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Using futures options to "hedge" entry timing


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  #11 (permalink)
 Bonem4nWalkin 
Phoenix Arizona United States
 
Experience: Intermediate
Platform: Ninjatrader, ThinkOrSwim
Trading: Options, Futures
Posts: 13 since Feb 2021
Thanks Given: 12
Thanks Received: 19

Hi Symple! thanks for the reply. I think we are both scratching at the same thing, a matter of nomenclature I think.

By neutralizing the directionality I am referring to the entire position, the combo of one long future and one long put, or one short future and one long call.

there are many ways to trade collars in equities so I won't split hairs there. you did answer my question more or less by saying to keep a 1 to 1 ratio futures to options.

I will rattle on however for the sake of tapping into the brain trust of this fantastic community and gathering more educational resources.

With equities, options contracts refer to the right to buy or sell 100 shares at expiration. when an equity option is exercised 100 shares change hands.

With futures options the options contract itself varies from product to product. ES vs NQ options have different "multipliers" for lack of a better word, and this makes some sense to me because of the built in leverage that comes with futures initial margin requirements. like when an ES option contract settles approximately 5 futures contracts change hands (or sometimes settles to cash?), whereas NQ 2 futures change hands on expiry. I guess I am unfamiliar with each futures ticker expiry framework and multiplier schema for options, and I am curious how the directional exposure actually works out when you have a 1 to 1 type futures options combo position.

I guess to illustrate my confusion a bit I will use an example in equities terms, if you have 1 share of AAPL, and you buy a -50 delta at the money put, your overall position delta would be -49 deltas. one delta one share, easy. This is not a real strategy, no one would do this.

What is the delta of one long future? when the multiplier varies from product to product and the notional is so much different than the cash you put up. I will probably make some paper trades to learn more about trading this way, but any links to articles or videos on learning these concepts would be much appreciated.

Cheers,

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  #12 (permalink)
Symple
Zuerich / Switzerland
 
Posts: 980 since Sep 2021
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@Bonem4nWalkin

When I press the "Thanks bottom", it means that I have read and accepted your posting with your questions. My answer, even in form of questioning you to have a feedback that you understood what I and we talk about, will come, usually once a day per posting and questioning in this thread like in any other one. If it takes a bit longer, so it will be.

Doing such topics only on the net, is not always easy and needs clarifications from both sides to be sure to speak about the same topic. Until the next round, in case no body else wants to talk about this topic in dept.

Symple

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  #13 (permalink)
Symple
Zuerich / Switzerland
 
Posts: 980 since Sep 2021
Thanks Given: 1,361
Thanks Received: 2,367


Bonem4nWalkin View Post
Hi Symple! thanks for the reply. I think we are both scratching at the same thing, a matter of nomenclature I think.

- Nomenclature, a nice term that was also used in politics, especially in the socialist regions. But yes, the terminology is also important in this area of trade.

By neutralizing the directionality I am referring to the entire position, the combo of one long future and one long put, or one short future and one long call.

- So again: We talk about a "Synthetic put" or a "Synthetic call".

There are many ways to trade collars in equities so I won't split hairs there. you did answer my question more or less by saying to keep a 1 to 1 ratio futures to options.

- In order not to make it too complicated I have deliberately chosen the example with one and one. So do not misinterpret, because it is not mandatory, because depending on the choice of trading strategy also other combinations come into play.

I will rattle on however for the sake of tapping into the brain trust of this fantastic community and gathering more educational resources.

- O'zapft is!: https://ww w.youtube.com/watch?v=IsGB6Kaw8bo / All joking aside: Yes, there is certainly a lot to discover.

With equities, options contracts refer to the right to buy or sell 100 shares at expiration. when an equity option is exercised 100 shares change hands.

With futures options the options contract itself varies from product to product. ES vs NQ options have different "multipliers" for lack of a better word, and this makes some sense to me because of the built in leverage that comes with futures initial margin requirements. like when an ES option contract settles approximately 5 futures contracts change hands (or sometimes settles to cash?), whereas NQ 2 futures change hands on expiry. I guess I am unfamiliar with each futures ticker expiry framework and multiplier schema for options, and I am curious how the directional exposure actually works out when you have a 1 to 1 type futures options combo position.

- Following another example, as already shown above, how the risk profile looks. No matter if you make a trade in ES or US or GC or whichever futures market, the structure is always the same, only the mathematical calculation varies, because of different valuations in the individual futures markets:



This trade was made in the EC Future. In this case we (I speak of we, because I have always traded together with a colleague) first bought the atm call and only after the "Filled" was there the future was sold. Therefore a much smaller part of margin for this trade was blocked in the trading account.

I guess to illustrate my confusion a bit I will use an example in equities terms, if you have 1 share of AAPL, and you buy a -50 delta at the money put, your overall position delta would be -49 deltas. one delta one share, easy. This is not a real strategy, no one would do this.

- Why would he not do this, since my above shown beginning of a trade shows exactly this? I am curious about your answer, since this entry trade was made in the real market

What is the delta of one long future? when the multiplier varies from product to product and the notional is so much different than the cash you put up.

- The delta of the trade entry shown above is visible on the screen shot. It is at 58.60. Going into the details in general: One future has a delta of 100 or 1. One option atm has a delta of 50 or 0.5.

I will probably make some paper trades to learn more about trading this way, but any links to articles or videos on learning these concepts would be much appreciated.

- You will find very little to nothing on the internet about synthetic trading in futures. I was lucky enough to have a mentor who is an absolute pro in the field. In order to go a little more in depth I recommend, as already mentioned these two books:

- The Bible of Options Strategies. Guy Cohen. (ISBN 13: 978-0-13-171066-5)
- Option Trading - The hidden reality. Charles M.Cottle (ISBN 1-55738-907-1 / @ 1996 / https://www.riskdoctor.com/

In the first book synthetic strategies with shares and options are described. Small tip and trick: Instead of 100 shares you take only one future and the number of options remains the same as in the given examples. What the book does not convey and usually no books and YouTube videos do in a really clear form, are the individual follow-up steps how to bring such a strategy/s really successful home. The reason for this is clear: Not everyone should know how it goes, especially in this area of absolute professional trading with derivatives in the banks and trading houses as well as with the big brokers, in detail. This is as normal as in every other field of business where you also will have knowledge the public never will acquire.

When it comes to software that is really good for this area of trading, then I can clearly point to this product: https://www.cannontrading.com/software/optionvue On the site there is also a lot to read and to find.

Nowadays you can rent the software to try it out. Costs at the moment in the month: 100 USD / OptionVue Basic: https://www.capitalallocation.io/products/optionvue/

I wish you a sunny and relaxing weekend.


@Bonem4nWalkin

My answers are in blue.

Symple

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  #14 (permalink)
Symple
Zuerich / Switzerland
 
Posts: 980 since Sep 2021
Thanks Given: 1,361
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@Bonem4nWalkin

There is still one question/statement from your side open. If you want to talk about it just move on and I will not be shy to give you at least an answer.

Symple

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  #15 (permalink)
 Bonem4nWalkin 
Phoenix Arizona United States
 
Experience: Intermediate
Platform: Ninjatrader, ThinkOrSwim
Trading: Options, Futures
Posts: 13 since Feb 2021
Thanks Given: 12
Thanks Received: 19

Hi Symple,

In my experience the best learning comes from trying something for real (with responsible risk).

I am starting to dabble in some futures options trading this past week, just using strategies I employ in equities i.e. Iron Condors and short strangles.

I am already noticing the capital efficiency for defined risk trades, the credit received to buying power reserved.

I am going to take some time and go through the links you have sent, and I do appreciate your time to address my questions.

One challenge I foresee with futures options trading consistently is liquidity.. Generally There is a huge advantage for options traders when there are tight bid ask spreads and it is easy to roll and exit trades when prudent, products like Tesla and Apple for example.

Which Futures products have the most liquid options markets in your experience?

If you are open to talking your book, what options strategies do you employ in your trading? Mostly Synthetics?

Thanks!

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  #16 (permalink)
Symple
Zuerich / Switzerland
 
Posts: 980 since Sep 2021
Thanks Given: 1,361
Thanks Received: 2,367


Bonem4nWalkin View Post
Hi Symple,

In my experience the best learning comes from trying something for real (with responsible risk).

- Yes, I agree with you completely.

I am starting to dabble in some futures options trading this past week, just using strategies I employ in equities i.e. Iron Condors and short strangles.

- Okay. And how do you apply these strategies to stocks? How do you implement these strategies for stocks? Whether you apply these strategies to stocks or to futures is basically irrelevant.

I am already noticing the capital efficiency for defined risk trades, the credit received to buying power reserved.

- Fine.

I am going to take some time and go through the links you have sent, and I do appreciate your time to address my questions.

- What I have shown you as links and also as book tips is very demanding and makes absolute sense if a good, broad basic knowledge in the field is already available. If this is not the case for you, then let me know. Then I can also go into simpler, individual topics if desired.

One challenge I foresee with futures options trading consistently is liquidity.. Generally There is a huge advantage for options traders when there are tight bid ask spreads and it is easy to roll and exit trades when prudent, products like Tesla and Apple for example.

Which Futures products have the most liquid options markets in your experience?

- 30 Year Treasury Bonds, S&P500, US Dollar Index, Dow Jones and many more. To get a really good overview I recommend to invest the 100 USD in the rental of "OptionVue" once. There you can also look at the volumes, along with many other information, in the individual futures markets without obligation.

If you are open to talking your book, what options strategies do you employ in your trading? Mostly Synthetics?

- With the whole topic to used option strategies the topic "volatility in the market" is always to be considered. There is the "SV", which shows the volatility in the future and there is the "IV", which shows the volatility in the option.

By the way, you can see and compare this in the software mentioned above. In addition to this criterion, it is of course always important to consider what the market is doing. Is the market in an "up-trend", in a "sideways movement" or in a "downward going trend".

Also to note: What time frame are you trading or analyzing for your trading idea. This, a very important aspect for each individual.

My favorite strategies were divided into two classes, and still are today when I am active on my own as a retiree. The first class is a "Closed strategy", which only needs to be adjusted, if at all, depending on the market's moves.

The second category is what I call "Entry strategies into the market" and which then also really need additional follow up steps during the active trade to achieve the desired end result or further leg ins. But also here adjustments are necessary if the market reacts accordingly.

In order not to make it more complicated than it already is, I simply name one strategy for each category with one leg per position.

Do not misunderstand. I do not say that these are THE strategies, because in the second segment I can still pull through other trading approaches, completely independently of the mentioned one. Only, these two strategies, with proper planning, are not connected with too high risk.

I think that this point of normal risk, especially for retail traders, makes a lot of sense. In my active time of trading, I have also participated in trades per leg of several hundred thousand francs. Only the Portfolio behind it was then also accordingly large.

To the first category belongs, independently of the "SV":

- Simple options "Put or call Credit Spreads", placed on personal, mathematical levels in the respective markets.

The second category includes, depending on various criteria such as "SV", pricing of the selected option(s), put/call ration, etc:

- "Delta Neutral atm Call or Put Straddle with future leg" (one position per leg).

As you mentioned synthetics, the above one is such a synthetic strategy. But even here in this second categories you can start with a simple put or call and then add leg by leg to come to your next planed point in an on going strategy you worked out or have in mind through experience gathered over time.


Thanks!

@Bonem4nWalkin

My answers are as usual in blue. Have a nice and sunny day.

Symple

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Last Updated on September 4, 2022


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