Contents:

  • Reducing Risk
  • Swing Trading @ smaller cost
  • Day Trading without PDT
  • Market Profile Strategy & Options

Futures trading is unlike any other instrument to trade. Very high leverage and sometimes high costs of trading futures contracts can be intimidating if you are not sure how to correctly approach these markets.

Options are an attractive way of trading the futures markets, but also a bit complex if you have never traded options before. Options are a derivative of the underlying symbol and have similarities to Futures Contracts, in that, options are contracts too. The attractiveness of the options is the ability to deleverage, but still participate in the futures markets.

“The way I like to think about options: Its like trading the e-mini of the e-minis” –Raul Rivera

Think of that quote. Is there anything smaller than an e-mini? There is! It’s called an e-micro, but only very few select commodities and currency futures have e-micro contracts. If you wanted to trade e-micro S&P 500 or e-micro Nasdaq, then you cant. It just doesn’t exist. But, the options give you the ability to trade these popular markets for less leverage based on a factor called “Delta”.

Here is how Futures Options reduce risk:

ES Leverage per Point= $50

ES option with a +/- 0.25 Delta per Point = $25  Literally reducing overall risk by 50%

Although an options position can cost more than the intraday margin on the underlying asset, the reduction of risk is well worth the investment, especially if you are looking to reduce your risk while still participating in the futures markets.

Another way of reducing your risk is using Options Spreads. This kind of options trading strategy uses multiple options to create the spread to the point where the price of investing can essentially be less than $100. Think of it like this:

If you buy an options for 20.00, your overall investment is 20.00. But, If you Buy an options for 20.00 while at the same time sell an option for 15.00, then your overall investment is now 5.00.
-> 20.00 – 15.00 = 5.00

This specific example is called a Vertical spread. There are other kinds of spreads like this. Some are simple like Vertical Spreads, Straddles and Strangle Spreads. Some are very complex such as a Butterfly spread, Calendar Spreads, Collars and Synthetic spreads. Each with its own twist in risk management and worth a little bit of research during your free time. You may be surprised with what you find.

Short Call Vertical Spread Graph
Spreads are great to use, but keep in mind that many spreads are constructed by a combination of Calls and/or Puts and are Limited Risk – Limited Reward strategies.

Another perk of trading futures options is the ability to swing trade for a much smaller cost. Many futures brokers offer intraday margin as little $400 per contract, but to hold those contracts overnight, it could be 10 to 20 times that of the intraday margin, this is called initial margin. This makes holding futures contracts overnight very expensive.

Assuming the intraday margin is $500 and the Initial margin is $6000:

  • If you enter a 10 contract trade
  • Intraday Margin = $5,000
  • Initial Margin = $60,000
  • HUGE difference!!

When you trade a futures option, there is no such thing as intraday margin or initial margin. It is simply the cost of the option and can be held as a swing trade or a day trade. But remember, all options have an expiration, so technically you cannot hold on to a position forever like you could with a stock.

Day trading is also possible with futures options. It is a great vehicle for day trading with a smaller account because the SEC rule about Pattern Day Trading does not apply to futures markets, including futures options. This means that the same trading strategies that I apply in the trade room can be applied with options trading, be it naked calls/puts or option spreads.

For example:

  • Buy zone on NQ flagged by the TPO indicator between 6499.25 to 6498.75
    • Idea #1: Buy the 6500 or 6490 weekly Calls when Price of the underlying is ≤ 6499.25
    • Idea #2: Buy the 6500/6520 weekly Vertical Spread
      • Meaning buying 6500 calls and selling the 6520 calls
    • Idea #3: Buy the 6520 weekly Calls when price of the underlying is ≤ 6499.25
      • This is called an out of the money (OTM) trade. This is a cheaper approach, but one worth the risk if those calls can go in the money (ITM). OTM calls have less Delta as well, which also means less risk.

Market Profile Image

 

Although the options are currently deep in the money, when the underlying price reaches the Buy Zone, they will not be deep in the money, which means that the options will be much cheaper than what they may currently be. The idea of trading the market profile strategy with the options is still the same – Buy low and sell high.

So, if you are looking for a way to participate in the futures market with less risk, then options is certainly the only way that I can see where overall risk reduction is possible.

By Raul Rivera
NeuroStreet Educator
Market Profile Specialist