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Stock Index Education Home Page

Overview

Equity Index futures are “futures contracts” on equity indices. They are cash settled contracts and the majority have quarterly expiration dates scheduled for the months of March, June, September, and December.

Equity Index futures provide market participants with tools to efficiently hedge or express an opinion on an equity index market, practically 24 hours a day, 6 days a week.

Benchmarks: The Backbone of Equity Index Futures

CME Group focuses on many of the widely followed and globally recognized equity index benchmarks. CME Group Equity Index products include both equity index futures and options on equity index futures. Currently, this represents 59 equity index futures and 29 equity index options. CME Group Equity Index products include a number of well-known indices.

Some of these are available in a variety of different sizes to accommodate different trading needs. For example, we offer  E-mini S&P 500® futures contracts, which are one-fifth the size of standard S&P 500®futures.

Spanning the globe, our Equity Index suite includes US dollar-based products such as the S&P 500®, the Nasdaq 100, and the Dow Jones Industrial Average as well as products covering other key markets, such as the FTSE Russell 100, a UK-based index; the Nikkei 225, a Japanese-based index; and the FTSE China 50, a China-based index.

As the world’s largest derivatives exchange, CME Group offers equity traders a deep and liquid marketplace to speculate or hedge their portfolio. What does all this mean? In short, CME Group offers a variety of Equity Index products suitable for many types of end users.

 

 

1) To set a Bollinger Band open this chart pageX

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2) Choose Add Technical Study
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3) Choose Bollinger Band
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4) To set your Bands, click on the default parameter
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5) The menu will open set your period and width
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6) About Bollinger Bands

Bollinger Bands are a technical trading tool created by John Bollinger in the early 1980s. They arose from the need for adaptive trading bands and the observation that volatility was dynamic, not static as was widely believed at the time.

​Bollinger Bands can be applied in all the financial markets including equities, forex, commodities, and futures. Bollinger Bands can be used in most time frames, from very short-term periods, to hourly, daily, weekly or monthly.

Bollinger Bands answer a question: Are prices high or low on a relative basis? By definition price is high at the upper band and price is low at the lower band. That bit of information is incredibly valuable. It is even more powerful if combined with other tools such as other indicators for confirmation. Learn  how to use this powerful tool in the Bollinger Band Knowledge section

John Bollinger  “What are Bollinger Bands?”

Bollinger Bands are a technical analysis tool, specifically they are a type of trading band or envelope. Trading bands and envelopes serve the same purpose, they provide relative definitions of high and low that can be used to create rigorous trading approaches, in pattern recognition, and for much more. Bands are usually thought of as employing a measure of central tendency as a base such as a moving average, whereas envelopes encompass the price structure without a clearly defined central focus, perhaps by reference to highs and lows, or via cyclic analysis. We’ll use the term trading bands to refer to any set of curves that market technicians use to define high or low on a relative basis.

The earliest example of trading bands that I have been able to uncover comes from Wilfrid Ledoux in 1960. He used curves connecting the monthly highs and lows of the Dow Jones Industrial Average as a long-term market-timing tool. After Ledoux the exact sequence of trading band development gets foggy. In 1960 Chester Keltner proposed a trading system, The 10-Day Moving Average Rule, which later became Keltner bands in the hands of market technicians whose names we do not know. Next comes the work of J. M. Hurst who used cycles to draw envelopes around the price structure. Hurst’s work was so elegant that it became a sort of grail with many trying to replicate it, but few succeeding. In the early ’70s percentage bands became very popular, though we have no idea who created them. They were simply a moving average shifted up and down by a user-specified percent. Percentage bands had the decided advantage of being easy to deploy by hand. At any given time a 7% band consists of a base moving average, an upper curve at 107% of the base and a lower curve at 93% of the base. (Arthur Merrill suggested multiply and dividing by one plus the desired percentage.) When I started using trading bands percentage bands were the most popular bands by far. Along the way we got another fine example of envelopes, Donchian bands, which consist of the highest high and lowest low of the immediately prior n-days. Those are the main types of band/envelopes that I know of. Over the years there have been many variations on those ideas, some of which are still in use. Today the most popular approaches to trading bands are Donchian, Keltner, Percentage and, of course, Bollinger Bands.

Percentage bands are fixed, they do not adapt to changing market conditions; Donchian bands use recent highs and lows and Keltner bands use Average True Range as adaptive mechanisms. Bollinger Bands use standard deviation to adapt to changing market conditions and thereby hangs a tale. When I became active in the markets on a full time basis in 1980 I was mainly interested in options and technical analysis. Information on both was hard to obtain in those days but I persisted; with the help of an early microcomputer I was able to make some progress. At the time we used percentage bands and compared price action within the bands to the action of supply/demand tools like David Bostian’s Intraday Intensity. A touch of the upper band by price that was not confirmed by strength in the oscillator was a sell setup and a similarly unconfirmed tag of the lower band was a buy setup. The problem with that approach was that percentage bands needed to be adjusted over time to keep them germane to the price structure and the adjustment process let emotions into the analytical process. If you were bullish, you had a natural tendency to draw the bands so they presented a bullish picture, if you were bearish the natural result was a picture with a bearish bias. This was clearly a problem. We tried reset rules like lookbacks with some success, but what we really needed was an adaptive mechanism. I was trading options at the time and had built some volatility models in an early spreadsheet program called SuperCalc. One day I copied a volatility formula down a column of data and noticed that volatility was changing over time. Seeing that, I wondered if volatility couldn’t be used to set the width of trading bands. That idea may seem obvious now, but at the time it was a leap of faith. At that time volatility was thought to be a static quantity, a property of a security, and that if it changed at all, it did so only in a very long-term sense, over the life of a company for example. Today we know the volatility is a dynamic quantity, indeed very dynamic.

After some experimentation I settled on the formulation we know today, an n period moving average with bands drawn above and below at intervals determined by a multiple of standard deviation (We use the population calculation for standard deviation). The defaults today are the same as they were 35 years ago, 20 periods for the moving average with the bands set at plus and minus two standard deviations of the same data used for the average. But they weren’t “Bollinger Bands” yet, that would come later when Bill Griffeth, an on-air host for the Financial News Network, asked me what I called my bands on air. I had presented a chart showing an unconfirmed tag of my upper band and explained that the first down day would generate a sell signal. Bill then asked me what I called those lines around the price structure, a question that I was totally unprepared for, so I blurted out the alliteratively obvious choice: “Bollinger Bands.”

So what are Bollinger Bands? They are curves drawn in and around the price structure usually consisting of a moving average (the middle band), an upper band, and a lower band that answer the question as to whether prices are high or low on a relative basis. Bollinger Bands work best when the middle band is chosen to reflect the intermediate-term trend, so that trend information is combined with relative price level data.

Soon the Bollinger Bands had company, I created %b, an indicator that depicted where price was in relation to the bands, and then I added BandWidth to depict how wide the bands were as a function of the middle band. For many years that was the state of the art: Bollinger Bands, %b and BandWidth. Here are a couple of practical examples of the usage of Bollinger Bands and the classic Bollinger Band tools along with a volume indicator, Intraday Intensity:

Bollinger Band Website

Futures Education Homepage

What is a Futures Contract?

Forward and futures contracts are financial instruments that allow market participants to offset or assume the risk of a price change of an asset over time.

A futures contract is distinct from a forward contract in two important ways: first, a futures contract is a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month. Second, this transaction is facilitated through a futures exchange.

The fact that futures contracts are standardized and exchange-traded makes these instruments indispensable to commodity producers, consumers, traders and investors.

A Standardized Contract

An exchange-traded futures contract specifies the quality, quantity, physical delivery time and location for the given product. This product can be an agricultural commodity, such as 5,000 bushels of corn to be delivered in the month of March, or it can be financial asset, such as the U.S. dollar value of 62,500 pounds in the month of December.

The specifications of the contract are identical for all participants. This characteristic of futures contracts allows buyer or seller to easily transfer contract ownership to another party by way of a trade. Given the standardization of the contract specifications, the only contract variable is price. Price is discovered by bidding and offering, also known as quoting, until a match, or trade, occurs.

Futures contracts are products created by regulated exchanges. Therefore, the exchange is responsible for standardizing the specifications of each contract.

Exchange-Traded

The exchange also guarantees that the contract will be honored, eliminating counterparty risk. Every exchange-traded futures contract is centrally cleared. This means that when a futures contract is bought or sold, the exchange becomes the buyer to every seller and the seller to every buyer. This greatly reduces the credit risk associated with the default of a single buyer or seller.

The exchange thereby eliminates counterparty risk and, unlike a forward contract market, provides anonymity to futures market participants.

By bringing confident buyers and sellers together on the same trading platform, the exchange enables participants to enter and exit the market with ease, makings futures markets highly liquid and optimal for price discovery.

If you have questions send a message or  schedule an online review.

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Futures Education Homepage

Support and Resistance are common terms that traders use to describe levels where price is more likely to stop moving in one direction or change direction.

Support refers to levels where price might reverse and move higher or a level that slows the momentum of price moving down. Resistance refers to levels where price might reverse and move lower or a level that slows the momentum of price moving up. Support or resistance is determined by whether price is above or below the level identified by the trader.

Generally, a trader can think of support being levels below price whereas resistance is formed above price. Levels of support and resistance can be formed in a few different ways. Moving averages, previous highs and lows, key price levels, and trend lines are the main indicators that traders use to find levels of support and resistance.

Moving Averages 

Traders will use moving averages of various lengths to indicate levels of support and resistance. Moving averages below price will form levels of support and moving averages above price will create levels of resistance.

Traders can add more than one length moving average to visualize initial and deeper levels of support and resistance. For example, a trader might add the 21, 100 and 200 period exponentially moving averages to their charts.

Typically, the shorter the length of the moving average, the weaker the support or resistance it creates. This means, for example, price will move through a 9-period moving average on a 5min chart more often than a 100-period moving average. The 100-period moving average is considered to provide stronger support for price when compared to the 9-period moving average. Traders can use any moving average that they like, some common lengths are the 9, 21, 50, 100 and 200 period moving averages.

Traders might use the 100-period moving average on a daily chart to indicate stronger and longer term levels of support and resistance. Price may only move this far every few months.

As price moves to areas that a trader believes is support or resistance, moving averages will be used to pinpoint areas that price could move through or bounce of off. For example, if price is moving up then retraces to the 55-period moving average, then starts to move back up, there is a good chance that the level will hold as support, and price will start to move in the direction of the original trend again.

If price moves to the moving average and does not bounce, there is a good chance that it will move to lower levels of support. If price is already at lower levels of support such as the 200-period moving average, then it could be an indication of a longer-term change in trend. It could indicate that price is moving from an uptrend to a down trend and vice versa.

Previous Highs and Lows

Technical analysts believe that price has a memory and that trends will repeat. There are certain price levels where traders will act a certain way. For example, traders might decide that Crude Oil is a strong buy at $50 after a retracement from higher levels, or that the S&P 500 is a strong buy at 2000. This is what creates tops and bottoms in the market.

If there is enough interest a key level, when the market gets back to that level traders seem to behave in a similar fashion over time. Because of this market tendency, technical analysts may look at where a market made previous highs and lows and use these levels as support and resistance. Markets will tend to pause at previous highs and lows. For example, if a market is moving up it will tend to encounter resistance at a previous high. If a market is moving down it will generally find support at previous lows.

If price breaks through support, then it will generally continue in that direction.

When price breaks through support or resistance, these levels will reverse, support will become resistance and resistance will become support. For example, if price breaks through support then that level of support will become resistance when price moves back up. The same will occur if price moves through resistance, the previous level of resistance will tend to become support when price moves back down.

Price Levels

Support and resistance can also be observed at certain price levels. For example, specific prices will create levels where price will find support or resistance because this is where there is potentially increased interest in trading that particular market. For example, the daily chart of CL shows how over a few years the $100 level in crude could not be successfully broken by more than a few dollars, and each time it attempted to break out, price retraced.

Trend Lines

Trend lines act like moving averages, except they are based on the highs and lows that price makes. In this example, this daily chart of the ES shows how a trend line can act as support.

In a market that is moving up, a trend line would be drawn through a series of lows in price. This creates an upward sloping line. The theory is this line can be extended past current price and will support price as it moves back down towards the trend line.

A trader can also draw a line through the series of highs that the same market has made creating a channel, where price will in theory stay contained.

The same lines can be drawn for markets that are in a down trend.

Levels of support and resistance offer traders insights in to areas where price might stop trending and retrace or where retracements might stop, and price will begin to move in the direction of the original trend. Traders should be aware that support and resistance will not always hold to the penny, rather they are zones that can be identified in a market which might be favorable for traders to enter or exit a trade. Support and resistance levels offer another piece of information that can be included in a trader’s assessment of the market.

If you have questions send us a message or schedule an online review.

Regards,
Peter Knight Advisor

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Futures Education Homepage

Exponential Moving Average (Red Line)
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1) To Set a Exponential Moving Average open this chart  (or 6-9 to calculate)
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2) Choose Add Technical Study
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3) Choose Moving Average Exponential
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4) Click on the default parameter
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5) Set the desired number of days
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6) About Moving Averages

Moving averages are a common way for technical traders to begin the process of price analysis. It is often one of the first indicators that traders will add to their charts and will serve as a measure on its own or in comparison with other indicators.

A moving average is the average price of a futures contract or stock over a set period of time. Traders can add just one moving average or have many different time frames on one chart.

For example, a 14-day moving average of CL WTI futures would be the average closing price of the CL contract over the last 14 days.

7) Calculating Moving Average

There are a number of ways to mathematically calculate the average of a set of numbers. Each method will come up with a slightly different result and place emphasis on a certain section of the data being calculated.

Two common moving average calculations are simple moving averages and exponential moving averages. These moving averages will appear on a chart as a line above or below price. Traders might have multiple moving averages on their charts at one time and use different lines to represent different actions you might take with your trades

8) Simple Moving Average

A simple moving average, the most basic of moving averages, is calculated by summing up the closing prices of the last x days and dividing by the number of days.

For example, if WTI (CL) contract closed at $45.50, $45.25 and $46.10 over the last three days the moving average would be calculated as follows:

Sum of closing prices = 45.50 + 45.25 + 46.10 = 136.85
Simple moving average = sum of closing prices divided by number of days
                    = 136.85 / 3
                                       = $45.62

9) Exponential Moving Averages

Exponential moving averages assign more influence on recent numbers and less on old data because of a weighting variable in the calculation. This makes them more responsive to changes in price and also acts in smoothing out the line.

Exponential moving averages calculate the average of a series of numbers using a weighting multiplier that typically assigns more weight to later data. EMAs can be calculated in three steps.

1. Determine the SMA or use yesterday’s closing price to begin

2. Calculate the multiplier

3. Using price, the multiplier (time period) and the previous EMA value.

Here is the calculation for a 14-day EMA

1. SMA = $46.60, Closing price today is $46.75
2. Multiplier = 2 / (1 + n) = 2 / ( 1 + 14) = 0.133
3. Calculate the EMA = (Price today x Multiplier) + (EMA yesterday x ( 1 – multiplier)
            EMA = (46.75 x 0.133) + (46.60 x 0.867)
            EMA = $46.63

Note the first day of the EMA calculation can either start with yesterday’s closing price or the SMA from yesterday. You just need to pick a starting value for the EMA calculation.

As with simple moving averages, no calculation is needed on your part, the moving average indicator will calculate this for you and show the results as a line on your chart.

While there are other more complicated moving average calculations beyond EMA and SMA, these two are the most common. Other moving averages are basically an EMA that assigns different weighting and smoothing variables to the calculations.

10) Using Moving Averages

Moving averages are often used to compare where the current price of the underlying instrument is in relation to support and resistance on a chart. When price moves down to a moving average line or up to a moving average line, traders can use this as a signal that price might stop or retrace at that point.

For example, if price moved down to the 200EMA a trader might think that price might stop moving down from there as the 200 EMA will act as support for price to move back up.

Traders can also visualize short-term and long-term support and resistance on a chart by adding moving average lines of different time periods.

For example, a trader could use the 13EMA as a short-term indicator and the 200 EMA as a longer-term indicator on the same chart. The larger the EMA, the stronger the support and resistance and the more likely the price will change direction as it moves towards that EMA.

Of particular interest for traders can be when moving averages cross over, as these crossovers usually represent a shift in price. Crossovers, which occur when one moving average line crosses another moving average line, is used to signal bullish and bearish signals.

Short-term moving averages crossing above longer-term moving averages is generally seen as bullish and long-term moving averages crossing below shot-term moving averages is generally seen as bearish.

For example, if a trader sees that the 50 EMA is crossing above the 200 EMA this is generally a sign that price might continue to move up. A trader using moving averages as a signal to enter trades might purchase contracts, or add to a position because of this crossover signal.

Moving averages are simple yet powerful tools that traders can use to help visualize where price has been and where price might be moving next.

If you have questions send us a message or schedule an online review.

Regards,
Peter Knight Advisor

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Currency Education Home Page

The European Central Bank (ECB) is the central bank of the Eurozone, a collective of European countries that use the euro as their sole official currency. The ECB is responsible for administering monetary policy and safeguarding the value of the euro. Given the relative size of the Eurozone economy, actions undertaken by the ECB garner nearly as much attention from U.S. traders as the actions of the Federal Reserve.

The ECB is governed much like the Federal Reserve. Decisions are made by the Governing Council, which consists of six members of the executive board, plus the governors of the national central banks of the euro-area countries.

Developing Monetary Policy

This Governing Council is responsible for assessing economic and monetary developments and meets every six weeks to set monetary policy for the Eurozone. Monetary policy decisions are published in a press release on the day of the Governing Council policy meeting. Following this release, a press conference begins and the ECB president makes a statement and answers questions from journalists to further clarify policy decisions.

In order to foster transparency, the ECB also publishes an account of the Governing Council’s monetary policy discussions prior to the next meeting, allowing public review of the rationale behind ECB decisions.

ECB Monetary Policy and Trading

Members of the ECB try to be as proactive as possible in managing market expectations and preparing traders for a shift in monetary policy. The executive board of the ECB must often try to unify the differing motivations of the national central bankers into a centralized monetary policy. For this reason, a trader must carefully parse any statements made by the ECB president, who is responsible for sending a consolidated message about overall euro policy.

There are a number of factors to think about when trading ECB policy decision announcements, but with a little insight and thorough preparation, these announcements can provide numerous opportunities for traders.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Currency Education Home Page

There are many ways in which one may trade FX or currencies. Two of the most popular outlets include the spot FX markets and FX futures markets as offered by CME Group. This report provides a quick look at the similarities and distinctions between these two markets.

Spot FX Transactions

A spot or outright currency transaction is simply the exchange of one currency for another currency, at the current or spot rate. We often speak of “currency pairs” or the exchange rate between one currency and another, e.g., Euros (EUR) vs. U.S. dollars (USD) or Mexican pesos (MXN) vs. U.S. dollars or British pounds (GBP) vs. Swiss francs (CHF).

Spot FX transaction may be concluded immediately in a variety of retail focused markets, or on a commercial scale through so-called interbank markets. Sometimes these transactions are conducted via telephone, or increasingly via electronic trading systems.

Typically a spot FX transaction is concluded through a payment or settlement process two (2) business days after the transaction is concluded – although practices may vary from one trading venue to the next and in the context of particular currency pairs.

E.g., it is frequent practice to settle transactions between the Canadian dollar (CAD) and U.S. dollar (USD) one (1) business day after the transaction is concluded.

Quotes may be in either “American terms” or “European terms.”

E.g., consider the Swiss franc vs. U.S. dollar currency pairing. Conventionally, one quotes this pair in spot markets in European terms, or in terms of CHF per one (1) USD. The pair was priced at 0.8955 CHF per 1 USD as of May 30, 2014. The American terms quote is

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American Terms Quote	=	—————————-
		European Terms Quote

 

Thus, one may quote in American terms, or USD per CHF, as 1.1167 USD per 1 CHF.

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1.1167 USD per 1 CHF	=	—————————-
		0.8955 CHF per 1 USD

Standard spot market practice is to quote most currencies in European terms. There are some exceptions to this rule including the EUR, the GBP and British Commonwealth currencies, such as the AUD and NZD, which are generally quoted in American terms.

Select Spot Exchange Rates

(as of May 30, 2014)

Currency	CODE	In USD	per USD
AMERICAS
Argentina Peso	ARS	0.1238	8.0787
Brazil Real	BRL	0.4462	2.2410
Canada Dollar	CAD	0.9220	1.0846
Chile Peso	CLP	0.001821	549.10
Colombia Peso	COP	0.0005271	1897.00
US Dollar	USD	1.000	1.0000
Mexico Peso	MXN	0.0778	12.8576
ASIA-PACIFIC
Australian Dollar	AUD	0.9311	1.0740
China Yuan	CNY	0.1600	6.2486
Hong Kong Dollar	HKD	0.1290	7.7529
India Rupee	INR	0.01686	59.30895
Indonesia Rupiah	IDR	0.0000857	11675
Japan Yen	JPY	0.00982	101.78
Malaysia Ringit	MYR	3.112	3.2135
New Zealand Dollar	NZF	0.8498	1.1768
Singapore Dollar	SGD	0.7973	1.2542
South Korean Won	KRW	0.0009794	1021.0
Taiwan Dollar	TWD	0.3328	30.047
Thailand Baht	THB	0.03044	32.848
EUROPE
Denmark Krone	DKK	0.1826	5.4750
Euro	EUR	1.3632	0.7336
Norway Krone	NOK	1.1674	5.9748
Russia Ruble	RUB	0.02866	34.895
Sweden Krona	SEK	0.1495	6.6886
Switzerland Franc	CHF	1.1167	0.8955
Turkey Lira	TRY	0.4768	2.0972
UK Pound	GBP	1.6756	0.5968
MIDDLE EAST / AFRICA
Israel Shekel	ILS	0.2878	3.4742
Saudi Arabia Riyal	SAR	0.2666	3.7506
South Africa Rand	ZAR	0.0946	10.5729

Source: Wall Street Journal, May 30, 2014

Most currencies are quoted to the 4th place past the decimal or 0.0001, also known as a “pip” or a “tick.” However, practices may vary with respect to currencies whose values are very small or very large in relative terms.

It is also possible to trade “cross-rates” or transactions which do not involve U.S. dollars. For example, one may trade the GBP/EUR exchange rate.

Select Spot Cross Rates

(as of May 30, 2014)

	USD	EUR	GBP	CHF	MXN	JPY
JPY	101.7843	138.7536	170.5547	113.6654	7.9163	–
MXN	12.8576	17.5276	21.5448	14.3585	–	0.1263
CHF	0.8955	1.2207	1.5005	–	0.0696	0.0088
GBP	0.5968	0.8135	–	0.6664	0.0464	0.0059
EUR	0.7336	–	1.2292	0.8192	0.0571	0.0072
USD	–	1.3632	1.6756	1.1167	0.0778	0.0098

Source: Wall Stree Journal, May 30, 2014

FX Futures Fundamentals

Currency futures were developed in 1972 by Chicago Mercantile Exchange Chairman Leo Melamed. This development was a direct response to the breakdown of the Bretton Woods Accord, which pegged global currencies to the U.S. dollar, and represented the first financial futures market.

Over the years, many currency contracts have been added and the listings now include contracts on Euros vs. U.S. dollars (EUR/USD), Japanese yen vs. U.S. dollars (JPY/USD), British pounds vs. U.S. dollars (GBP/USD), Swiss francs vs. USD (CHF/USD), Canadian dollars vs. USD (CDN/USD), Australian dollars vs. USD (AUD/USD), Mexican pesos vs. USD (MXN/USD), New Zealand dollars vs. USD (NZD/USD), Russian ruble vs. USD (RUB/USD), South African rand vs. USD (ZAR/USD), Brazilian real vs. USD (BRL/USD), and many others.

More recent additions to the line-up include Chinese renminbi vs. USD (RMB/USD) and Korean won vs. USD (KRW/USD). Further, CME lists smaller sized or “E-mini” versions of several of our more popular FX futures contracts. The aforementioned contracts are generally quoted vs., and denominated in, the U.S. dollar.

Major cross-rate contracts included EUR/GBP, EUR/JPY, EUR/CHF, GBP/CHF, GBP/JPY and many others. CME Group further offers options on many of these currency futures contracts.

Mechanics of FX Futures

Futures are traded on a regulated futures exchange subject to standardized terms and conditions. They are distinguished from spot or other “over-the-counter” FX transactions by their standardization, which concentrates liquidity in a relatively small number of items.

FX futures are traded on the CME Globex® electronic trading platform and on the floor of the Exchange in an open outcry environment, although the predominant mode of trade is electronic.

These contracts generally call for delivery of a specified quantity of currency, or a cash settlement, during the months of March, June, September and December (the “March quarterly cycle”). ¹ Thus, one may buy or sell 12,500,000 JPY for delivery on the 3rd Wednesday of June; or, 125,000 Euros for delivery on the 3rd Wednesday of September.

Traders who “go long” or buy JPY/USD futures are committed to take or accept delivery of 12,500,000 JPY while, traders who “go short” or sell EUR/USD futures are committed to make delivery of 125,000 Euros. The short making delivery is compensated by the buyer accepting delivery by an amount equal to the futures settlement price quoted in USD on the last day of trading.

American vs. European Terms Quotes

(as of May 30, 2014)

CME Quotes	American Terms	European Terms
USD vs. EUR	1.3632	0.7336
USD vs. JPY	101.78	0.00982
USD vs. GBP	1.6756	0.5968
USD vs. CHF	1.1167	0.8955
USD vs. MXN	0.0778	12.8576

Source: Wall Street Journal

CME Group FX futures are generally quoted in “American” terms, i.e., in terms of dollars per foreign unit. This is at variance from the typical interbank practice of quoting foreign exchange transactions in terms of foreign unit per USD. ²

¹Our appendix includes contract specifications for several of the most popularly traded CME Group currency futures contracts.

² Some CME Group currency futures are quoted in European terms. For example, we list a South African rand (“ZAR”) contract quoted in rand per USD. Further, many currencies listed on the CME Europe platform, launched in May 2014, are quoted in European terms as well. But most of our most popularly traded FX futures are quoted in American terms.

Options Education Homepage

Futures contracts can be an effective and efficient risk management or trading tool. Their performance is basically two-dimensional, either you are up money or down depending on the entry price point and whether the market is up or down versus your position.

But with options on futures there are more dimensions, or forces, acting on the price, or premium, of the option.

There are metrics to measure each of these different forces impacts on the premium of an options. These metrics are often referred to by their Greek letter and collectively as the Greeks.

While we have addressed each Greek separately, it is important to understand they do not operate independently, but move and adjust dynamically with changes in market conditions.

Example

Assume futures are at 980. The 1000 call is priced at 12 with a:

Delta of 40

Gamma of 0.50

Theta equal to 0.20

Vega equal to 0.10 and

Volatility at 15%

If market goes to 1000 (up 20 points) in 2 weeks  and volatility drops to 14% (down one point) what is the resulting premium of the option?

Look at each one of our Greeks.

The effect on the option’s premium from delta alone would be .40  x 20 which equals 8 points.

To calculate the delta effect due to gamma, we multiply the gamma of .50 times the 20-point move, giving us 10 additional delta. This changes the options delta from 40 to 50.

The initial delta is 40, which would generate 8 points of change across the 20-point move. The new delta of 50 would generate a premium change of 10. Across the 20-point move, the delta changed from 40 to 50, therefore we take the average, 45. This will contribute 9 points to the options new premium.

To calculate theta, or time decay, multiply the theta value of 0.20 times 14 days which equals -2.8

The vega effect is calculated by multiplying the vega metric by the change in volatility.

Vega of -1 x 0.10 = -0.1

Now we can add those values to get our new option price.

Old option premium + delta + theta + volatility

The option premium is now 18.1

Conclusion

You should now have a greater understanding of how the options Greeks work together. Recognizing the pricing variables of options is a necessary component of option trading.

 

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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