What Futures Traders Should Watch This Week
By John Thorpe, Senior Broker
The Week Ahead
The key futures market news for next week focuses on FOMC rate decision, followed by Fed Chair Kevin Warsh’s first press conference 30 minutes later. It’s Equity Index Rollover Monday! September=U26 is the front month! Begin trading the U26 contracts. It is the next month and year designation.
Here is a quick Youtube Video on how to change your contract on CannonX (cqg StoneX) https://www.youtube.com/watch?v=AzeOgBa5HwA .
Additionally, due to the national Juneteenth Holiday next week falling on a Friday, The June quarterly expiration will fall on Thursday this month. Some markets will have abbreviated hours June 19th, look for our holiday schedule.
In last week’s newsletter, we provided you with definitions and examples of Long Option Straddles, Today I want to show you the Short Option straddle, this is a technique we use in a relatively new trading program we are offering called “AIM” Always in the Market.
The option strategy compliments futures contracts in Micro Crude oil, Micro E-mini Nasdaq, Micro E-mini S&P 500 and the U.S. 30 yr bond contract using a swing trading protocol. Please contact your broker, if you are a current client or call us to learn more about this opportunity.
Options Workshop 202:
A short volatility option Structure:
A futures option short straddle is an options strategy where you sell (write) both a call option and a put option on the same futures contract, with:
-
The same strike price
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The same expiration date
You collect premiums from both options upfront and profit if the underlying futures price stays close to the strike price until expiration.
Example
Suppose a Crude Oil Futures contract is trading at $70.
You sell:
- 1 call option with a $70 strike
- 1 put option with a $70 strike
Assume you receive:
Total premium collected = $2.70
Profit and Loss
Maximum Profit
Your maximum profit is the total premium received:
$2.70 per unit
This occurs if the futures price is exactly at the strike price ($70) at expiration, causing both options to expire worthless.
Break-even Points
- Upper break-even: $70 + $2.70 = $72.70
- Lower break-even: $70 − $2.70 = $67.30
Loss Potential
Losses occur if the futures price moves significantly above or below the strike.
Examples:
- If futures settle at $80, the short call loses about $10, partially offset by the $2.70 premium.
- If futures settle at $60, the short put loses about $10, partially offset by the premium.
The downside and upside losses can be very large, making this a high-risk strategy.
Why Traders Use It
A short straddle is typically used when a trader believes:
- Volatility is overpriced.
- The futures market will remain relatively stable.
- Actual price movement will be smaller than what option prices imply.
In other words, it’s generally a short-volatility trade.
Futures Options vs. Stock Options
With futures options:
- The underlying asset is a futures contract rather than a stock.
- If exercised, the option generally creates a futures position.
- Margin requirements and risk management differ from stock options.
Risk Profile
Profit
^
|
Max Profit = Premium Collected
| /\
| / \
| / \
–+—-/——\—————-> Futures Price
BE BE
|
| Unlimited loss potential
v
A short straddle is considered an advanced strategy because it involves selling volatility with potentially large losses if the futures market makes a strong move in either direction.
Is the smoke clearing in the Mid-East and the markets have a renewed sense of confidence?
The energy and metals are swirling in the uncertainty of a lack of resolution in the attempted unwinding of the Iranian nuclear program.
Don’t let your guard down just yet, the fog continues, tune into the Sunday evening markets to witness reactions to the weekend news streams, manufactured or true.
Plan your trade and trade your plan!
Earnings Next Week:
· Mon. Quiet
· Tue. La-Z-Boy
· Wed. Jabil Circuit, Carmax
· Thu. Kroger, Methode Electronics
· Fri. Quiet
FED SPEECHES: (all times CDT)
· Mon. Quiet
· Tues. 8 day blackout period
· Wed. Fed Chair Kevin Warsh’s first Public FOMC Press Conference
· Thu. Quiet
· Fri. Quiet
Econ Data:
· Mon. Empire State Manufacturing Index, Industrial Production, Capacity Utilization, NAHB Housing Index,
· Tue. Building Permits, Housing Starts, NY Fed Svcs., Redbook,
· API Crude Stock Change
· Wed. Retail Sales, Business Inventories, Pending Home Sales, EIA Crude stock Change, Fed. Rate Decision, Economic Projections
· Thu. Initial Jobless claims, Philly Fed., CB Leading Index, EIA Nat Gas Stocks, Baker Hughes Oil Rig Count
· Fri. Juneteenth, therefor no U.S. Data releases. |
