Did you know that as an equity trader you can apply the same strategies to options on futures that you use with equity options? One of the benefits of being an options trader is that you can use the same trading strategy in multiple markets.
All traders have at one time or another found it difficult to consistently find new trades from their watch list; adding options on futures markets can help expand your watch list to find more trades. If you already have trade set ups for equity options, you benefit from the ability to apply those same set ups across all futures markets, thus giving you access to more trades.
Trades in options on futures can include market neutral, multi-leg and directional trades depending on your market assumption and risk/reward goals. Using the same tools you already use to create your equity market assumption about where you think the underlying will move, you can place trades to take advantage of that move. Essentially, if you already know how to trade equity options then adding options on futures becomes an easy transition and a valuable addition to your trading plan.
Take a look at some of the trade strategies you might use to trade Equity Index options that can also be used to trade options on futures.
Directional trading by buying calls and puts is a common way to trade options and can be used in the same manner in options on futures. Trading options on futures by purchasing puts and calls is a way to capitalize on a fast moving market with a set amount of risk (what you pay for the option) just the same as buying a call or put in an equity option.
Other spread strategies like debit spreads can also provide a subsidized way to buy put and call options with a fixed risk and reward. Regardless of the strategy, all of the directional trades that you currently use in equities will be applicable here.
In fact, trading options on futures can, in many cases, have an advantage. Rather than trade the futures contract alone, options on futures allows a trader to make a trading assumption about the direction of price similar to trading a futures contract, but with the advantages of only risking what you paid for the option rather than the usual higher cost of the futures contract, all while taking advantage of a fast move in these markets.
A trader who believes that silver is poised to move higher might buy a January $16.50 at the money call in the Silver contract for $0.38, when Silver is trading for $16.60. Their belief is that Silver will be worth more in the next month. This trader buys this call that is about one month out so that there is time for silver to rise and for him to sell the call for more than what he paid for it.
Just like equities, options on futures can also be traded using multi-leg trade strategies like spreads and butterflies. Combinations can be traded as one order or add legs to existing positions to build spreads. A spread strategy can be used to take advantage of trading an expected move with a directional assumption while allowing the trader to control risk/reward at the initiation of the trade. It can also be an opportunity to trade by selling premium with less margin requirement than selling puts alone. A spread strategy will behave the same whether in equity options or options on futures.
Using E-mini Dow ($5) Futures (YM) as an example, if a trader feels that the markets are at all-time highs and are poised for a reversal, he can trade by selling an out of the money call credit spread at 20,000. The trader would sell the 20,000 call and buy the 20,050 call that expires in three weeks when the YM is trading around 19,840 and receive a credit of around 20 points. This example of taking advantage of premium from volatility is just one way a trader using multi-leg strategies can benefit from options on futures.
If a trader believes that 30-year Treasury Bonds (ZB) are going to move down, he could sell an out of the money January weekly call spread that expires at the end of the current week. ZB is currently trading at 152’27. The trader could sell the 153 call and buy the 153’50 call creating a credit of 15/64 ($234.75) on the trade. The trader would keep the entire credit received if bonds closed below 153 at the end of the week.
Just like equity options, with options on futures, volatility traders and non-directional traders can use the same strategies which are already familiar. Non-directional traders can implement strategies like selling straddles and strangles to take advantage of decreasing volatility in a sideways market. Other strategies like calendar spreads are also possible just like with equity options.
If a trader believes that YM is going to consolidate over the next few weeks, one of the ways he could trade is by selling a straddle. If YM is currently trading at 19,848, a trader could sell the Jan 31 19,850 put and call for 396 points. The strategy would pay off if YM moved less than 396 points by expiry of the spread.
As an experienced equity index trader, you can hedge your positions in a couple of different ways using the futures markets and your existing trading knowledge. You can consider combining any existing futures holdings and options on futures to create a perfect one-to-one hedge. For example, a trader who is net long the S&P in their stock holdings, could use short-term E-mini S&P 500 futures (ES) puts to help offset any downturns in the portfolio. The same is possible with foreign exchange (FX) contracts allowing traders to hedge any foreign currency exposure they might have.
A trader who has multiple stock holdings could help offset a downturn in the market by buying sufficient puts in the ES contract. The trader can choose between long- and short-term expiries depending on the time frame they wish to hedge. For example, ES is trading at 2,266. The trader could buy March 2017 2,270 puts for 46 points to hedge over the short term or buy September 2017 2,270 puts for 113 points to hedge over the longer term.
Next time you are searching for a new trade, consider looking at the many options on futures products available and use the knowledge you already know.
Peter Knight Advisor