learn to trade futures

Trading futures and options on futures involves a substantial amount of risk. Accordingly, Carley Garner and DeCarley Trading, have allocated substantial resources to help people to learn to trade futures.  After all, an educated brokerage client is a better client.  

Years of commodity market experience as futures brokers has contributed to the cause; we hope you enjoy these articles focused on trading in futures, option trading, and commodity market analysis. 

  • Jobs - Dodd Frank = ES Futures Rally

    the financial futures report

    A healthy jobs report, a potential Dodd-Frank peel back, and renewed talks of tax cuts propelled markets higher.

    Financial futures traders loved Friday's events and they expressed that sentiment by buying into US assets. For the first time in a LONG time, the jobs report was judged by its merit as opposed to the anticipated reaction by the Federal Reserve. In other words, the markets no longer seem to be held hostage by the Fed's every move. Instead, investors are looking to speculative economic growth as the driving factor with the Fed's monetary policy as a secondary concern.

    Non-farm payrolls grew by 227,000 in January but the good news was slightly dampened by sluggish wage growth. On a positive note, the unemployment rate ticked higher to 4.8%. No, that isn't a typo...a higher unemployment rate is a positive. The increase in the unemployment rate is a sign that the labor force has increased. In short, some of those who were discouraged from looking for work have found a reason to get back on the job-hunt (remember, the headline unemployment report fails to recognize those who stopped looking for a job out of frustration but are still unemployed).

     

  • Learn to Trade Commodities

    Learn to trade commodities with DeCarley Trading and Carley Garner

    Carley Garner, and DeCarley Trading, have compiled a vast resource of educational material aimed at helping people learn to trade in the commodity markets.  

    Whether you intend to trade futures, futures spreads, options, option spreads, or you haven't determined a commodity market strategy, we believe you will find useful and applicable information here.  In addition to the dozens of futures and options trading articles listed below, we offer visual learners free access to our commodity trading video archive.  Visit DeCarleyTrading.com for details.  

  • Light trading volume in the ES, melt up

    the financial futures report

    Where did the ES futures volume go?

    At the time this newsletter was being written, volume in the December e-mini S&P was creeping up on the one million mark in contracts traded. This is dramatically lower than the 1.5 to 2.0 million we were starting to get used over the last three or four weeks of trading.

    Our theory is that many of the highly leveraged market participants have moved to the sidelines after a rough period of trading. Don't forget, bear markets lure traders to the futures markets like flies on "fertilizer". This is because most speculators believe there is quicker, and bigger, profits to be made during sell-offs than can be made during a bull market phase. Their assumption is true, but it also comes with elevated risks.

    The big sell-offs in August and September brought traders to the markets, but the October rally has likely chased them back into hiding (particularly the massive short squeeze seen on Thursday and Friday of last week).

    What does this mean going forward? Two things stick out in our minds; first, the e-mini S&P 500 bears will think twice about selling into a market that has burned them (twice). Second, if these traders stay sidelined and volume remains light, the path of least resistance will continue to be higher in the stock market (light volume tends to see melt-up type of trade).

  • No surprise from Yellen, Treasury futures turn the corner

    the financial futures report

    Trading volume was muted ahead of the Fed announcement

    Pending home sales were a bullish surprise this morning. According to stats, homes under contract for sale were up 1.4% in March. However, it was the crude oil inventory report that garnered the largest reaction...at least until traders remember it was an FOMC day, and stock prices reverted right back to where they started. The S&P fell markedly following a $1.00 drop in crude oil futures at the hands of the latest weekly inventory report, but both oil and the S&P recovered later in the day.

    Naturally, the story of the day was the Fed. The Fed didn't change interest rate policy, as was widely expected. They also basically copy and pasted their policy statement from the last meeting. In short, today's FOMC meeting was a non-event.

  • No surprises from the Fed, maybe seasonal tendencies will take over financial futures

    the financial futures report

    As most futures traders expected, the Federal Reserve didn't take action

    Going into today's FOMC meeting conclusion, the Fed Funds futures markets were assigning a 15% probability of a rate hike. As it turns out, the majority of traders were correct in assuming the Fed would bypass the September meeting. In our view, we probably won't see any action until December but of course, the November meeting is still up in the air.

    We recently took part in a survey conducted by FXStreet.com in which we found the results to be rather interesting. According to the survey, expectations of the rate hike campaign are rather meager. The consensus average of those polled is calling for the rate hike cycle to stop at about 1.5%. Some were even predicting the Fed would stop at .75% (only one more rate hike from the current level). Also interesting, almost 60% of those polled believe quantitative easing is a tool the Fed will continue to use in the mid-to-long term.

    If you are interested in seeing the details of the survey, click here: (http://www.fxstreet.com/analysis/fxsurvey-dovish-fed-to-hike-interest-rates-in-december-qe-might-return-in-the-mid-term-201609201150)

  • Once again, e-mini S&P buyers stepped in on the dip

    the financial futures report

    Despite a lack of economic data in the US, the markets found a reason to bring the ES to 2100ish.

    The economic data schedule was skimpy in the US this week so investors were focused on news coming out of China. Word of Chinese exports tumbling 10% while imports also softened by 1.9% triggered global selling in stock indices. However, as has been the case since early 2016 market corrections are merely a signal for dip buyers to put money to work. Overnight and early morning losses were quickly shored up by afternoon trading.

    On the lows of the day, technical oscillators were suggesting the sell-off had gotten ahead of itself. As it turns out, they were right. However, the lack of volatility has become silly. A 50 point decline in the S&P shouldn't constitute an oversold market.

    Tomorrow's docket is relatively busy. We'll digest inflation data along with the latest consumer sentiment readings.

  • Option Expiration and holiday rally could start next week

    the financial futures report

    Holiday futures markets are around the corner

    Perhaps the most valuable lesson I've learned in my decade (plus) time as a commodity broker is that holiday markets are not to be reckoned with. Volume is light and trading desks are filled with the second, and third, string staff. As a result, the markets can make dramatic and uncharacteristic moves. An example of this that still stings, is last year's Thanksgiving day crude oil futures collapse. The market was technically closed for the holiday, but the CME decided to let futures trade for an abbreviated session on the morning of Thanksgiving day. As a result of the light volume, and an ill-timed OPEC meeting, crude oil fell roughly $7.00 in single clip. In a nutshell, this is the time of year to keep trading light.

    In regards to the S&P and Treasuries, the holidays have an interesting influence on trade. Nearly every year (I'm not exaggerating), we see an end of the year melt-up. It is often a very slow moving grind, but it eventually adds up to a significant move.

    More pertinent to the current market; the week of Thanksgiving is statistically highly bullish. In fact, the Stock Trader's Almanac suggests that it might be a good idea to look for weakness prior to Thanksgiving to enter bullish trades, and strength after the holiday to exit. In fact, in the Dow, netting the day before and after Thanksgiving day has combined for only 13 losses in 62 years.

  • Option Volatility Trading with VIX Futures

    Futures Option Volatility Trading with the VIX 

    The adage buy low and sell high was originally used in reference to price, but can also be applied to the practice of trading volatility. In fact, even as a commodity option trader looking to trade market price as opposed to volatility, ignoring measures of potential explosiveness while entering or exiting a market could mean financial peril. While many commodity traders, whether beginner or pro, understand the concept of buying options during times of low volatility and selling them during times of high volatility, emotions often lead a well-planned strategy astray.


    Unlike traders that are looking to profit from a directional move in price, volatility traders are more interested in the pace at which the market is moving than the direction. However, I argue that it is important to chart both price and volatility in a commodity market before speculating in options. Doing so provides trades with a better understanding of the 'big picture'.

    Volatility Index Futures CBOE

    In my opinion, the most efficient means of trading equity market volatility isn't through the VIX index, or any other similar measure. High levels of leverage, a lack of options on futures market, and a tendency for the index value to erode over time are major factors working against the viability of doing so. Instead, I believe that traders should look to buy or sell options on S&P 500 futures, or more specifically the e-mini S&P (symbol ES). The S&P 500 is a broad based stock index and its value is sharply impacted by market sentiment and the corresponding volatility. Thus, a trader that is of the opinion that volatility will increase may look to buy volatility through the purchase of options written on S&P 500 futures and those looking for volatility to decrease may look to sell volatility buy going short options on the index. Accordingly, insiders often refer to the practice of buying or selling options as "going long volatility" or "going short volatility".


    Trading S&P 500 Volatility through Premium Collection in the Futures Market


    As mentioned, one way to speculate on variations in volatility is through the practice of option selling, often referred to as premium collection. It is important to realize that I am referring to trading American style options which allow traders to buy, sell or exercise options at any time prior to expiration. This differs from the European style versions that offer far less flexibility. The increased level of flexibility tends to have a positive impact on the value of the option and thus the amount of premium collected for selling it. In other words, option buyers may get more value using European style options (referred to as end-of-month options in the S&P) due to lower premiums; conversely this concept works in favor of option sellers of American style options.

     


     

    Why Option Selling?


    Option sellers are in the business of collecting premium, much like an insurance company, under the assertion that in the long run the Navigating the Commodity Marketspremium collected should outweigh any potential payouts. This theory is based on the assumption that more options than not expire worthless, which has been suggested by several studies including one conducted by the Chicago Mercantile Exchange. Unfortunately, similar to insurance companies who are sometimes forced to honor their policies on excessive claims, commodity option sellers are vulnerable to monster market moves than can be potentially account threatening. Preventing such disasters ultimately come down to timing of entry along with a good understanding of futures market volatility, market sentiment, and market knowledge. Additionally, experience, instinct and, of course, luck will also come into play. Yet, in my judgment option selling is a superior strategy in the long run.

    Futures options selling advocates and equity market volatility traders seem to migrate to the S&P 500 futures market (e-mini S&P). There are other stock index futures such as the e-mini Dow Jones Industrial Average and the e-mini NASDAQ, but the e-mini S&P offers the most liquidity as well as a broader based index with smoother price movement.

     


     

    CBOE's Volatility Index Futures (VIX)


    CBOE VIX Futures Volatility IndexAn important measure of volatility when referring to the S&P 500 is the now infamous Chicago Board Options Exchange's Volatility Index, often simply referred to as the VIX. According to the CBOE, the VIX is a "key measure of market expectations of near-term volatility as conveyed by S&P 500 stock index option prices" and has become one of the most prominent measures of market sentiment in the world. In “normal” market conditions, the VIX spends a majority of its time below 20. As chaotic price action in the financial markets heat up, the VIX can see spikes into the 30 or 40 levels. However, in historically extreme circumstances such as the 2008 financial crisis, the VIX can trade into the 70s, or even higher.


    The VIX futures contract is the sole futures offering on the CBOE exchange. As a result, not all futures brokers offer access to trade it. Additionally, receiving real-time VIX quotes in a futures trading platform isn’t necessarily a given.


    The VIX futures market offers contracts expiring each month. The margin to trade VIX futures fluctuates around $3,000 per contract and the point value is $1,000, making it a very volatile holding in any commodity trading portfolio. For instance, fi the VIX moves from 15.00 to 16.00, the trader would have made or lost $1,000 per contract with a margin deposit of just $3,000. If you’ve followed the VIX, you know that it doesn’t take much time to travel a full point. Thus, most traders are probably better suited trading e-mini S&P options, than dabbling with highly levered VIX futures.


    Increased values of VIX are highly correlated with higher option premium in the ES (e-mini S&P) options due to inflated expectations of future volatility built into options on futures prices. Assuming he is willing to accept the risk of participating in such a market, times of inflated expectations of volatility, and therefore over-priced options, are ideal conditions for an experienced option seller.


    The Quest for Implied Volatility in Futures Options


    Unlike the VIX which is derived from the underlying futures price, among other factors, implied volatility is a component of option price. The implied volatility of a futures option, is the amount of volatility implied by the market value, or price, of the option. In other words, the implied volatility is forward looking in that it incorporates the current market precariousness as well as what market participants are expecting at some point in the future.


    You may also find that market emotion and sentiment are a component of futures option implied volatility. As long commodity option traders scramble to “buy” volatility through the purchase of options in an attempt to profit from the latest hype, option premiums can and do explode exponentially. As a sidelined options on futures seller, these types of conditions should be inviting. The premise of this approach is to attempt to sell options to buyers that are simply "late to the party". The key is making sure that as a seller you aren't too early.


    Selling Puts can be Lucrative, but the Option Strategy Comes with a Hefty Price Tag


    It is often the case that selling puts is more lucrative than calls, but the added reward carries baggage in the form of additional risk. Due to the increased levels of risk, timing becomes crucial. By nature an option selling program in the futures markets tend to leave room for error in the execution. Nonetheless, being short puts in a spiraling market can quickly change that.


    The phenomenon of put premium in the stock indices being larger than call premium is often referred to as the volatility smile. The volatility smile is a long observed pattern in which at-the-money options have lower implied volatility than out-of-the-money options along with the idea that there is more value in owning a put relative to an equally distant call. This scenario seemed to be born after the crash of 1987 in the U.S.


    While there are no crystal balls to let us know when a futures market will turn around and how low that it might go before it does, being aware of historical patterns in price, volatility and market sentiment may help to avoid a compromising situation. Let's take a look at the relationship between the VIX and the S&P.


    VIX and the S&P 500


    Looking at the chart below, it is obvious that the S&P 500 has been able to forge recoveries during times of spiked volatility as measured by the VIX. Armed with this knowledge, it may be a viable strategy to look at erratic, and many times irrational, trade as a point of entry for put sellers.


     

    Short Put Option Trading Example

    For example, based on this assumption put sellers may have fared well during the lows in 2001, 2003 and 2007, and 2011. That is of course assuming that the option seller wasn't early in his entry. If a short volatility trader enters a market prematurely, there is a strong possibility that the trader will be forced out of the market prematurely due to lack of financing or margin. Let's take a look at one of the most opportune times in history to be a volatility seller (sell puts in the S&P).


    Beginning in the middle of 2002 and throughout the beginning of 2003, put sellers with savvy timing may have done very well. However, trading is a game of risk and those selling puts during those times were accepting great amounts of risk in order to reap the reward.
    Let's take a look at a continuous S&P 500 futures chart during the 2002/2003 lows. While the VIX is a great indication of volatility and extreme market sentiment, it is also helpful to look at indicators of volatility such as standard deviations. Luckily, the creation of Bollinger Bands allows us to visually determine market volatility through the line plot of two standard deviations from its mean. Times of high volatility are denoted by wider bands, or a larger standard deviation, and times of decreasing volatility result in narrowing bands.

    S&P 500 Volatility Trading and Option Selling

     

    As futures market volatility increases, so will option prices.  During such times, commodity option buyers are forced to pay extremely high prices for options that in theory are more likely to expire worthless than not.  On the other hand, option sellers are provided top dollar for accepting theoretically unlimited risk.


     

       

    Option Selling with Implied Volatility in Options

    Higher premiums collected not only increase a futures market trader’s profit potential but it also increases the room for error. The money collected for a short option can be viewed as "cushion" in that it defines the amount in which the trader can be wrong and still make money by shifting the reverse break even further from the market. The RBE of a short put is calculated as follows:


    RBE = Put Strike Price - Premium Collected + Commissions and Fees


    As you can see, the more money that the option seller collects, the deeper-in-the-money the option can be at expiration without resulting in a loss to the trader. 

    According to the hypothetical data available to us, in July of 2002 with the September futures e-mini S&P price near 780, it may have been possible to sell the August S&P 500 futures 680 put for $4.3 in premium which is equivalent to $215 before commissions and fees (each point in the e-mini S&P is worth $50). If this was the case, a trader could have collected a little over $200 U.S. dollars for an option that was, at the time, approximately 100 points or nearly 13% out-of-the-money.


    $215 per contract before transaction costs might not sound like a lot of money, but considering the margin on the trade (required deposit in a trading account) was under $1,000 most traders could have sold them in reasonable multiples. For instance, selling 5 of the August 680 puts might have brought in a little over $1,000 in premium for a margin requirement of less than $5,000. Those that like to calculate return on margin, it would have been roughly 20% had the option seller held the short futures options to expiration a mere four weeks down the road.

     


     

    Selling options on futures in high volatility  

    *This chart assumes selling a single option in the full-sized S&P futures, which is equivalent to 5 e-mini S&P options. We recommend using the e-mini version of the options due to liquidity and option market transparency benefits.

    At expiration, this trade would yield the maximum profit of $1,075 before commissions and fees if the futures price is above 680. Ignoring transaction costs the reverse break even on the trade is at 675.70. This simply means that this particular trade makes money with the e-mini S&P futures price trade anywhere above 675.70 before commissions and fees. Please note that the amount of commission paid will reduce the premium collected and shift the RBE closer to the market. To look at it in another perspective, the trader can be wrong by 104.3 points after entering the trade still manage to break even. If the trader's goal is to put the odds in their favor, this seems to be a commodity option trading strategy to consider.


    Selling Options on Futures with the VIX can be an Attractive Trading Strategy


    Without regard to transaction costs, futures and options trading is a zero sum game; for every winner there will be a loser. Thus, putting your odds ahead of those of your competition is a must. In my opinion, selling options during times of high volatility, while exercising patience, and incorporating experience, is doing just that.


    With that said, where there is reward there is risk; in efficient markets you cannot have one without the other. A short option strategy in the futures markets should only be attempted by those that have ample risk capital to allow for potential drawdowns as well as the ability to manage fear and greed. Fearful traders are vulnerable to panic liquidation at inopportune times in terms of market volatility and option pricing. Likewise, greedy traders are tempted to sell options closer-to-the-money in hopes of higher payouts but the risk may turn out to be unmanageable. I strongly believe that less is actually more when it comes to premium collection. Trade less, collect less, and hopefully enjoy more success.

  • Parabolic ES Futures

    The Fed is as hawkish as they've been in years...

    A hotter than expected inflation reading and more confirmation from the Fed that they will be seeking at least three rate hikes this year set a negative tone for Treasuries. However, the same news was seen by stock trader as a sign of economic growth and prosperity. Accordingly, the seemingly never-ending stock market rally logged another session of buying. What can we say? This is a bull market...and nothing can derail it. In recent weeks we've seen chaos in Washington, riots in the streets of our cities, a North Korean missile headed for our shores, but we've yet to see investors interested in taking profits in the equity markets.

    If you ask me, the bulls are starting to get greedy (that said, we've obviously been wrong about the strength of this rally). According to our friends at Consensus, their bullish sentiment index has reached 76%. Generally speaking, this signifies an extreme that often results in a reversal. Likewise, The AAII Index suggests only 25% of those polled were bearish the market. The bus could be getting full...and we all know that that means.

     

  • Quick thoughts on the ES route and ZB run

    the financial futures report

    China is ruling the roost, U.S stock index futures markets flailing

    Today marked the end of this week's economic calendar, which leaves tomorrow's fate nearly entirely at the hands of tonight's Asian trading session. If we could put blinders on to block out Chinese volatility, we'd probably feel relatively upbeat about the prospects of the e-mini S&P futures from here. Unfortunately, China matters....**a lot!** The markets know this. With that said, we still expect the Chinese government to come to the rescue (again). Eventually, they'll find a way to get the job done for now (can kicking).

     

  • Rebirth of the bull market or a head fake

    Stock Index Futures Trading Newsletter

    The futures markets have voted: Did Donald Trump awaken the bull market in stocks?

    It is no surprise the markets are fickle. Wall Street appeared to favor the stability of a Clinton regime but in the end they voted for growth policy following a Donald Trump victory. Whether or not the stock market's optimism will be mimicked in the economy is yet to be known, but for now we believe the euphoria could take us into year's end.

    Stocks often find a significant low in October, this year it seems that low might have been a few weeks late. Nevertheless, seasonal strength and one of the most convincing key reversals we've ever seen has us looking higher. That said, volatile markets can change quickly. The bulls will need to break above 2165, until this occurs the bears are still alive.

    Now that the election is over, the market "should" start focusing on the Fed.

     

  • Slow news week (hopefully), ES should recover with solid earnings

    the financial futures report

    This week's news docket is skimpy but be cautious of the Fed's Beige Book on Wednesday afternoon.

    I'm sure there will be plenty of headlines coming out of DC, as usual, but scheduled economic news is thin. This should leave traders focused on earnings, which are projected to be relatively positive. As mentioned in the previous newsletter, when earnings season arrives during a market dip it tends to be supportive. We suspect this time will conform to the norm, leading the S&P 500 futures higher for the next couple of weeks.

    With that said, don't underestimate the potential market reaction to Wednesday's Fed Beige Book. With the Fed's interest rate hike campaign in full force, the markets will be interested in knowing their thoughts on the domestic economy.

    Also, the early April stock market dip could have been tax related selling (investors liquefying to pay tax bills). However, post-tax deadline we could see funds flow back into the market equity.

  • Slow trade in the e-mini S&P Futures ahead of Fed minutes

    the financial futures report

    Light futures market volume, and surprisingly light volatility

     

    Another wave of stock selling in China failed to excite the U.S. equity market bears. In our opinion, the bears are simply busy doing other things (not trading). In regard to both volume and volatility, this is one of the most sluggish markets we've ever seen during our time as commodity brokers. It feels like Christmas in August! (If you've ever followed the markets over the holidays, you know what I'm talking about).

    We've been reminding our readers of the fact that China is a communist country with few rules. When things get bad, they simply fabricate stability through money printing, legal restrictions on stock selling, currency market manipulation, implementing constructions projects with no real purpose, etc. Last night the Chinese central bank reached into their bag of tricks, and pulled out one of the largest cash injections into their financial system in nearly 2 years to put the brakes on economic contraction. Despite the government's intention of stability, the reaction was panic.

  • Small specs are getting squeezed out of ES futures contracts

    the financial futures report

    It is early, but October has been the least volatile month...EVER.

    If today was the end of the month, this would be the quietest October on record and it would also be the quietest month ever. Of course, it is too early to suggest that is what is in store for the markets come October 31st, but it should at least offer some perspective.

    Further, it has been almost a year without a 3% drawdown in the S&P 500. This is the second longest run of its kind in history. If the market survives the next 10 days, it will beat the previous record. Keep in mind, 3% is literally a drop in the bucket. At today's price, that would be a mere 75 ES points.

    We don't when the dam will break, but we do know it always does, eventually. Traders should be on their toes. Afterall, investor complacency is at an all-time high and historically such environments haven't ended well.

    As mentioned in a previous newsletter, the University of Michigan stock market sentiment index measuring the percentage of investors that believe the stock market will be higher a year from now is at an all-time high. Similarly, credit spreads are near historical lows (this is the difference between the yield on high-risk securities and risk-free Treasury securities). Tight credit spreads suggest investors are reaching for yield and lack concern for economic turmoil (in short, they are complacent). The last time we saw such tight credit spreads was mid-2007, just prior to the financial collapse. We aren't predicting a repeat of 2007, we are simply saying the bulls should consider exercising caution. Is anybody familiar with "Old Man Partridge" from "Reminiscences of a Stock Operator"? The trend is only your friend until it ends.

  • The $ES_f couldn't make it three in a row

    the financial futures report

    The E-mini S&P traded lower two days in a row for the first time since late September.

    Although losses were minimal, the ES managed to settle in the red on two consecutive trading sessions to close out last week. In a normal market this wouldn't be worth a mention, but in this market, it is a rare occurrence. The last consecutive negative closes took place on September 25th and 26th. Before that, you have to scroll the chart back to early August!

    I doubt the _bulls_ are concerned in light of the fact that the ES is within 15 points of its all-time-highs. On the flip side, the _bears_ must be growing concerned over the fact that the seasonal tendencies from Thanksgiving through the end of the year generally call for higher stock prices.

    That said E-mini S&P futures traders are holding one of the longest positions we've seen this year. Thus, one has to wonder if the bulls will soon run out of capital. After all, most of the bears have already been squeezed out of positions. This is true even in the stock market, the percentage of outstanding short positions on individual equity products is near record lows.

  • The Commodity Trading Game Plan

    Commodity Trading Game Plan

    A New Look at an Old Futures Trading Topic



    There are an unlimited number of ways to skin a cat, and trading is no different. Despite your futures trading strategy, risk tolerance or trading capital, having a plan is one of the most important components of achieving success in these treacherous commodity markets. However, we believe that the most important characteristic of a profitable futures and options trader is the ability to adapt to ever-changing market conditions. Assuming this, it seems logical to infer that a commodity trading plan should be established; nevertheless, just as rules are meant to be broken, futures trading plans should be flexible to accommodate altering environments and new events.

    The premise of properly planning a commodity trade is similar in nature to a business plan. It is a relatively detailed outline of the structure of the futures and options speculation and the contingency plan, or plans, should the market go against the trade. Once again, I believe that trading plans should not necessarily be set in stone; behaving as if they are could lead to financial peril.

    There are two primary components of a commodity trading plan: price prediction and risk management. Price prediction is simply the method used to signal the direction and timing of trade execution. This may involve fundamental or technical analysis, or both. Risk management specifies when to cut losses, when and how to adjust a position, or better yet when to take profits.


    Commodity Futures Price Speculation (Hopefully Prediction)

     

    The only way to make profitable futures and options trades is to buy low and sell high. This is true whether you are trading derivatives, or baseball cards. Although it is a simple concept in theory, in practice, it is much more difficult to implement than one may think. In order to successfully buy something at a low price and sell it at a higher price, the trader must first be accurate in his speculation.

    Determining an opinion on where commodity market prices could, or should, go is only half the battle. Once you have done your homework in both fundamental and technical analysis, you must be able to construct a prospective commodity trade that will be profitable if you are correct and hopefully relatively painless if you are wrong.


     

     

    Timing is Everything



    Timing is Everything when Trading in Commodities

    In futures and options trading, timing is everything. I constantly remind my clients and prospects that there is a big difference between being right in the direction of a commodity market and actually making money. I have witnessed traders be absolutely correct in their speculation of futures price movement, but miss getting into the trade due to unfilled limit orders, or entering the commodity position too early (which can cause the trader to run out of money or patience before the price move occurs).

    Attempts at commodity price prediction can be based on technical oscillators, psychological barometers, supply and demand, or anything else that provides clues to price direction and timing. I am a firm believer that there aren't right or wrong trading tools but there are right and wrong ways to use them. Simply put, trading indicators can be compared to guns; guns don't kill people, people kill people. In trading, oscillators or charting tools don't siphon trading accounts; unfortunately traders sometimes do it to themselves by acting too aggressively to trading signals, or ignoring them altogether.

    Further, while it isn't important which indicator you use to time a futures trade entry and exit, it is important how comfortable and confident you are in using it. This is especially true in reference to computer generated oscillators such as the MACD and Slow Stochastics. In the long run, I believe blindly taking all buy and sell signals triggered by such indicators would yield similar results. Accordingly, the primary factors playing a part in whether a trader experiences profits or losses are likely the ability to avoid panic liquidation, properly placing commodity risk management techniques in place, and exiting option trades that have gone bad before it is too late. In other words, I believe that good instincts and experience are more valuable than any technical indicator, or supply and demand graph, that you will run across.

    Once you have determined your speculative tool of choice and determined your conclusion on the direction, or lack of, it is time to construct a strategy that will benefit if your assessments are accurate and mitigate risk if you are wrong. This may include the use of options, futures or a combination of both. The method that you choose should be based on your risk tolerance, personality and risk capital.

     


     

    Options, Futures, or Both



    Commodity speculators have an unlimited number of "options" when it comes to trading vehicles. The key is to find an approach that will provide you with a manageable risk profile, while still leaving the potential for a profit that you will be satisfied with. Throughout the process, keep in mind that the relationship between risk and reward isn’t linear. Only a fine balance between the two will allow the trader the probability of a reward rather than the dream of one. Accepting reckless amounts of risk may pay off for a lucky few, but for the masses the results will be dismal.

    Depending on the characteristics and personality of the trader, a stock market bull might purchase an e-mini S&P futures contract, purchase an e-mini S&P 500 call option, sell an e-mini S&P 500 put option, or even use a combination of long and short options and futures contracts, to construct a trade with various risk and reward prospects.

    Likewise, a crude oil bear might opt for a limited risk option spread such as an iron butterfly or he be willing to accept large amounts of risk and volatility by choosing to short a futures contract outright. I couldn't possibly touch on each of the commodity market strategy possibilities in within the realm of this article but you should be aware of the opportunities available to you, and which fits your personal trading profile, before ever putting money on the line. If you are interested in exploring commodity trading strategies outside of simply buying or selling a futures contract, you might find my book “Commodity Options” helpful. It outlines several commodity option spreads and even synthetic strategies in which futures and options are combined to construct a hedged position in the futures markets.


     

    risk in commodity tradingRisk Management is Imperative when Trading in Commodities



    The "meat" of a proper futures trading plan is risk management. This is concerned with establishing thresholds of loss that you are capable and willing to accept in exchange for potential rewards. In the case of futures traders, this may simply mean picking a stop loss price and placing the order in conjunction with a profit target (limit order).

    Once again, trading plans are for guidance and shouldn't be followed blindly. Don't be the futures trader that misses taking a healthy profit while trying to squeeze out an extra $20 because the price came within ticks of a working limit order but failed to trigger. Also, even if your trading plan doesn't involve a trailing stop don't be a fool. Markets don't go up or down forever, if you have a large open profit tighten your stop loss order, or place protective options or option spreads and walk away.



    Managing Commodity Market Risk is an Art not a Science



    Creativity can be a valuable tool in futures trading. Think beyond the traditional practice of using stop loss orders to manage risk, because there are an unlimited number of possibilities. For instance, experienced futures traders might choose to incorporate selling option premium against a correctly speculated futures contract as a form of risk management. Doing so converts the trade into a type of “covered call” or “covered put”. The premium collected from the short option not only produces income, but it provides a hedge against a price reversal. This is because a long futures contract and a short call option benefit when the market moves in the opposite direction (they counter act one another). Likewise, in-line with this strategy you may want to use the proceeds of the covered call or put strategy to purchase an option to protect your risk of an adverse futures price movement.

    As you can see, well-informed traders have a plethora of strategies to adjust the risk and reward of a futures position. A trading plan couldn't possibly cover all market scenarios, and adjustment possibilities, but writing down a few potential ideas may keep you from freezing in the heat of the moment.

    If you are interested in exploring the endless possibilities in regard to futures trading management, and strategy creation, please visit our futures and options trading educational video archive.



    Risk and Reward: Give Yourself a Chance!



    When deciding how much risk you are willing to take in the commodity markets and setting your profit objectives, you must be realistic. Beginning futures traders are often surprised to hear that many of the best traders struggle to keep their win/loss average above 50%. With these odds in mind, it doesn't make sense to consistently risk more on a trade than you hope to make should you be right. For instance, if your average risk is $500 you should have an average profit target of at least $500. Anything other than this puts the odds greatly in favor of your competition.




    Commodity Option Sellers Face Optimal Win/Loss Ratios but That Doesn't Guarantee Success



    Because more options than not expire worthless, commodity option sellers often have much better win/loss ratios than futures traders.Commodity Trading Game Plan However, the drawback of an option selling strategy is the reality of accepting theoretically unlimited risk in exchange for limited profit potential. In the game of commodity option selling, winning far more trades than you lose is only the beginning. An option seller must be savvy enough to prevent the small percentage of losing trades from wiping out months of profit. My intention isn't to deter you from selling options, in fact this is the strategy that I prefer and recommend as a commodity broker to my clients. However, those that partake in this practice must be ready and willing to face the consequences during draw-downs.

    U.S. futures exchanges don’t accept stop loss orders on options. Even if they did, it wouldn’t be in the best interest of traders. This is because it wouldn’t be feasible to place stop orders on most options, or option spreads, due to the nature of the bid/ask spread and the seemingly high probability of being stopped out prematurely. Remember, a stop order becomes a market order as soon as the named stop price becomes part of the bid/ask spread. If the bid/ask spread is wide due to a lack of liquidity, a stop order will be triggered and filled at a dramatically inopportune time and price (unfavorable slippage).

    Instead of placing stop loss orders, short options should be monitored closely; keeping a "mental" stop in mind is important. I typically advise traders to use a double out rule. This means for every naked short option, whether it is within an option spread strategy or sold individually, you should strongly consider buying it back at a loss if its value doubles from your entry point. In essence, if you sell a crude oil option for .50 cents or $500 ($10 x 50) and following your entry the option doubles in value (appreciates to $1.00 or $1,000) it may be fair to say that you were wrong. At this point, a trader should strongly consider liquidating the position and moving to the next opportunity. Failure to do so may convert a moderate loss into something much more.

    Unfortunately, in fast moving markets the value of an option sometimes explodes in value very quickly, making the double-out rule impossible to implement. Even so, the double out rule should be part of the overall trading plan. This doesn't necessarily mean it is an exact science; trading is an art and should be treated as such. Imagine being short a put option in a declining market that has reached the designated double out point, but the market is approaching significant support. If you strongly believe that the futures price will hold support, exiting your position at top dollar in panic, doesn't make sense. However, on the flip side; if you find yourself counting on hope rather than rational logic, you have let it go too far. Sometimes the line is difficult to see until it has already been crossed but its times like this that make or break a trader. I believe the ability to properly manage these scenarios come from instinct and experience; it cannot be attained from reading a book or attending a seminar.




    The 10% Rule in Trading

     

    Many futures trading courses and literature claim that a commodity trader shouldn't risk more than 10% of their trading account on any one trade. This seems to be relatively sound advice but might, or might not, be feasible for everyone. For example, a risk averse trader may not be psychologically equipped to handle such a loss which can easily lead to irrational trading behavior. On the contrary, a well-funded-trading account might be risking a substantial amount of money if risking 10% of the commodity trading account.

    Most beginners underestimate the value of psychology. Once the balance is broken it is hard to regain logic and can lead to large losses. For example, a trader that opens an account with $10,000 and immediately loses $1,000 on the first trade may dedicate subsequent trades to recovering losses sustained on the original. In other words, they are often tempted enter a market prematurely and aggressively to make up for lost ground. This behavior would demonstrate an example of a trader that simply isn't capable of taking such a large loss without detrimentally impacting the original trading plan.

    An additional drawback of the 10% rule is the fact that during volatile market conditions, whether trading options or futures and depending on the risk capital available, it may not be possible to construct a trade with reasonable odds of success without surpassing the appropriate percentage. In this case, the market is often best untouched, but as humans we are naturally drawn to that of which we shouldn't.


     

     

    Leave Multiple Contract Trading to the Pros and Well Capitalized



    As a long-time commodity broker, one of the most destructive things that I have witnessed traders do is execute multiple futures contracts in a moderately funded account. Inexperienced traders are under the assumption that trading several futures contracts simultaneously will maximize their "return", but what they are actually doing is maximizing risk and minimizing the probability of a successful trade. Despite the emotions involved, commodity trading isn't about feeding your ego it is about making money...right?



    Stop the Loss!



    Stop Loss Order in FuturesFutures traders often look to manage risk of loss through the use of stop loss orders. A stop order instructs the broker to exit an outstanding futures position if market prices move adversely enough to reach the named price. However, keep in mind that a stop order can also be used to enter a market. Such a stop order is often placed above areas of significant technical resistance or below support in an attempt to capitalize on a potential price break-out.

    In order for stop orders to be effective, they must be properly placed. Anything less will result in either too much risk, or premature liquidation of a trade that may eventually go in favor of the position. This too is an art and not a science. Where stop orders should and shouldn't be placed isn't a black and white decision. There are many areas of gray involving market conditions and characteristics as well as the personality, account funding and risk tolerance of the commodity trader.

    If you are a beginning trader this may be a good argument in favor of using a full service commodity broker. However, you must realize that even a well experienced futures broker or advisor can't see into the future and is subject to the same frustrations as you may be. Nonetheless, in theory she may be a little more savvy, and that could have a positive impact on performance in spite of the slightly higher commission rate.

    Be warned, stop orders aren't a guarantee of risk. Because a stop order becomes a market order once the stated price is reached, there may be slippage; in rare cases, a substantial amount of slippage. An experienced commodity broker might be able to help you in constructing an option strategy to be used as an alternative in risk aversion. The use of options in place of stop loss orders provide traders with additional lasting power because it eliminates the possibility of being stopped out of a commodity market on a temporary price spike. For example, a short option or futures position may be hedged by a one by two ratio write if the volatility and premium allows.

    The ability to place a stop order or limit the risk of a futures trade through options and option spreads should eliminate some of the stress and emotion involved in trading. Rather than losing sleep over a trade gone bad, those with stop orders or protective option positions (insurance) can relax knowing that he has done his homework and has mitigated his risk in commodity trading.




    It is Your Money



    The Game of Commodity TradingWe don't all wear the same shoe size, or have the same hobbies, so why should we all use the same trading strategy and risk management techniques? The truth is that we shouldn't. My perception of what constitutes reasonable timing of entry, and how much money and emotion to risk on a particular trade, is likely far different than yours. Commodity trading is an ambiguous game; there isn't a right or wrong answer to most aspects of speculation. For example, the same trading "ingredients" may work for one person but not for another due to differences in experience, education, risk capital and emotional constraint.

    Only you will be able to determine what works for you; discovering what that is requires patience, discipline, and an open mind. The most important feedback on your progress will be your commodity account statements. This isn't to say that you should hang up your trading jacket if you experience a drawdown, or even a complete account blow up, but it is important that you are realistic. Some people tend to only remember the good trades and others only remember the bad. Each of these distorted perceptions of reality can have an adverse effect on your commodity trading. Successful traders remember the good trades and the bad trades, but most importantly learn from all of them.

     

  • The e-mini S&P 500 futures are on shaky ground

    Generally speaking, the stock index futures markets stumble into October

    The last week (or so) of September is notoriously weak for equities, and strong for Treasuries. We don't see any reason to buck the seasonal trend. After all, Friday's bloodbath on Wall Street is a sure fire sign that investors have not gotten over the mid-August stock market "crash".

    Although the Fed meeting is behind us, we still have to worry about the details of Janet Yellen's speech on Thursday at the University of Massachusetts-Amherst. Oddly enough, the financial markets sometimes react to non-FOMC speeches than they do the official Fed meetings. Be prepared for volatility.

  • The e-mini S&P 500 is technically neutral

    the financial futures report

    Crude and the Yen reverse yesterday's moves, so does the ES

    Obviously, the market panicked a bit when in regard to the implication of a Yen rally. Although this is the highest we've seen the Yen in years, it is still historically cheap. Further, today's reversal suggests the unwinding of the carry trade isn't quite upon us. Accordingly, this should be somewhat supportive of the equity markets.

    On another note, the greenback is still trading sluggishly, but it has yet to break support. In theory, weakness in the dollar should help push commodity prices higher, and eventually the stock market as well. As a result, we'll need to keep an eye on the DX support near 93.00.

  • The e-mini S&P finally corrects, 2340ish is key

    the financial futures report by futures broker carley garner

    The First 1% down day in the S&P 500 since October 11th.

    Finally, we are seeing the equity market correct. Traders have been waiting months for this, but I doubt it was everything they had hoped for. Although it is a relatively decent one-day sell-off, today's action was meaningless in comparison to the post-election night rally. Further, selling was orderly and without panic. The good news is, the market is looking healthier. Corrective trade is "normal" and should be expected. As crazy as it sounds, the market needs to be bearish before traders can get comfortably bullish and buying picks up.

    Today's shake-up is being blamed on yesterday's Congressional hearings and today's uncertainty regarding Thursday's health care vote in the House. The Republicans claim they have the 216 votes necessary to pass the bill, but some last minute amendments are raising concerns.

    As we've been stating in this newsletter, the markets had priced in political perfection but governments are designed for flawed operations (checks and balances). The financial markets could get rocky as the new administration attempts to administer change.

  • The FOMC Minutes ARE a big deal for ES Futures Traders

    the financial futures report

    Historically FOMC minutes have been an afterthought, but in today's climate they are a big deal to futures traders

    The futures markets have been hanging on every word that trickles from the mouths of Federal Reserve members. Even off-handed comments made on their personal time have been moving through the grape vines.

    Today's FOMC minutes didn't offer any surprises. The Fed feels like the U.S. economy is moving in the right direction, which justifies a rate hike. But overseas market turmoil (namely China) has them pressing pause. The market seemed to like what they heard.

    In more bullish equity market news, the Chinese stock market opened for trade today after being closed for an entire week in observance of a national holiday (this is odd to us because it is essentially illegal in the U.S for the stock exchange to be closed more than 3 consecutive days). Once the bell rung, Asian traders bid prices higher to catch up with the global equity market rally that had taken place without them.

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