Cannon Trading is a full service and discount online futures trading brokerage firm located in Los Angeles , California since 1988. We provide futures, commodities and options trading access to all US futures exchanges and many international exchanges.
Futures Trading for Beginners in Phoenix AZ Spread Strategy |
Description | Reason to Use | When to Use |
---|---|---|---|
Buy a call | Strongest bullish option position | Loss limited to premium | Undervalued option with volatility increasing |
Sell a put | Neutral bullish option position | Profit limited to debt | Small debit, bullish market |
Vertical Bull Calls | Buy call, sell call of higher strike price | Loss limited to debt | Small debit, bullish market |
Vertical Bull Puts | Buy put, sell put of higher strike price | Loss limited to price difference | Large credit, bullish market |
Futures Trading for Beginners in Phoenix AZ Spread Strategy |
Description | Reason to Use | When to Use |
---|---|---|---|
Buy a put | Strongest bearish option position | Loss limited to premium | Undervalued option with volatility increasing |
Sell a call | Neutral bearish option position | Profit limited to premium | Option overvalued, market flat, bearish |
Vertical Bear Calls | Buy at the money put, sell out of the money put | Loss limited to debt | Small debit, bearish market |
Vertical Bear Puts | Sell call, buy call of higher strike price | Loss limited to stroke price difference minus credit | Large credit, bearish market |
Futures Trading for Beginners in Phoenix AZ Spread Strategy |
Description | Reason to Use | When to Use |
---|---|---|---|
Strangle | Sell out of the money put and call | Maximum use of time value decay | Trading range market with volatility peaking |
Arbitrage | Bull and sell similar simultaneously | Profit limited to debt | Any time credit received |
Calendar | Sell near month, buy far month, same strike price | Near month time value decays faster | Small debit, trading range market |
Butterfly | Buy at the money call (put), sell 2 out of the money calls (puts), buy out of the money call (put) | Any time credit received | |
Guts | Sell in the money put and call | Receive large premium | Futures Options have time premium and market in trading range |
Box | Buy at the money put, sell out of the money put | Small debit, bearish market | |
Ratio Call | Buy call, sell calls of higher strike price | Neutral, slightly bullish | Large credit and difference between stroke price of option bought and sold |
Conversion | Buy futures, buy at the money put, and sell out of the money call | Any time credit received |
Have you ever wondered who sells the futures options that most people buy? These people are known as the option writers/sellers. Their sole objective is to collect the premium paid by the option buyer. Option writing can also be used for hedging purposes and reducing risk. An option writer has the exact opposite to gain as the option buyer. The writer has unlimited risk and a limited profit potential, which is the premium of the option minus commissions. When writing naked futures options your risk is unlimited, without the use of stops. This is why we recommend exiting positions once a market trades through an area you perceived as strong support or resistance. So why would anyone want to write an option? Here are a few reasons:
Cannon Trading Company Inc. believes in writing options on futures, but advises against doing it without the advice and expertise of a knowledgeable broker or specialist. Be strict when choosing which futures options to write and don't believe in writing options on futures as your only strategy. Using the same strategy every month on a single market is bound to burn you one month, because you end up writing options on futures when you shouldn't. Cannon Trading Co. Inc. believes you should treat option writing just like futures trading. We believe you should stay with the major trend when writing futures options, with rare exceptions. Use market pullbacks to support or resistance as opportunities to enter with the trend, by writing futures options which best fit into your objectives.
Volatility is another important factor when determining which options on futures to write, it's generally better to sell over valued futures options then under valued futures options. Remember not to get caught up with only volatility, because options on futures with high volatility could always get higher. The bottom line is, pick the general market direction to become successful over the long-term. We also believe in using stops based on futures settlements, not based on the value of the option. If a market settles above or below an area you believed it shouldn't and the trend appears to have reversed based on the charts, it's probably a good time to exit your positions. We can help you understand the risks and rewards involved, as well as how to react to certain situations, i.e.,: if/then trading scenarios. We can either assist your option writing style or recommend trades and strategies we believe are appropriate, using the above guidelines.
Most futures options expire worthless and out of the money, therefore most people lose when buying options on futures. Cannon Trading believes there is still opportunity in buying , but you must be very patient and selective. We believe buying futures options just because a market is extremely high or low, known as "fishing for options" is a big mistake. Refer to the guidelines on our "Trading Commandments" before purchasing any futures options. Historic volatility, technical analysis, the trend and all other significant factors should all be analyzed to increase your probability of profit. All full-service accounts will receive these studies, opinions and recommendations upon request. Cannon Trading Company's "Trading Commandments" can be used as a guideline to assist you in the process and decision making of selecting the right market and futures options to purchase.
A common strategy we implement involves the writing and buying of futures options at the same time, known as bull call or bear put spreads. Ratio and calendar spreads are also used and are recommended at times. Please do not hesitate to call for help with any of these strategies or explanations. Here are a few examples we use often:
Some futures options trade based on different futures contract months and should always be considered in your trading. Don't hesitate to call for help with any of these strategies or explanations. Remember, the key is still going to be picking the general market direction correct. Therefore, you must analyze and study each market situation with several different trading scenarios and determine which one best suits your risk parameters.
The art of trading these strategies is deciding when, where, which futures markets, and what ranges to use. If you are an inexperienced options trader use these strategies through the broker assisted program.
For more information, check out our Online Trading Futures Market Glossary
The material contained in 'Futures Trading for Beginners in Phoenix AZ 101' is of opinion only and does not guarantee any profit. These are risky markets and only risk capital should be used. Past results are not necessarily indicative of future results.