Options Trading

Category Archives: Options Trading

Option trading has two main components – puts and calls. While the call option is used for the option of buying a certain futures contract, the put option is for the option of selling them. Another terminology used in options trading is strike price. This strike price is the price at which the underlying asset is confirmed to be bought or sold when the trader exercises the option.

There are a few other noteworthy items about option trading and each one is important. Take for example the expiration date of the option and the option style, so on and so forth. Once you understand the terminology, you will be able to understand options trading clearly.

One thing to remember about options is that they are comparatively less liquid than futures contracts. For those who analyze the markets thoroughly and regularly, options trading is just a great way of controlling risks. We at Cannon Trading help you understand options trading better and also provide you good advice on options trading. This category archive talks about a number of option trading blogs and articles to give you the most recent update on options.


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.


Trading Crude Oil Futures

June 13th, 2018 Filed under Commodity Brokers, Commodity Trading, Crude Oil, Day Trading, Energy Futures, Futures Broker, Futures Trading, futures trading education, Options Trading, Trading Guide | Comment (0)

Tips for day trading NYMEX crude oil futures

By Ilan Levy-Mayer, VP Cannon Trading Co, Inc.

When it comes to day trading futures contracts, crude oil futures are assumed one of the leading positions as far as trading volume.

 

During the month of May 2018,  crude oil futures averaged around 1 Million contracts traded per day! That actually surpasses contracts like the ten-year notes, mini SP, mini Nasdaq and others who have traditionally been leaders’ in terms of volume.

 

Part of the growth in crude oil futures is attributed to day trader participation. Day traders, by definition, will enter and exit their positions during the same trading day. This adds volume to the market traded.

 

Some of the tips I am sharing below can be applied to most futures contracts as well as other financial products that are traded like stocks, forex, bonds and others. Some of the advice I am sharing is very specific to the crude oil futures trading field.

 

  1. Know the product you are trading:

 

  1. Just like a trader who trades a stock like Facebook knows what Facebook does, when its earning reports are due and other factors, so does a crude oil futures day trader needs to know a few facts about crude oil:

 

  • Contract Size: Crude Oil Futures consist of 1,000 barrels. For the trader this means that each full $1 move in crude futures = $1,000 against you or in your favor.

 

For example:  A move from 72.10 to 73.10 = $1,000 and a move from 72.10 to 72.11 = $10 (the minimum fluctuation size or the tick size). Be aware that the CME also offers the mini crude contract,  which is half the size.

 

  • Trading Hours: Crude oil futures trade on the Globex terminal between the hours of 5:00 PM CST the DAY BEFORE to 4:00 PM CST the following day. Which means 23 hours of straight trading. It is important to know that most of the volume will trade between the hours of 8:00 AM CST and 1:30 PM CST, as these hours correspond to the “pit session” of the old trading floor.

 

Another key aspect to remember is that crude oil is a deliverable commodity and the “front month” will change every 30 days or so. For example: since May 22nd 2018 we have been trading July crude oil.

 

  • Reports: There are more than a few reports that will affect crude oil future prices indirectly. These include monthly unemployment, the FOMC rate decision, and a few others.

 

However, there are two major reports that move crude oil futures and its by-products (unleaded gasoline and heating oil) sharply: The API report, which comes out at 3:30 PM CST every Tuesday, and the DOE (Dept. of Energy) inventory numbers, which come out almost every Wednesday at 9:30AM CST.

 

Take a look at this one-minute chart from Wednesday, May 16th right around the report time below to understand the volatility involved.

As you can see above, the market made a move of $700 per ONE contract in a matter of minutes, perhaps even seconds! That type of risk and opportunity is one of the factors attracting day-traders into the crude oil market.

 

  • Geo Political Events: Middle East tensions, the Iran nuclear deal, tensions between Iraq and its neighbors…these are all examples of events that affect crude oil prices. Not to mention OPEC meetings!

 

 

  1. Trading Personality:

 

In my opinion crude oil (like many other markets) will have one of the following 3 modes: trending, two-sided volatility, or Choppy/quiet/range bound trading.

 

My experience is that crude will more often fall into the first 2 categories:  strong trend or two-sided volatility.  This leads me to my next point below, different trading set-ups.

 

  1. Trading Set-Ups:

 

My preferred methods for trading crude are either breakout concept in an attempt to catch a strong move up or down once the market broke some key support or resistance levels, AND/OR counter trend methods to take advantage of when the market is oversold or overbought. Crude does seem to bring more fear and greed out of traders. So looking at RSI levels, for example, and using moving averages ON the RSI to try and get a feel for market reversals are methods worth exploring.

 

  1. Keep a journal:

 

Like with any other trading, keep a journal. Take notes on how the market reacted to certain reports, how the markets traded during certain times of the day, and action you took and emotions you had that either helped or hurt you while trading. These notes will help you going forward.

 

In summary, crude oil futures volume has increased significantly these past few years. The crude oil futures offer traders certain dynamics that other markets may not at certain times. Volatility, fear and greed are key traits for this market. Remember that trading crude oil futures specifically and futures and options in general carries a large degree of risk and is not suitable for all investors. Make sure you consult with a series 3 broker if you never traded this market before. As always, I wish you Good Trading!

 

Important: Trading commodity futures and options involves a substantial risk of loss.

The recommendations contained in this letter are of opinion only and do not guarantee any profits.

There is not an actual account trading these recommendations.

Past performances are not necessarily indicative of future results.


Grain Options Volatility Video! 2.01.2018

January 31st, 2018 Filed under Future Trading News, Grain Futures, Options Trading | Comment (0)

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Voted #1 Blog and #1 Brokerage Services on  TraderPlanet   for 2016!!

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Front month for crude oil and Natural gas is March.

Front month for gold is now April.

Wishing all of you  EXCELLENT trading in February!

La Niña: Grain Options’ Implied Volatility Languishes

By Erik Norland, Senior Economist, CME Group

Video Highlights
  • Corn, Soybean options’ implied volatility languishes despite La Niña
  • La Niña can elevate grain volatility, has historically been bearish

Rise of non-U.S. grain producers could be limiting volatility.

Read the rest of this entry »


Futures Options 101 1-30-2018

January 29th, 2018 Filed under Future Trading News, Options Trading | Comment (0)

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Voted #1 Blog and #1 Brokerage Services on  TraderPlanet   for 2016!!

____________________________________________________________________

Front month for crude oil and Natural gas is March.

Front month for gold is now April.

Market Strategies using options

1. Bullish Market Strategies

Futures Options Trading
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

2. Bearish Market Strategies

Futures Options Trading
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

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Volatile Markets Require Professional Brokers! 12.01.2016

November 30th, 2016 Filed under Future Trading News, Options Trading | Comment (0)

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Big moves in the markets today as we anticipated yesterday. Crude oil up over $4 along with it’s products heating oil and unleaded gas.

Gold down another $15, bonds resumed the downward trend with close to two full points down and stocks showed the first sign of weakness in a few days….

The volatility in some of the markets encouraged me to remind you about the weekly options available for markets like mini SP, gold, Crude, Bonds and others.

While options have their advantages and disadvantages…when the markets are so volatile they present an alternative to trading with out the need to use stops that have higher chances of getting hit when markets move like they did today…..

Read more about weekly options here and ALWAYS feel free to pick up the phone and chat with any of our experienced, series 3 brokers about options, markets, trading and more!

Have a great December!!

Dont forget to vote for us!! It takes 8 seconds….vote here! 

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