Futures Options pt. 2 | Futures For Rookies

[Music] welcome to future futures for rookies man I'm just stumbling on my words today you got it this is the segment where Pete and I I'm Caty talk about all things features related whether they be concepts strategies ideas how they differ from the equity world and today's piece centers around options on futures so previously we kind of defined what options on futures are and how they differ from equity options this is our piece that's kind of more centered on that dynamic Delta meaning that the deltas change based on where the price of the underlying is so we've kind of talked about how options on features expire the pros and cons of using them in a portfolio and today we're gonna kind of go through the strategies that we tend to use with options on futures and if they differ from the equity world as well as talked about the whole idea of trading them so we're gonna talk go from entry to management all the way to exit tsuki one of the fundamental pillars at tastytrade is this idea that we use options for what reason I mean to take advantage of implied volatility and uncertainty and fear being overpriced absolutely so that that foundational mechanic that logic that makes us selling premium makes it profitable for us takes that 50/50 bet and gives us an edge right this dead edge translated into futures yes absolutely definitely that's great that that's that in and of itself it's compelling now let's talk about some of the benefits and you get you've certainly done a thorough analysis here this is great though because it gets people comfortable about the new are there some nuance differences sure not enough to impact your your exploration of these products but let's make sure everybody is comfortable as they buckle in and take advantage of futures definitely for sure okay so I mean this is just a quick list of the strata geez that we tend to use when trading options on futures if you'll notice there are a couple that we didn't include here that we often use in the equity world some of those being things like diagonal spreads more custom spreads and even the traditional calendar spread as it's typically known in the equity world we actually kind of spin it a little bit different than the options on futures world but for the most part for the larger part all of the selling premium plays as well as buying premium in the hopes of an implied volatility expansion they all translate into the options on futures world here we just have a couple listed whether or not they're naked defined undefined and the pros and cons of using them and things you should be aware of when you're maybe looking to use any of these in your portfolio do you want to comment on the the calendar piece in particular so what I was thinking here is I'll say it and then how about you clarify because I think you're really good at doing this let's do it alright so like I mentioned in this pic in this piece we don't have stuff like diagonal spreads because in our previous shows we talked about how active months have different prices or I should say the the curve of futures products all have different prices there for doing something like a durational trade like a diagonal or like a calendar doesn't necessarily make sense because your deltas are gonna be based and your strikes are gonna be based off of two different products moving and they may be moving at different severa tees and that that is a great description the when we look at options and let's just say we were trading Boeing we were looking at you know April options May June and July now they're all priced and options more expensive the further out in time you go but they're all based on the idea of either being exercised or assigned into that same hundred shares a Boeing that's trading in this spot market are on the exchange say there's no futures or for prices futures market - each month is its own contract market market are they all the same thousand barrels of crude yes but it's the markets perception of where that price will be a time so when we roll out in time in our options strategy we try to do a june/july diagonal we're actually not doing it on the same underlying now it's on the same hundred thousand barrels of crude but it's two different price points so we're compelled to not only determine we're going to have different strikes because there's going to be different equivalency of Delta's because of as you said that term structure up or down we're also we can do a calendar spread in crude oil by powering accrue contracts around $3,200 right now calendar spread is around two hundred and eighty dollars so if I want to buy June and sell July it's a much smaller movie trade thus look much less buying power production it's an interesting trade a much smaller trade but it's very carefully efficient now if we were to do that calendar trade with options we would be selling a call in one product selling a put in another right so it gives you that theta component which options are very beneficial for right and it's a leverage theta composed so you think well I'm getting I'll pay a lot of premium what you're losing though is your static your you've taken your static Delta's of one to one in a futures product and when you've added options you've now taken your diagonal and added theta that will move differently depending on where the underlying move and they don't have to move in lockstep because you're not it's not all based off of that hundred shares of Boeing it's based off of two different underlyings and the other side of that is by doing that you're creating basically two naked futures positions that will have a buying power far in excess of a single outright futures position so you're you're not engineering you're not engineering the trade you want which is actually to take advantage of differences of volatility between different months these types of diagonals do not lend themselves to trading of futures perfect so I mean I guess the the overarching picture here is that personally I like to stick more to the left hand side of this slide I'm the vertical spread naked options strangled straddles iron condors type of girl as well as covered positions via the ones on the right hand side are certainly something that you can do it's just not a way that I typically lean unless we do identify skew or a couple of other things where butterflies ratio spreads might come into play and might be a better option for our portfolio at the time and you make it you mentioned a great pointer skew skew it traditional skew is that downside skew we see in equities irrespective of what sector I'm in energies or metals or technology there's always a the puts or richer and price in the calls now in futures and in commodity futures whether it be metals or energy or agriculture they're off times is what they call a reverse skew where the calls are make sure that the place which of the puts what we see to is with leverage remember because these are options on a leveraged product so what's great is you collecting appreciably more premium but you have appreciably more exposure your Delta's will change faster than you're used to pay so you have to remember that that premium comes at the expense of still originating from a larger notional product so I think that one of the things that we need to be mindful of is that nature of skew is so that skew well it's dynamically well some types of Kolb's will be very rich to put sometimes in gold will see a neutral skew we need to be mindful of the shape of that skew cassette sometimes will help us define optimize our strategy and our strike selection so be mindful that that skew will tend to move more and can have an impact on optimizing our trade entry levels so and it will be different across different products but I agree with you I mean the one key takeaway here is capital efficiency they get options vertical spreads covered positions all you can do a covered futures position one of the things we talked about yes last time which was important is the idea that if I do it if I'm long June crude can I go out and sell a June crude call and against it create a covered call position absolutely does it lower my exposure sure because you're you're reducing your Delta may does it cost me anymore to add that call in terms of buying power reduction know that as long as that option exercises in to that corresponding June future you could so when I say sell that call at no cost I've told you about in terms of capital sure but if I wanted to go out to a further say I wanted to sell that July call against that June long future I no longer because as we talked about the July call exercises into what July future I've got a long tuned future they're not the same thing so I don't get that when I sell that call in July I'm going to actually be required to post the required margin of a naked short call so when I it's strategy selection also depends on okay well does that mean I can't sell calls because there's only nine days left to go in the June's yeah I wouldn't sell nine day calls in June what I would do is move my whole position right move the outright to July there's lots of liquidity out there and then sell the joy so these are not insurmountable problems we just have to be mindful of again and we've got a good check here looking at iron condors iron flies four-legged traits do they work and set up well-defined risk absolutely the one thing we need a month be mindful of is liquidity further out so depending on product we pick just like I mean we go through that we we had looked at a some earnings trades coming out and there is a voluminous amount to choose from will parse through that list very quickly because some will be like well there's no liquidity in the next month so I have nothing to roll - there's no liquidity upfront so even if I'm right tomorrow morning when they open wide on them not gonna be able to manage exactly exactly same thing holds true here you need to look at the liquidity further out both think about not only initiating the trade but managing the trade if you're gonna do a strangle and you want to roll that out make sure there's liquidity most of the products that we are going to offer unless there is liquidity but be mindful that that's part of our decision-making process perfect alright so we've kind of talked about what strategies we tend to lean towards when we are looking to incorporate options on futures into our portfolio but what do we look for when it comes to identifying opportunities oftentimes like the equity world just like any active retail trader out there we look for price extremes we look for extremes and implied volatility or option premium we look for binary events how do we gauge this option premium there's a couple different ways we can do it one of those would be the corresponding ETFs which we've covered when we've listed them and the numerous cheat sheets that we've done I'll be sure to attach it to this segment as well as one that I hadn't even thought of until you brought it up actually which is it's a great piece of market awareness that I kind of wish I had known when I was starting and that is just tracking strangle and straddle prices of these options on futures on your own so maybe you're not ready to dive in this week or next week but start by looking at what a strangle is looking like in crude or what a strangle looks like in emini S&P x' or whatever product you're particularly interested in track it over time and you can potentially see as we see movement in all of these different markets when they start to ramp up premium and when it gets cheaper alright so and then last but not least I think we're gonna actually end on this slide today so we can cover the management and exit pieces for tomorrow I think three segments and options on futures is definitely warranted I do our entry parameters change given the notional exposure this was a big one for me when I first started and what I have learned and this is obviously completely sick Jack's objective but what I tend to do is I look for strikes that are farther out of the money just to widen my break even as somebody that's trying to get comfortable in this space but what I always default to is start by looking at the 30 Delta options for defined risk so that would be your vertical spreads and your iron condors and then adjusting from there going farther out and collecting enough if you can and then also checking again the one standard deviation options for the undefined risk what would you say for like a naked call though like a position so cuz like in the up and the equity worlds we often go like maybe one or two strikes out of the money sure look at we're looking for a capital e efficient way to get to workplace stuff exactly here we have if you want to do that you've got the perfect product that's the futures underlying you're getting in the case of SOPs a hundred and thirty-five thousand dollars of exposure for six thousand dollars in buying power reduction so selling an at the money call doesn't necessarily it's that you will be margined very close to that six thousand dollars so you could argue i'm you know if the market falls away I'm losing my short deltas and I'm still getting margin as a full futures contract the the span marching looks at that naked at the money call as it as a full futures contract so at that point what's it if I'm looking for that direction I'm just going to use the underlying cuz that's gonna give me static deltas and let me if I'm right maintain that Delta exposure but when we start to look at okay I like the idea how is the quick what is the quickest way for me to get smaller you know I don't want a bite and $135,000 at a pop that's way too big a piece of pie for me I want a nice you know I want a nice thirteen thousand $18,000 exposure how can I do that can I go to spy sure that's perfectly comfortable but you're gonna find terms of capital efficiency the ETFs are gonna be to get that equivalent size it's going to be much more expensive now I can go out to a ten or a twelve Delta s and P call and I can even define risk on it and bring that buying power down from $6,000 to below six hundred dollars and still collect three or four hundred dollars in premium now on in terms of return on capital and again buying power reduction is very seductive because they do you think wow you know I sold a ten Delta call for seven hundred bucks you know I I've really protected myself I've got pulled in seven hundred dollars in premium and I'm way far away from the market the one thing we've learned I think we can say is that yeah it seems very far until it's not and the amount that markets can move and that 10 Delta be coming at the money or close to at the money very quickly we're always exposed to and that leverage effect and bites us very hard so the idea of just not going by buying power but looking at your return on capital of that is really speaks to your efficiency and that though that helps you set okay if I if I am posting $600 and collecting 500 dollars of premium I'm almost if that premium goes to zero I have almost a 90 percent return on capital well we know that that is looking for 90 percent returns on capitals is unrealistic so that immediately starts me to set a more realistic goal about collecting a lot of premium here for not a lot of buying power but I'm not looking for all 500 dollars of that I'm looking for a hundred I'm looking for 80 to 120 and that in and of itself is still a 20 percent return on capital which is anyone would consider very successful so don't be don't be a swage that you don't have exposure just because you're going farther out of the money on a naked on a naked position and the buy power reduction is reduced alright perfect well that wraps up this edition of futures for rookies in this segment we covered the strategies that we tend to use when looking to incorporate options on features in our portfolio and we started to talk about how we identify opportunity in all these different futures products that are available to us in the next segment we're going to talk about management and of course exit and profit targets I'm Katie he's Pete this has been features for rookies we'll see you guys next time you

Channel: tastytrade

Views: 5,413

Rating: 5 out of 5

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

Id: i8cpaR68ZfY

Length: 17min 19sec (1039 seconds)

Published: Tue Jul 10 2018