Futures Trading

Category Archives: Futures Trading

Futures trading is done by two main parties, one of which is the hedger and the other one is the speculator. Where a speculator is there to trade for either their own accounts or that of their clients, a hedger always uses futures as a possible protection from losses. Hedgers can also be described as individuals or business owners who are more risk averse. Speculators and hedgers are likely to benefit from futures trading if the trader has a strong ability to analyze the markets and understands that future behavior. Though futures can behigh risk, they offer an equally high return and are thus very tempting.

In case you are new to futures trading you need to understand how things work. We at Cannon Trading are there to help with your understanding of all the elements of futures trading and also counsel and advise you with the same. Our knowledge base featured on our website, is a store house of information. In order to know every aspect of futures trading, you must read through these articles that have been listed in this category archive. Go through it and get better informed!


CME MICROS: Micro Mini Futures Contract

January 6th, 2021 Filed under Futures Trading, S&P 500 | Comment (0)

CME MICROS, more commonly known as Micro E-Mini Futures Contracts, have been trading with great success since they were first introduced by the CME Group in 2019.   In terms of liquidity, for both smaller and newer futures traders, the Micro E-Mini has made futures trading more affordable and  accessible to the independent investor, who may not have large amounts of risk capital to invest.

Standard futures contracts and Mini Futures Contracts are sized to a certain value multiplied by the futures price.  For example a mini contract sells for $50 x the contract price.  The E-mini S&P 500 has a contract size of $50 times the E-Mini futures contract price, which if the contract price is say $1,240, then the contract value is $62,000.

CME states all four of the Micro E-Mini Futures Contracts are 1/10 the size of their respective E-mini futures counterparts – allowing all traders futures exposure without the notional constraints of the larger contracts.  These Micro Minis include the follow contracts:  S&P 500, Nasdaq-100, Russell 2000, and the Dow Jones Industrial Average.

 

What Is a Micro Mini Futures Contract

Micro E-Minis are one-tenth of the size of a traditional E-Mini contract, which allowing for lower margins and requires a significantly lower investment capital than their standard counterparts.

If the S&P 500 index is 2950, the micro e-mini value is 5 times the value of the index or $14,750 versus the value of a  standard e-mini contract, which is 50 times the price, and would set an investor back $147,500.  While the contract value is significantly higher, so is the exposure to market fluctuations.  This is where the benefit of the Micro E-mini comes in.

The Micro E-Mini contract is a significantly smaller contract than the mini or standard futures contract, which can set an investor back several thousand dollars.  The micro E-mini offers a much more affordable way for traders to access the equity index futures markets.

 

How Do Micro E-Mini Futures Contract Work?

While a standard E -mini S&P 500 futures contract has a value of $50 times the contract price – the Micro E-mini S&P 500 futures contract has a value of just $5 times the contract price, making this a much more affordable futures contract vehicle.

Your upward and downward exposure to fluctuations in the market is significantly reduced.

Most traders will use MICROS for short term trading, and can day trade the micros with less than $2,000 in the account.  Both losses and gains are smaller relative to the Mini S&P, but there are still risks associated even if you trade Micro E-Mini Futures.

Open a new trading account here

 

Why Invest in Micro E-Mini Futures

Experienced traders will enjoy the efficiency of the contract, the ability to sell short with ease, and the possibility of benefitting from short- and long-term profit and loss tax rules.  New traders will appreciate more affordable options of Micro E-Mini Futures Contracts, that incur less risk at just $5 times the contract value and have lower margins.

This allows new investors with limited assets to participate in this exciting market with limited exposure to risk, and for a much larger pool of traders.  Cannon is excited to bring in new traders, as well as, offering more diverse and flexible portfolio of futures trading options to new and  current clients.

Contact Cannon Trading here for more details on investing in Micro E-Mini Futures Contracts, or other futures investments.

“The MICROS offer a few advantages for both new and experienced traders”, says Ilan Levy-Mayer, Cannon’s VP. “If one wants to move from demo to live trading, one can start with the MICROS and utilize less capital and ease into the live trading part with smaller contracts. Another advantage is the ability to scale in and scale out and last but not least, longer term trades or maybe swing trades might be better utilized using the smaller MICROS.”

In addition to the micro e-minis, Cannon Trading brokers can also help investors trade MICRO gold.  Learn more here.

Appx Daily & Monthly Volume(December 2020)

Micro E-mini S&P March Contract (MESH21) Daily Volume – 57,180

Micro E-mini S&P March Contract (MESH21) Monthly Volume – 1,143,585

Micro E-mini Nasdaq March Contract (MNQH21) Daily Volume – 227,598

Micro E-mini Nasdaq March Contract (MNQH21) Monthly Volume – 4,551,970

Micro E-mini Dow Jones March Contract (MYMH21) Daily Volume – 50,061

Micro E-mini Dow Jones March Contract (MYMH21) Monthly Volume – 1,001,220

Micro E-mini Russell March Contract (M2KH21) Daily Volume – 34,335

Micro E-mini Russell March Contract (M2KH21) Monthly Volume – 686,700

Micro gold Feb Contract (MGCG21) Daily Volume – 51,118

Micro gold Feb Contract (MGCG21) Monthly Volume – 1,022,350

 

Benefits of the Micro E-Mini Futures Contract

The economical aspect of the Micro E-Mini is perhaps its largest draw. In the S&P a trader traditionally must maintain a minimum margin of $13,000, but with the new Miro E-Mini, that margin may now be as low ae $1,300. With these lower margins, more and more traders will now be able to make investments based on where they think the markets may be headed with Stock index futures contracts. Those who now trade with exchange-traded funds (ETFs) can now more easily expand to the futures market.

Cannon Trading stresses the importance of finding a broker that offers the most up-to-date technology and resources available. They also stress the importance of choosing a firm whose brokers have experience and specialize in an array of market corners, thus making it easier for them to customize their services to every trader’s needs and objectives. “At Cannon Trading we offer an expansive selection of cutting-edge technology, and our brokers are knowledgeable and experienced enough to assist any level of trader with his or her needs”.

FREE, real-time demo, with live prices of ALL MCIROS futures available at:

 

https://www.cannontrading.com/software/e-futures-international

Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors.  You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.

 


COVID-19 Impact on Futures Trading

November 11th, 2020 Filed under Futures Broker, Futures Trading | Comment (0)

Futures Trading

 

The sweep of the coronavirus around the world ranks as one of the most impactful events in decades. Due in large part to sweeping lockdowns of businesses, travel and social activities, global markets, particularly commodity markets, have experienced price disruptions on an unprecedented scale. Recall earlier this year, the front month crude oil futures contract (May) traded at a value below $0.00 per barrel and at the close of trading one day, its price settled at a negative value. Conversely, gold’s December futures contract recently reached an all-time high above $2,000 per ounce. These price moves and similar ones – in silver, copper, stock indexes like the S&P 500, Nasdaq & Dow Jones, lumber and others – can be at least partly attributed to abrupt changes in supply & demand patterns during this international health crisis and its effects on producers’ and consumers’ behavior.

In this environment, the case could be made to review trading strategies and make adjustments – in market selection (think “full-sized” vs. mini- or micro- contracts), risk parameters – both in terms of dollar value and price toleration – market selection/allocation, trade frequency and for automated systems, adjustments to algorithms. All this would be to expect a continuation of the last several months’ market movement/volatility.

As part of a strategy review, it would be a good idea to also be aware of any price limits or circuit breakers in place for the markets you’re trading. A price limit is the maximum price range allowed for a futures contract for a trading session. At those price limits, trading may halt for a period of time and an expanded price limit is set, or it may be stopped for the day. Circuit breakers are price limits that when hit, set a timer within which the market is restricted from moving beyond the price limit. In some markets, price limits and circuit breakers are based on percentage moves from the prior day’s closing price and thus are recalculated each day.

Grains and livestock futures contracts, for example, have daily price limits that remain in place for an entire trading session. Stock indexes have both price limits that remain in place for an entire trading session and several circuit breakers: ones that are in place overnight and others that work only during the day. During high volatility periods of time, if markets trade to circuit breakers or price limits, orders placed during at that time can be rejected by the exchange. In summary, knowing these price parameters is especially important.

For more information on how CME Group price limits and circuit breakers work, visit this link.

For specific CME Group price limits and circuit breakers, visit this link.

During this time, it’s more important than ever to be informed, aware and prepared. One of the best means available to help you is access to an experienced, knowledgeable broker. Not only do they have answers to questions regarding the items discussed above, they can look at your situation specifically and offer strategy guidance as well as educational material and information sources you may have overlooked, couldn’t find, or were unaware even existed. Contact Cannon Trading Company.

COVID-19 Impact on Futures Trading

  • Increased volatility and risk
  • New traders needed to understand limit down/ limit up
  • Wild overnight swings
  • Wild moves both ways
  • MICROS are a valid tool
  • Twitter is now a factor
  • More than ever an experienced broker is an asset

Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.

 


Hedging Futures Price Risk Through the Futures Market

September 5th, 2019 Filed under Futures Trading | Comment (0)

Hedging Futures Price Risk Through the Futures Market

Written by John Thorpe, Senior Broker

Would you pay $700.00 for a one way airplane ticket between Chicago and Dallas?  Economy? How about $650.00 one way between Oakland and Seattle in a middle seat?  What if the price of your favorite coffee-chino increased by 50% or even 90%, how much will you be willing to pay to get that same fix? Or would you buy a lesser product? Is it rational we as consumers are forced to change our buying habits due to unexpected price increases?

A jeweler needs to buy resources (platinum, silver, gold, etc.) to make what he is going to sell, even when resources are sparse and costs are high. A farmer may be forced to sell his product when there is an abundance and prices are low. This doesn’t seem fair to the jeweler, who needs his supplies even when their costs skyrocket, or the farmer, who toils through a growing season and takes on the risks of weather, insects, and disease. These prices can fluctuate dramatically on the world market, and yet it is important for sellers to keep their prices a steady as possible to please their customer base. Perhaps where it is most apparent how important these fixed prices are is with your daily cup of coffee. A coffee roaster like Starbucks must try to control the cost of inputs even when the price for raw coffee bean fluctuates, sometimes dramatically, on the world market. If they couldn’t control the cost of the coffee, then you would not be able to depend on your daily $5.00 fix.  Even Airlines are subjected to price variability in the form of costs for jet fuel. As fuel costs rise, the ticket price needs to cover the expense, and a rational increase in the price of a coach ticket should be expected; Budget prices no more. Irrational market price moves for the basic inputs of industry are long and storied throughout human history.

All of the above  hedge price risk, to try to offset some of that price risk. But where do they begin?

Futures markets temper and offset price risk for producers of products, shippers, retailers, and end users. But why is price risk so important to understand, and how can you protect yourself buy hedging or how can you lock in a price for future delivery of goods? You will through the futures market.

What is a Futures Contract?

A futures contract is a contract between two parties where both parties agree to buy and sell a particular standardized asset of specific quantity and at a predetermined price, on a specified date in the future. These legal contractual obligations can be offset at any time prior to contract expiration. A good faith deposit or performance bond equal to approximately 5% of the notional value is required and is called the margin requirement

Who trades in the futures markets? 

Well, the farmer, the jeweler, the airlines and Starbucks all do. Large corporations, farm cooperatives, import/export companies and even your next-door neighbor might. These are all entities who could be hedging, so we call them Bona Fide Hedgers. 

There are other participants that we call speculators. These could be banks or individual investors who use the markets as a supplement and compliment to their investment portfolio.

The History of Futures

The History of Futures markets and hedging is long and varied. 

  •  “Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot. Every one imagined that the passion for tulips would last forever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland. Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney sweeps and old clotheswomen, dabbled in tulips.”                 
    •  Mackay, Charles (1841), Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, London: Richard Bentley

“When Tokugawa Yoshimune became Japan’s shogun in 1716, he sought to reform the state’s finances. Rice played an important role in his reforms, since it accounted for 90 percent of the government’s revenues.  The shogunate also paid the bannermen (an important group of samurai who formed the civil and military administrations) fixed amounts of rice each year to secure their support.a Low rice prices in the late 1720s strained the samurai’s finances, which had already deteriorated significantly over the previous century. Potentially as a result of several good harvests, the price of rice in 1729 was only 40 percent of what it had been in 1721, and samurai incomes had thus dropped sharply.  In fact, since 1710 the nominal income of the bannermen had fallen by nearly 50 percent, and their real income had also decreased significantly, though less so since other prices had dropped as well.”

-Moss, David, Professor at The Harvard Business School, “The Dojima Rice Market and the Origins of Futures Trading” (2010)

 

Simply, from these two examples we can see that the need for price stability of commodity costs drove the creation of futures markets. 

Getting Started in Futures

Currently, hundreds of different Futures contracts are available for hedgers. View some, not all markets used for hedging    

The mechanics of a hedge are varied and a hedging professional can help you with your unique situation. 

People always ask me if they have to take delivery of the product they are hedging and the answer is no. However, you can take delivery of many of the futures contracts if it happens to be suitable for the strategy you are engaged in. Some futures contracts are financially or cash settled. For instance, if you buy a mini crude oil contract at $55.00 per barrel and on expiration day, the contract is priced at $57.50 and your account will be credited with a $2.50  x 500 barrels or $1250.00 per contract. Which brings us to a few hedging examples I would like to share. The first one is a currency hedge utilized buy grain processors between Canada and the U.S.

(The following example is compliments of the CME “Hedging Foreign Exchange Rate Risk with CME FX Futures” 2014)

Capital Press research put this clear example together on how farmers use futures options as price insurance in their hedge.

If you would like to know more about hedging or simply how to use the futures markets for price risk mitigation or speculation, please contact a futures Professional at www.cannontrading.com to walk you through the steps to open an account and begin the process of protecting your commerce.

Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.

 


Interest Rate Futures, Real Estate and Mortgage Rates

July 17th, 2019 Filed under Economic Trading, Financial Futures, Futures Broker, Futures Trading | Comment (0)

By John Thorpe, Senior Broker

 

Over the course of the last 45 years, whether you own a small monopoly of commercial buildings or a condo on Oak street U.S.A. your investments are subjected to the actions of the Federal Reserve Bank.

 

The Federal Reserve Bank seeks to provide stability in the largest world economy through interest rate regulation. Its mandate is to use financial tools to satisfy two congressional mandates, 1: Full Employment and 2: Moderate Inflation to a 2% annualized rate; Move too far too fast in any direction with policy shifts and financial perils for all! may be in the offing. The economy could move too fast in the wrong direction or too fast in the right direction which can lead to an overheating and a bursting of an economic bubble. Look no further than Savings and Loan crisis in the 1980’s and 90’s, the Japanese housing market collapse in 1989 (Japan is currently still struggling with a zero interest rate environment 30 years later) the Dot Com bubble after Y2K and most recently , the housing market collapse, which began with the bankruptcy of Iceland, no one paid attention, then the bankruptcy of Ireland, again, no one paid attention, then the bankruptcy of Bear Stearns,  some paid attention  (what did any of these entities have to do with the value of our homes, we thought) then Lehman brothers collapsed in September of 2008 and everyone paid attention as our home prices collapsed.

Use Google, DuckDuckGo, Bing or any of your favorite search engines and type in

10 yr. correlation with mortgage rates

 

You will find search pages full of information about the importance of interest rate policy and its effect on mortgage rates, specifically the Fedfunds rate.

 

 

Whether you have a 30 yr fixed, a 15 yr fixed or a 5/1 ARM  (usually capped after 5 years) you need to protect your largest investments by first understanding the tools available to the public to monitor these markets and second, knowing you can contact a professional to discuss the myriad of ways to hedge your real estate portfolio and be ready when you need to by utilizing the futures markets to protect your investments.

 

The hypothesis:  Generally speakingand largely from region to region diversity, when interest rates go lower, home prices go higher. Lower interest rates lead to increases in the value of real assets. Mortgage rates are sensitive to changes in Fed Policy, the 10yr note being the reference financial instrument moves in response to market reactions to Fed policy shifts.

 

When interest rates go higher, a definite time lag exists in the long run may make  home prices move lowerand real asset prices lower.

 

 

Watch futures market prices in the interest rate futures. Get comfortable watching the interest rate futures contracts.

 

I am by no means offering a pure hedge or even a short-term hedge in my analysis.

I believe what you will see and get a sense of the ebbs and flows of these markets from a visual perspective  while you are learning about the base currency (US Dollar) valuation of real assets changing and thereby affecting not only the value of the real assets you hold but also the cost to maintain those assets. The interest rate futures markets give you the clearest picture of how policy equates to real rates for you, the mortgage holder. 10yr Note Futures prices and chart

 

Major trends that are a serious harbinger of future housing price changes are important to understand so you may act to preserve, maintain and profit from potential shifts in policy.

 

 

FRED

 

Between 2008 and 2012 during the last recession, a major fed policy tool used was a series of fed fund rate reductions (net effect is the cost of money becomes cheaper relative to real asset prices), these calculated moves lowered the interest rate on longer term debt obligations  10Yr. Note Futures Prices and Chart as well as all dollar denominated Treasuries.

 

As you can see, Mortgage rates, I mean the 10yr Treasury Note rates (Freudian slip, sorry), are still at or near all-time lows.

In Summary, Familiarizing yourself with the interrelationships among Mortgage rates, 10 year treasuries and fed fund policy shifts are an important starting point for a conversation with a professional about protecting your family’s biggest investment.

 

A Cannon Trading professional is available between 8:30am to 5:00pm Eastern to answer your questions Call Now

 

Disclaimer – Trading Futures, Options on Futuresand retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledgeand financial resources. You may lose all or more of your initial investment. Opinions, market dataand recommendations are subject to change at any time.

 


Selling Future Options Premium

June 26th, 2019 Filed under Commodity Brokers, Commodity Trading, Day Trading, Economic Trading, Financial Futures, Future Trading News, Future Trading Platform, Futures Broker, Futures Exchange, Futures Trading, Options Trading, Trading Guide | Comment (0)

Futures Options Writing

 

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:

  1. Most futures options expire worthless and out of the money. Therefore, the option writer is collecting the premium the option buyer paid.

 

  1. There are three things that happen to the underlying price of the option: Price goes up, goes down or stays the same. If when the option expires, the market price was at or below your strike price you collect all the premium if two of those things happen Time decay is the option writer’s friend.

 

  1. The writer believes the futures contract will not reach a certain strike price by the expiration date of the option. This is known as naked option selling.

 

  • To hedge against a futures position. For example: someone who goes long cocoa at 850 can write a 900 strike price call option with about one month of time until option expiration. This allows you to collect the premium of the call option if cocoa settles below 900, based on option expiration. It also allows you to make a profit on the actual futures contract between 851 and 900. This strategy also lowers your margin on the trade, and should cocoa continue lower to 800, you at least collect some premium on the option you wrote. Risk lies if cocoa continues to decline, because you only collect a certain amount of premium and the futures contract has unlimited risk the lower it goes. So you should trade with a stop on the futures contract. You can read on different strategies using options on futures here:

 

https://www.cannontrading.com/tools/education-futures-options-trading-101

 

Cannon offers SPAN margins for options sellers.

Many brokers will restrict or increase the margins required for options sellers, or traders who like to “collect premium”, but here at Cannon we can find you the best set up utilizing the multiple clearing arrangements we have with more than a few FCMs.

How much margin is required to sell a futures option?

That is a question we get asked often. The exact number is an output of SPAN margins. SPAN deserves a post on its own, but what it stands for is: Standard Portfolio Analysis of Risk. The formula takes into consideration volatility, time value, distance of strike price from current underlying future, and more.

Outright options may be easier to “guesstimate” margin than more complex strategies and spreads, but our free platform, E-Futures Int’l (https://www.cannontrading.com/software/e-futures-international )has a margin calculator built in so you can calculate the margin you will need for different strategies.

Commission for selling options on futures?

Commissions will vary based on the following:

Are you trading online or with a broker?

Trading volume

Account size

Risk responsibility.

The rates for selling options will vary from as low as $0.25 per side + fees for HIGH VOLUME, institutional accounts to $30 per side + fees for retail, broker assisted accounts.

 

Selling options is NOT for newcomers as it involves higher risk than buying options.

However, selling options and trading option spreads may offer an edge if done with proper risk management. No guarantees are made here.

Our strength at Cannon is our ability to offer CUSTOMIZED trading solutions, so contact a broker at:

https://www.cannontrading.com/company/contact

and learn more about risks and opportunities in futures trading (https://www.cannontrading.com/riskopportunity), what software you can use, consult with a broker on margin, commissions and strategy questions and much more!

 

Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors.  You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.

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