of any security or strategy does not indicate or guarantee future success now in order to demonstrate the function of the platform we will be used in actual symbols however TD Ameritrade does not make recommendations or determine the suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility now while this webcast discusses technical analysis other approaches include fundamental analysis may assert very different views as always all investing involves risk including the risk of loss keep in mind futures and futures option trading is speculative and is not suitable for all investors please read the risk disclosures for futures and options that link is provided for you here as well as futures and futures options trade services are provided by TD Ameritrade futures at forex LLC those trade and privileges are subject to review and approval not all clients will qualify options are also not suitable for all investors as these special risks inherit the options trade and may expose investors potentially rapid in substantial losses carefully read the proofs provide a copy of characteristics and risks of standardized options spread straddles and the multi leg option strategies can entail substantial transaction costs include multiple commissions also advanced option strategies often involve greater complex risk than single leg option trades investors should also consider contacting a tax advisor regarding the tax treatment applicable to those spreads and other multi leg option transactions now we're going to be utilizing a demo account it looks like a real account but it actually is a practice account you have the ability of practicing some of the concepts you learn here today we certainly encourage you to do that by utilizing the paper-money software which is for educational purposes and only and successful virtual trading during one time period does not guarantee successful investment of actual funds during a later time period as those market conditions change continuously also those you that utilizing tools such as probability analysis and back testing theoretical in nature not guaranteed does not reflect a degree of certainty an event a current also keep in mind with back testing that there's no guarantee that the same strategy implemented today would produce similar results and as always asset allocation diversification does not eliminate the risk of experience in investment losses okay well there's a little background for those of you that do not know me there as you can see not only with myself but a lot of our other instructors here at TD Ameritrade education I've been with the organization in various forums for well over twelve thirteen fourteen fifteen years and more you can see where my focus is you can certainly join me on some of our other webcasts a later on today we'll be having technically speaking reversal and bounce patterns with me being away for the last two weeks probably did asmath check to see where we're seeing the markets and some of the various market patterns that have developed over last few weeks and months and if you're a beginner at the top of the next hour we have Cameron May which is going over getting started with technical analysis and chart in essentials that's a must for those of you if anything we're going over today it's a little more intermediate to advanced is over your head from a technical side feel free to go ahead and reference that webcast again top of the next hour there all right here's our topics for the day folks we're going to discuss the characteristic of index futures options the transitioning from equity options to futures using strategies you may already know if you are considering futures and futures options one of the easier leaps for some traders is going from equities index options to potentially overton futures futures options on those equities because it's probably something you may already know and then you one may explore some other asset classes commodities grains gold oil Treasuries currencies and we discuss about these different asset classes each and every week as well cycle through them now what we'll do is we'll apply define risk option spreads with our examples we'll look at potential entry and exit techniques and as always determine an appropriate risk in position sizing as we'll go ahead and look at our paper money account over the course of this session we'll see some previous trades that we've done you can see some positive outcomes some negative outcomes but what is universal is defining risk on individual traits we've got to go to full camera to make this point you know many things we do have no control over in the markets as well as with life we may not have control over certain outcomes markets are that way we do have relative control over risk on how much we're willing to put into a position and by understanding defined risk spreads which some you may already have applied with equities we can also apply those principles into the futures options okay so let's go ahead and get right into it here here's comparison that we bring up as far as on options on futures versus options on equities some of the key points that may come into play here is the ability to go over a wide variety of asset classes where as options on equities are typically tied to stocks also sorrows with trading hours typically upwards of 24 hours a day six days a week from Sunday evening typically through Friday afternoon keep in mind there may be some liquidity issues at different times there but something to consider there also a big difference as far as with capital efficiency there's a more of a risk based model when it comes to futures whereas with equities is tied to Regulation T margin and some other considerations which we discuss as we go through other examples is what may happen at expiration or in the context of American style options which may happen at any time is that in the case of futures is going to settle in the underlying futures contract or cash it's important to note the underlying when that underlying futures contract expires because at some times one may have a assignment on an individual future that may be expiring very shortly after that in some cases the same time in the case of options when equities settles to the underlying equity or the equity index options to cash now in our example as we'll be looking at some of the individual equity futures some of the common indices you have the S&P 500 the Nasdaq 100 the russell 2000 and then there's also the Dow futures as well so for major indices represented now keep in mind as far as with TD Ameritrade there are three of them that we'll focus on here today the S&P futures the Nasdaq and the Russell even though there are options available on the Dow futures since they're not quite as liquid they are not available for trade on the TV thinkorswim platform at this time as other instruments become more liquid then they may become more available as an example the Russell had been more recently available for options trading over the course of this previous year here but looking at the ESPY futures options one things that's consistent as far as with a standardized contract is what is the leverage or the multiplier there we want to be conscious of that in each example on the espy futures multiplier is $50 whereas we go ahead and look at some of the other examples the Nasdaq 100 and trying to go through the screen here has a multiplier of $20 in the case of the Russell is going to be similar multiplier to the SP which is $50 now other considerations as far as with the indices is the daily settlement that's going to occur at around 15 minutes after the regular equity market closed I'm showing times for central time you can see the trading hours now there is going to be a little bit of maintenance on a daily basis between certain hours they're they're illustrated here hey I just saw the comment from Ricardo as far as tenor at TD Ameritrade yeah I'm not sure where I stand on that but appreciate that Ricardo looking at the end of trading as far as with just such as on the equity side there are American style options the end of training on that is typically going to be on the third Friday of the contract month there are weekly options available for some of these some traders may focus on some of these areas if they do not want to be dealing with an early assignment by looking at european-style options and some of these are going expired during different times of the week as well as the and the month options now as I mentioned from the breakdown on the previous page is what happens on settlement at expiration is that the options exercise results in a position in the underlying cash-settled futures contract so that would result in a position in the underlying future now that's important to note because once a there is an exercise of a an option there and if one chooses to keep that underlying futures contract your risk certainly is going to change if we go ahead and go to the the thinkorswim platform here momentarily you know we have the ESPY futures on the screen right now we'll be taking a closer look at this one in a moment but just looking at what's transpired over the course of the last two weeks Espie futures made a high upwards around twenty nine sixty one twenty five market opening down this morning although it looks like still trying to hold some lows there you know off about four percent one hundred and twenty some points so we can take that about 123 points right there and multiply that 123 times multiplied for the SP was fifty dollars okay that's a six thousand one hundred and fifty dollar move per contract when we go ahead and click on the drop down to the left for the charts and look at futures we get some useful information on understanding the the stick size tick value in initial margin for the individual futures underlying futures contract we can see the Mart the initial margin shown for the SP futures is seventy seven hundred dollars so just over the course of the last two weeks the market has moved almost the size of that initial margin and if one does not have the funds available to continue supporting that contract there may result in a liquidation or certainly a margin call where one may have to put up additional funds so certainly not a little bit harder to define risk when the markets may move very quickly there hence where some traders may consider futures options where we can define the risk a little bit better now while we're here you can also see what the underlying margin is for some of the other futures and this would be a consideration if one ends up taken or receives an assignment rty 3900 for the Russell futures if you look at the Nasdaq which is /nq is eighty three hundred and sixty dollars all right so let's go ahead and take a closer look black back on the slides and then we'll go ahead and we'll apply this there's once again the SP specs there now if one wants to get more the latest and greatest or be able to see what's currently out there as far as on the futures market one can go to the futures page on the TD Ameritrade website also the exchange website CME Group comm where many of these contracts are traded off of there's a breakdown for the Nasdaq mini most of the information very similar amongst these index futures and futures options understanding the multiplier being the primary difference with a few of these here and let's bring up the Russell and as Russell 2000 right there now we actually did have a previous trade that we did on the Russell so let's go ahead and take a look at that one and then we'll go ahead and we'll apply this to some of the other indices so I'm gonna go ahead and go right back to the thinkorswim platform we're gonna go to monitor tab and under futures options you can see a few the other ones that we have here ford slash CL for crude /gc for gold we have a /zw for wheat so if you join us each and every week should be introduced or at least applying the principles to another asset class so we're looking at support slash rty at the moment those of you that have traded options in the past should be able to recognize that this is an example of a short put vertical where had sold a 1545 strike at $17 and bought a cheaper option against it at 1580 so the principle here is having an understanding that the russell 2000 would stay above the short strike to 1545 now where are we right now we're pretty much right at that level if I go ahead and right-click few trades this was initiated towards the end of February of correction the end of April there are 18 days left for this trade now for those you that have joined us and CW welcome there for those you that joined us if you do not have much of an understanding of spreads you may have stumbled onto this class we do have another webcast it's called trading verticals it's everywhere day at 3:00 p.m. Eastern Time yours truly I actually go over that on trading verticals on various equity options there so you're welcome to join us also keep in mind through the education tab you also have link to the various courses under options and some of the same principles that we're going over here can be found under the trading options course so make sure you make note of that if you haven't already done that and hey if it's been a while since you've been through some of our education yeah a lot of this has been updated over the last year feel free to go back and check that out also while right here the webcast link up at the top where you can go ahead and see all of our various upcoming webcasts not just for today but for the following week notice as I mentioned earlier in the session coming up the top next hour getting started with technical analysis and charting essentials scroll down later on the day those you want to join me later technically speaking reversal bounce patterns right here so hopefully making things much easier for everyone to access their education there all right so get back to the show with the Russell we're kind of right at that area right there we had sold a credit of a buck 20 now remember that buck 20 has that multiplier I if you kind of forget about the multiplier don't fret when you look at your position there you'll notice the multiplier is actually embedded in that contract there so there's that 50 so 50 times a buck 20 would equate out to what that credit was in this example so if I go ahead and take that buck 20 times 50 at $60 now there were seven contracts so times seven that was a credit of 420 dollars now that was the maximum game now the maximum loss would be that spread to five dollars difference between the long and short strike minus the buck 20 so that would be three dollars and 80 cents times 50 which is $190 times seven 1330 okay so what's the significance of that 1330 dollars well if we go ahead and take a look at the size of this account which has moved a bit back and forth here the net liquidating value this account is $275,000 and this is practice account that 1330 falls in just about a half a percent of this account in our examples I've been using that for quite a few the examples that we've done so we have control over risk the defined risk on this trade is about thirteen hundred and thirty dollars defined risk defined game now if anyone has any questions on anything what we're discussing here today feel free to go ahead and share that type that in the chat window would certainly love to hear from you also keep in mind towards the end of this session we'll push a survey out to you as well we'd certainly love to get your feedback all right so where do we stand right now well if we look at this position the position is off by about 350 dollars okay we already know where the maximum loss may be and go ahead and look at the chart /rt why looking at the price action right now prices went ahead and broke below some recent support those who they may have been looking at the markets over the last couple of sessions you know notice the market had sold off rallied up held support sold off rallied up held support today at the opening we've taken out those lows there could potentially be some more downward momentum and see it is that we're also below or inside that short strike some traders may go ahead and as we already position size to a max loss already determine their loss they're gonna let the market do whatever it needs to do and hopefully they have a positive outcome other traders may use another technique you know if a price breaks support you know the reason why they've gotten into trade in the first place which is more of a bullish bias in this example to weather hold or trade higher they may consider closing out the position and essentially minimizing that maximum loss now there's pros and cons to that you know if one close out a position whether closer to expiration or or if prices go against them there may be some time where prices may actually move back into one's favor again kind of gets to some of the probabilities statistically on where prices may fall you know originally we had sold and out of the money spread go and buy the probabilities that yes price may fluctuate prices may even touch but probabilities is that the prices may actually expire out of the money desired outcome but that doesn't always happen so some traders may look to limit some of those losses their weather if they look at a 50% risk of that maximum game or if the price breaks below support they may go ahead and let the possibly close out that position so if we go ahead and look at our imple so we can do that here so I'm going to go ahead and right-click the feza says what is the minimum account requirement to trade futures mention in number 25,000 there's not necessarily a minimum account size what comes into play though as as you look at some of the various futures contracts that are available is what the initial margin is and in the case of options making sure one has the equity for those options there now one does have to go through an approval process there one does need to have a margin account and then go ahead and apply for level two and in case of options level three for that match says the plan on trading the new micro futures in this course we'll take a closer look at that one of the considerations as far as instruments that we may practice with a lot of the falls within the realms of liquidity Matthew so the question again was there's some new instruments coming out a micro futures we'll see what some of the liquidity is on if it is potential to be able to do that we'll certainly illustrate them no bias as far as one contract over another we certainly want to be able to teach all the various products that are available there okay so one thing is what we'll do in the case of the Russell here I'll do this for illustrate purposes is close out this position which will be at a loss we paid about a buck we had a buck 20 credit it's going to be about a 220 debit maybe a little bit more the natural place is closer to 3 okay I'll move this up a little bit to 250 and confirm and send we'll see if that fills that went ahead and filled so we basically applied one entry technique if price breaks below a support area in this case an example of a bullish trade one may look to preserve some of that capital from a positive outcome would potentially be if one recognizes a certain percentage of that game a positive outcome since we had sold a a buck 20 correction on that trade price is gone again it was about a buck 20 if one was able to capture let's say 60 cents of obviously times fifty there one may look to go ahead and lock in that game other traders may set a higher percentage 80% of that maximum gain and we've been applying that in some of our other strategies here now let's go ahead and apply this to a another example we'll go ahead and let's bring up the es for the SP futures and SP futures very similar to the Russell you know is dip down below the lows of the previous two sessions notice that prices traded to around that 28 15 mark interchangeable as an area of resistance as well as support was previous resistance acting as support potentially may act as support as well some traders may anticipate prices bouncing and holding again similar to the rustle of prices break below support they may look at more of a bearish bias as far as trading price action down now if I integrate one tool into this the sudden we actually discuss a little more on our Thursday session which is technically technical training with futures at the market open likewise those you that are beginners at the 11:00 a.m. Eastern time tomorrow is getting started with futures with Barbara Armstrong but in technical training with futures we've utilized a drawing tool called a Fibonacci retracement and if I go ahead and draw on the low pre preceding the breakout of the market okay this is the previous low and trade it up to the high of the market you'll see some interesting ratios come into play here 1/3 1/2 2/3 our common retracement levels at 61 point 8 some Fibonacci retracement those confluence of that level right out around that 28:16 level so this would be an a technical area that some traders may be keeping an eye on today to see if prices break down or hold at this level and certainly a lot of drivers can occur with that you know what are some of those drivers well if you go ahead and take a look at the economic calendar some key economic reports to consider and with the equities market looking at economic strength interest rates inflation now notice some other things which are not there you know there's things in the news as far as with trade with China that's been going back and forth leaning a little more towards a negative side you know other unforeseen events may occur but some traders may look at the economic calendar as a bit of a driver on how where they're positive or negative news on the markets may come into play so economic strength interest rates inflation on the economic front a lot of things tied into payrolls employment GDP production retail sales durable goods and housing data interest rates FOMC announcements also how the bond market may be playing as well typically if Treasuries are rallying that's pushing interest rates lower in many cases if Treasuries are rising that may have temper equities a little bit there as investors may be pushing more money and the government Treasuries consider them to be more of a risk off investment now Treasuries have a level of risk as well but comparing equities some traders may look for the relative safety of of income from the government as far as paying they're paying the interest now other things such as inflation I can also impact what the Fed does look into consumer prices as well as producer prices consumer prices I if those prices are rising can have a negative impact may push more towards inflation producer price index if prices are rising for producers that can have an indication on cutting into their earnings or the bottom line if they do not pass it on to the consumer so as far as looking at some of these this information here we can go ahead and go to the market watch page I'll show you two ways one is the market watch page under calendar and checking off economic or a condo day events notice I unchecked everything else so you can focus on some of the different events and looking at information such as you know CPI PPI that are in the mix now the one thing to keep in mind is the thinkorswim platform will show news internationally so for instance this CPI is actually not for the US it is for the Canadian market there although a lot of news that comes up just before the US equities markets typically maybe to the US for instance some other events here as I'm trying to close this out here looking at industrial production this is coming out on Wednesday that's from the Federal Reserve that's from the US retail sales one of the other things we looked at here too this is also a big one here so a few events coming out on Wednesday that may point towards concerns as far as on the economy or at least reports on the economy another resource that you have is through the TD Ameritrade website and may be easier for some of you to go through through the tea merit or website under researching ideas going right to the calendar and when one brings that up there is a tab for economic events and if one goes ahead and clicks on any particular day for instance we are looking at Wednesday there's retail sales industrial production so two of the bigger reports that we had highlighted on the slide and you can go for forward and look at other days housing starts Friday leading indicators you can also see where some news may be clustered there for instance towards the end of the month we're going to see some information on GDP all right so that's we're going to pull off from some of the news there let's go back to the chart now if we go ahead as an example and look at potentially anticipate in a bounce in the market at or near this level that anticipation certainly doesn't have much of a technical confirmation one would be anticipating that prices may bounce above that area other traders may be looking for the break and looking for more of a bearish trade either can be a good example let's go ahead and actually do we'll do an example of let's say if prices may end up being more in Turin look to sell a call spread and a put spread that would result in what would be referred to as an iron Condor so I'm going to go ahead and go to the trade tab we'll go out a certain number a days and this is similar to what may be discussed in the trading options course on equities selling options looking at a period of time typically well under 50 days we'll go ahead and look somewhere closer around 25 to 30 days now you can see some of these are going to be weekly and end a month options you're going to look at the week please this will be going into June this will be 25 days out if we want to go a little bit further the second week in June that'll be about 32 days and let's go ahead and we'll find an example with our Greeks looking at something that's a little out of the money or maybe a bit more out of the money 30 deltas possibly even closer to 20 if one's looking at more of a wider range now the thing is if one goes further out credits are going to be less the reward for that risk is also going to be lower as well even though the probabilities may be higher so if I go ahead and look at let's say an example at the 26 60 on the put side let's say we're 26 60 is 26 60 is a bit lower than where the price is right now so that's certainly a a wide range let's see if there is what type of credit we may have here so I'm going to select cell vertical now notice as far as on the prices there may be a bit of a spread here and what may not be able to get the credit that they're anticipating this would be a 70 cent 75 cent potentially 75 cent credit on a $5 why if we want to try and look for a higher credit but less probability we can go ahead and bring it in a bit more let's say we look at for instance closer around 2700 where some traders may go ahead and reference where some of the previous lows are on the chart anticipating that some support may be had there and if we're going to be a little more on a bullish bias may go ahead and look to be closer to being at the money let's see if I can sell a vertical here on this example here potentially a dollar credit now notice that there's a wider spread here this may be one of the challenges on looking at some of the weekly options which in this case are America next aisle if we look at the third week which is the american-style option one may see some tighter spreads here Princeton out to the third week and say I look at the 2730 I'm going to right-click on this and do a sell vertical and notice still you know a bit of a spread here we'll go ahead and see if we can actually attempt now again your results may vary on this as far as doing this short put vertical which is going to be up to twenty seven thirty mark below the sixty one point eight retracement and actually below some of the previous lows we can also go ahead and look at the call side and say we construct one similarly which would be at a higher level and if I go ahead and right-click on these areas we can actually select a cell iron Condor we're just going to go and create both the call spread as well as the put spread now in the call side the short strikes at 2900 which is right in this area here as I'm trying to illustrate this which is essentially where the prices have broken down on the foot side we're gonna have to go in and adjust that we are looking at that twenty seven thirty so I'm going to go ahead and change this on this short side of twenty seven thirty and we'll make it a lower strike 27:25 and this would be potentially the credit I notice there is a spread there above seventy five to three there so if one was looking at this trade the ideal outcome is that the market would stay below twenty nine hundred and above twenty seven thirty in this case it would be over the next 39 days so what we can do is position sizes to match them loss here's a maximum profit 1:37 define risk 11250 now if we want to position size this to a maximum loss we can go ahead and select a number of contracts it doesn't exceed a certain percentage of this account if I was to do ten contracts for our example hit confirm and said our maximum loss is showing up at 875 we can probably adjust that even more that would be about $1,000 I'll go ahead we'll stick with this example and I'm gonna go ahead and edit I'm gonna go ahead and adjust this a little bit so you can get this filled for today and we'll go ahead and we'll send now this one went ahead and got filled with it being multiple contracts there certainly can lend weight towards getting a marketable order there and we'll go ahead we'll monitor that position and we'll go ahead and we'll review it next week we'll go and we'll move it to the list and we'll also get take a look at some of our other contracts there now finish off with some of the questions Paul says what do the Fibonacci retracement levels mean if you go and join us on our technically trading futures in fact the archive from three weeks ago actually we've been two weeks ago I actually cover that but these are common areas of support and resistance that have a tendency of coming into play in various trends and keywords tendency not certainty now I'm doing folks as we wrap things up I'm pushing a link to you if you can go ahead and click on that link list know how you feel would certainly love to hear from you and even being away from to week so sometimes I feel a little rusty there but hopefully you've learned something new today as we try and understand what's going on with our markets there so kind of wrapping up some of the considerations for index futures and your if you're already trading options on equities you can apply those same strategies for options on futures and options an option regardless of what that underlying asset is now keep in mind that index options on futures can be American style or european-style the latter can only be exercise upon expiration now with our example since it was the third week it would be an american-style and then here's your resource as far as learning more about some of the other futures contracts that are available so we learn a little bit about characteristics of index futures options we went in and reviewed that Russell example as far as some of the potential exits we also went ahead and did an entry on the S&P futures on our practice account anticipating that prices may stay more in a range for the next 30 some days although it may be a wide range as we've seen we've applied defined risk options spreads and identifying sona's potential entry and trade management techniques now we didn't cover all the various techniques and nor will we necessarily be able to cover every possible scenario but be join us each and every week you should learn something new most importantly which we cover each and every week is determining the appropriate risk and position sizing so once again folks do appreciate your time as always taking what you learned here today make sure you apply it what a challenge you to do is take one of the option strategies you may have already applied for equities and go ahead and apply it for one of the index futures options choice being the S&P futures the Nasdaq index futures or the Russell since those are the topics that we covered here today you can choose to do an iron Condor or maybe do some simply as a vertical spread if you're bullish look at a short put vertical if you're bearish look at a short call vertical or one may actually apply some long verticals which we also cover on Wednesdays so once again appreciate your support here folks and remember in order to demonstrate the functionality of the platform we have to use actual symbols keep it in mind TD Ameritrade does not make recommendations or determine suitability of any security or strategy through the use of our tools any investment decision you make in your self-directed account is solely your responsibility so coming up to the top of the hour getting started with technical analysis and chart Jules Cameron may coming up take care everyone [Music] you

Channel: Trader Talks Webcasts from TD Ameritrade

Views: 490

Rating: 5 out of 5

Keywords: Futures, Futures Options, John McNichol, Futures Index Options

Id: OYQ5qxN5C4E

Length: 47min 55sec (2875 seconds)

Published: Thu May 16 2019