Futures Options pt. 1 | Futures For Rookies

[Music] welcome to futures for rookies I'm Katie this is Pete and this is our segment where we cover all futures related topics concepts strategies and ideas so to quickly recap Before we jump into the segments we've kind of covered all of the features related stuff having to do with the static properties of them meaning how you know some of the metrics don't change such as Delta these are kinds of things like outright directional plays pairs trades and calendars and today and as well as with the next segment we're gonna actually focus more on the dynamic side of futures via options on futures so in this segment we hope to be able to define what they are how options on features are different from options on equities and then a couple of quick behavioral notes that are important to know before you start to establish positions in the next segment we'll then go over the strategies that we commonly use for futures options as well as any type of entry management exit that we need to be aware of as we dive into this part of the toolbox that we haven't used before right and you know we talking about static deltas which are the core futures products but basically it's just very simple longer short exposure we've got a little creative with pears and calendars ways to extend duration lowing buying power reduction enhancing return on capital we've also highlighted some of the benefits that capital efficiency the access in terms of time the leverage that is a powerful tool of use productively so all those good things about futures let's see how they translate to options on futures because this could be you know you're making every time you add a new product you're kind of making a deal with yourself is it worth it to me to spend the time getting comfortable in this space and we believe very strongly at tasty work tasty trade that it's important to be product different and explores many options pardon the pun it's possible so today we've got a great schedule set out for you chance strategy so we've covered a lot on top now we're going to get into I love this piece because not only does it speak to tasty trades fundamental tenants it actually lets us get smaller in a leveraged product very powerful definitely so like Pete mentioned some of the benefits of incorporating options on futures into a trading portfolio would be hedging against those static deltas from the strategies that are listed there you are also able to capitalize on volatility reversion which is not something you can really do with static and outright directional place as well as setting up delta-neutral portfolios or positions which as we've seen and with our studies over time have shown that that helps with profitability in the long run and of course by selling premium you also are allowed to collect theta from your portfolio as time goes by so it's just another added way to enhance that's from our set up basic and you know especially get the getting smaller side lets us get more diversified one of the great things with futures is you know whether it be an oil ETF or an oil stock like Exxon or a metals ETF or metals minor like American Bear sure they all wear a different skin they produce a different thing but when equities tend to move in general they all tend to move in sync especially on a download options on futures will give us that asset class diversification and let us get smaller at the same time while adding theta so this is gonna be really fun to see how these fit in what makes them different K all right so just quickly this little list is basically the differences between options on equities and options on futures I'm gonna focus more on the right-hand side if that's okay with you so first and foremost rather than expiring in too long or short 100 shares like an apple you know put option or a call option would an option on a future will expire into one long or short futures contract depending on whether you're using puts or calls or whether you're long or short it so does that mean no matter what I'm trading natural gas corn beans crude s apiece that never changes right yes it helps it helps make things a little bit easier however there does become a little bit of an added layer with options on equities the multipliers are standardized but as we've mentioned with futures all of them have different contract multipliers based on the size of the product so that actually starts to play a role into the price multiplier that you see with options on futures so when you see a quoted price on an options change it's not always dollars and cents so in other words if I see 11 and quarter on a 30 Delta call yes right it's not a hundred and twenty-five dollars it depends on the contract multiplier of that futures okay so we have to lock that down to get comfortable with that tick value but that tick value translates just like it does in the underline correct very good correct except there's some little things to know about interest rate futures which are a little bit of a caveat but we're not going to focus on that we're gonna focus on the general onward with that is the at the money is based on the individual futures expiration month rather than being based on the stock price so we've kind of covered how every futures product and expiration has a different price and that's where the term structure comes into play so we need to be aware of that term structure as well as those prices in order to gauge where the actual at the money options are located so we're worried use we and much of our mechanics defending or harvesting profits are built around the actual strike prices as we roll out in time they're a good indicator because they're all that that at the money strike is always based on that same type of at that spot today's trade interact rule or amazon here it's based on wherever their futures product is trading and depending on what option you're in their futures can be different so how do we adjust from just using equivalent strikes what could we look at right so what we're going to we focusing on is the equivalent Delta so that's a piece that we will kind of tease at the end of this segment and grant hopefully can discuss a little bit in terms of how that plays into trade defense for the next segment the more strategy focused checklist segment carrying on we have capital efficiency with coverage strategies this is a similarity between the two but there are some things to keep in mind that we will mention and then last but not least the leverage which we've mentioned as futures as a whole they do offer you know a significant amount of leverage but that also allows us for a greater return on capital compared to something like ETFs or I think that's in the SCC world of red tea marketing will will cost us more to transact the same amount of business perfect okay so I think that you are really good at saying how this slide goes so take it away okay so we're gonna this is and this speaks to what you just said this idea that term structure and that each month enough futures expiration is its own little market do they have to does June crude and July crude at some point have to converge to one another no June will expire while July is still trading there can always be a difference sometimes it's a contango difference sometimes it's a backward data difference that curve moves back and forth so one of the things we have to be mindful of when we go out and we do something like a covered call or a covered put is when we select our corresponding options expiration month it has it's not just a function of it is a function of time ideally we'd like to hit that 45 days sweet spot right now we're at if you go out to a June future right now and in this example we bought a June future at $68 now the buy power reduction on that is Scotia over 3,000 dollars we want to create a covered call so we're gonna sell a call up above $68 now we chose a 71 call now that has 21 days left to expiration I'm sorry 27 days left to exploration and if we go to July it's 57 days left to expiration so neither of them fit the 45 day bucket one's a little short in terms of time once a little long what can help us make that decision now ideally we want to shoot for 45 but because there are certain expiration periods we don't get to choose that one of the things we need to might be mindful over here is that if we pick a corresponding option that exercises or expire exercises in to the particular underlying future we're trading in other ones a June option exercises into future when we do that we can add that covered call where in this case we go sell June 71 call for a dollar two which translates we multiply that by a thousand that gives us a little over a thousand dollars in premium core collection any additional buying power reduction no because we know intuitively that by selling that call we're lowering our risk on the trade so the market recognizes that we're not adding any risk so we're actually lowering risk at some finite point if the market keeps falling you're just gonna have a long future with no premium left into it right but it will not cost you anything additional because they exercised in the same month say we want to go out a little bit further to 57 days because we feel we're gonna not only cooked a little bit more premium want to give ourselves a little more time little bit more time our second example we're buying that same June future at $68 same exact buy power reduction $3,050 but we're gonna go out and sell that July 71 call now we're collecting more premium because we have more time so in this case it's dollar 40 we see we multiply that by the multiplier of a thousand so we're collecting about $1400 of premium the difference here you've got a June future we've got a July option that exercises into a July future results they don't exercise into the same products so we are not afforded that margin offset and when I see margin offset we don't sell that call for no buying power - M so in this instance we would be charged them we would be responsible for the margin and a full futures contract of $3,000 plus the margin of being short the July future at 71 call for $1,700 so this trend well looks very similar to the other trade requires 47 almost $4,800 and by pound reduction so we need to be mindful of now some days if they're tuned only is 12 days left to go what can I do well if I go out it's a lie I'm going to have to post an additional premium absolutely but you know it's not like you're giving that $1,700 away that's just your margin your performance spot what will affect net profit is how that call moves what you can also do is go out to the July futures now we know we've trade the curve June July August all the way up to December this year there's between 200 between a hundred thousand and five hundred thousand contracts traded so lots of liquidity right so we could move out if we moved out to a July future and we wanted to do the July call that we're back to that capital efficient capital efficiency they both exercise into the same underlying so we can add that covered call our covered put at no additional cost all right so what about those people that maybe are out there who are reluctant I guess to feel like they're taking a bigger bite with this additional leverage we don't have to go over this in the nitty-gritty but this is just a basic overview of what it looks like for the buyer we're private excuse me the buying power requirement for and at the money put in a couple of the products the futures products that we trade and how the maximum return on capital is significantly greater compared to their relative ETFs which is a smaller bite but also a smaller you know maximum return on capital right and what's interesting here is you look at the SPD at the money put now you think well that's 50 Delta's that you know a full future in the sops is seventy sixty nine hundred fifty dollars well I'm selling a put with half the deltas and I'm almost getting charged the same buying power reduction well span looks at it is it basically is just to become about to become a full futures product once it becomes in the money so it margins that way so you have to realize that an anthem money put will not be half the buy power reduction of the underlying future now if you defined risk on it it does shrink just like underlying equity options shrink but so we've got an antimony put here in terms of SPS there's that natural gas gold gold is around three thousand dollars here's twenty six hundred dollars for that at the money put crude oil is three thousand fifty dollars we are very close to that with it at the money crude a put what's different here though is the amount of premium we're collecting versus that buying power reduction is substantially higher because we're in a much more leveraged product so we're seeing that when we take that buying power requirement to the credit you're collecting we take the credit we're collecting divided by that buying power requirement it shows us our return on capital in other words what's the maximum I can make what is it costing me to hold this position and if futures we see that that in it all the way down through these products the one thing that's interesting is well why is it inconsistent why isn't I know by power as a function of movement and volatility and I understand that gold has lower volatility doesn't move as much as CS a piece of Nasdaq right thereby power would be higher versus span why doesn't the return on capital stay equivalent it's because different futures products because of their movement of volatility have different leverage ratios so it's not like while all futures are leveraged twelve to one right it can be eight to one or if you look at Treasuries it's almost a hundred to one so depending on what product you're picking there's a different leverage ratio and that's why we see this right let's see QQQ isn't a five point five percent compared to the Nasdaq make it wood or whatever it might be okay that's what you're saying so but across the board the one takeaway here is that in terms of return on capital because of the leverage futures before provide a much better opportunity for us to use our capital efficiency then using ETF underlines and that's Universal yes there's a little bit of dynamic difference between each of the underlyings but overall it's a markedly different efficiency level we're seeing in all these futures products all right so on top of the bank our efficiency and some return on capital metrics there's a couple of other things that we need to know when we're looking to trade options on futures options on features trade at the same time as the futures but it's important to keep in mind that liquidity that first thing we talked about in futures for rookies in the European and Asian hours might be thinner so the way that I think of it and especially what helped me as I learned to put positions on and manage them around the clock is of course fewer participants means wider bit Usk spreads which means tougher trade H me entry tougher management and swinging P&L so it's important to keep that stuff in mind whether you're looking to put something on in the overnight hours or whether you already have something on and you're seeing you know a massive gain or a massive loss it's just because that the liquidity might have thinned out in those hours when not as many people are looking to trade you know what this is such an important note because you would think you know well if they're open there should be liquidity and in the underlying sternness 23:5 everything all 22 products tasting works offers the market pretty much is one tick bid and offered now it made instead of being 500 op and maybe tunne 10 up but when we go to options we're gonna start to learn that some of the benchmark products like gold like crude like s apiece that liquidity while thinner and the options market still exists other products like natural gas can get very wide at night the you know natural gas because it can't be exported is a very domestic based market so we wouldn't expect US natural gas they have a lot of liquidity in Asian or European hours we see that play through down rolling the futures but the options - so what does that mean as you said so well is to establish a position may be harder to manage one may be harder and to get a sense of how's my position overnight because sometimes if there's a wide bid-ask depending on the firm and depending on the platform they'll pick the offer side to price it the P&L you or the bid side now you can see that while all of a sudden G's have down $2,200 on $600 so that doesn't make any sense or I'm even better I'm up 2200 hours how can I ring the cash purchase sir though the the the one thing you have to always check is when you see a odd print like that it's look at the underlying you're trading it whether it be natural gas against your natural gifts options or gold against your gold options if the underlying have moved those options haven't moved so just take it for the fact that sometimes platforms you know every calculation is they have to set a rule so some rules will be will always P&L against the offer side well if the offer is traditionally two tix live but overnight it's a hundred ticks wide that could be a thousand dollar difference in your P&L either up or down Sam so but if I see that natural gas is unchanged overnight there's no reason to panic no reason to panic and but it also means that you can't you're not gonna be able to effectively manage those positions overnight so you need to be mindful of and that's why we always preach staying small making sure that you're comfortable with the idea traditionally things like the actual guests don't have big overnight moves see traditionally there's always exceptions to the rule but this is why we want to stay mindful of our position sizing because at the end of the day as markets move and we've experienced probably our greatest struggle was being very wide with one standard deviation Gold strangle so fearing Jesus did I ever get there well I want to be sure Sham fortunately once you do get there and you've got a full short future it's usually not when you actually want them so be mindful that these wider spreads because of the leverage can move very quickly so defined risk is a great place to start in other words using an iron Condor instead of a strangle to start with going out - with the leverage you're gonna find a 10 Delta or an 8 Delta strangle it's gonna yield you a fair amount of credit when I say fair amount a manageable amount it won't be like selling on eight Delta strangle and spy where by the time you figure resort fees Commission's there's nothing to be made on it so start smaller be mindful of that moving forward effect and speaking of actual Delta the one thing that we said in the beginning was that how these contract multipliers not only influence the way the credit you're collecting is kind of displayed but it also is to influence the way all of your Greeks are displayed so what I actually did was I did a quick handout focused mostly on Delta and how when you have a position on not when you're selecting your position but when you have a position on thank you guys what it would look like in terms of the contract multiplier and that equivalent Delta so for example you can see here an email ESP contract has a 50 Delta that means that the at the money if I were to sell and they could put in there it would probably display on my platform in my portfolio as me only being long 25 Delta and then we took it one step further and then we kind of equivalent is that a word I don't know we took it one step further and tried to show you guys the one standard deviation option so maybe if I wanted to put on a strangle any mini S&P x' what would that look like I would be short eight Delta on one side and short eight Delta on the other side so that will be available as a handout to download below the video player when this segment is uploaded it'll be a red link so be sure to check that out but other than that what do we have next we've covered you know what the nuances of options on futures are so the next things that we're going to actually be talking about are strategies which ones do we tend to use for options on futures are certain products better for certain strategies that will well we'll talk about that a little bit in the next segment trade entry what do we look for how do we gauge the option premium based on these multipliers do our entry parameters change because of that notional exposure and because of the buying power efficiency that is typically afforded to us trade defense like you mentioned and that's where another great place this handout will come in handy how does defending a futures option position differ from the equity worlds so we're going to cover some hedging best practices and then of course management do profit targets changed based on the daily weekly monthly moves from the static world and do profit targets changed because of the notional exposure that we are kind of getting from that leverage so that will be what we cover in the next segment look forward to it all right well I know that was a lot you guys but just take it all in you know if you have any questions you're more than welcome to email us support at tastytrade calm but I'm Katie he's Pete this has been futures for rookies we'll see you guys next time you

Channel: tastytrade

Views: 17,234

Rating: 4.8347106 out of 5

Keywords: Futures, Market, Trading, tastytrade, Money, Success, Futures Trading, Stock, futures options, equity options, capital, buying power

Id: WBY06WUNSsI

Length: 22min 52sec (1372 seconds)

Published: Tue Jul 10 2018