Gold Futures Options Reviewed | Trading Futures
good day everyone john mcnichol here and welcome to trading futures our topic today we'll start going through a series on looking at the fine risk on various commodity options our focus today will be on gold so stick around [Music] all right good morning to those of you that are live with us today such as frank tony vj we got anthony ricardo tm and everyone else also those you that are listening in the archive session welcome back and thank you for joining our archived webcast each and every week we have connie hill helping out on the chat uh thanks for uh connie stepping in i believe uh ken uh had some technical difficulties uh this morning we may see him pop on but we do appreciate connie helping out a great coach and great resource you can see her on our webcasts as well so keep an eye out for her you can see my twitter handle on the screen at j mcnichol underscore tda if you wish to follow myself along with other fine instructors such as connie her twitter handle is at c-h-i-l-l underscore tda let's go and take care of disclosures folks we'll get right into it contents intended for education information purposes only not investment not investment advice or recommendation of any security strategy or account type options not suitable for all investors spread straddles other multi-leg options strategies often involve greater more complex risks than single leg option trades also transaction costs are important factors should be considered when evaluating any trade keep in mind with spreads short options can be assigned at any time up until the expiration regardless of the in the money amount also long options places the entire cost of the option position at risk your courage practice which you learn here today with tools such as paper money however successful virtual trading during one time period does not guarantee success of actual funds during a later time periods market conditions change continuously futures and futures options trading involves substantial risk is not suitable for all investors please read the risk disclosure along with futures and futures options trading services are provided by charles schwab's charles schwab futures and forex llc those trade privileges are subject to review and approval not all clients will qualify make note of transaction fees and while this webcast may discuss technical analysis other approaches include fundamental analysis may serve very different views and let's go ahead and bring up our agenda here so we'll start going over some of the characteristics of various options on commodity futures our emphasis today will be more on metals we'll uh discuss some of the impact uh such as economic government reports may have uh with in our emphasis here on metals on other weeks so we'll take a look at energy and grains we'll apply defined risk option spreads as well as position sizing maybe something that you already learned and understand with equity options and uh we'll apply a potential entry exit and trade management techniques along the way there and here we go uh for those of you that are new to this class welcome this is one of uh two futures webcasts that we have if you are on the td ameritrade website or on the thinkorswim platform and go to the education tab uh you'll see a link for webcasts once you're there you can go ahead and take a look at upcoming webcasts as well as with the webcast schedule and pointing out we do have a futures class on thursday with michael fairborn called futures basics and beyond so both of these classes complement uh ours may have a tendency being a little more technical based maybe slightly more [Music] intermediate in some cases advance although with the topic today should be fairly easy to follow along all right let's go ahead and go back to our presentation here and here's trying to dispel some of the mystery when it comes to trading options on futures compared to options on equities one of the approaches here is we have a wider access to a variety of assets such as stock indices something you may be familiar with along with energies interest rates metals currencies and agricultural and we intend to do uh practice trades to find risk trades on a lot of these different commodities in our practice account whereas obviously options on equities you can trade options on various different sectors and indices however tied more closely to the equities market a little more efficiency when it comes with uh futures however that leverage can cut both ways someone's locking up a relatively small amount of capital to control something of greater value that risk model is a little more dynamic also another attraction 24 hours essentially futures trading from sunday evening going into friday afternoon uh with uh relatively uh little interruption you know some brief breaks uh in the afternoon uh as the 24 hour cycle ends and a new cycle begins you can see some of these times here uh also not that this is an endorsement of uh day trading but there is no pattern day trading rule when it comes to futures uh unlike with uh equities and equity options last one here is one we need to have a better understanding with as we understand some of the different contract specifications uh review and contract specifications are important because unlike equities which generally uh are very similar as far as size uh you know 100 multipliers for options in most cases in the case of futures those multipliers are going to vary uh likewise they're expirations uh are gonna vary as well so we need to understand those before we trade and i didn't hide some of these slides uh we'll probably talk about uh energy in the coming week or two i do want to go ahead and go right into some of the metals and talk about gold as one example uh forward slash gc is the root symbol for gold futures now there are some other instruments we'll show you on how you can look at that but as far as with our example for today forward slash gc is the underlying future for gold they do have future options that are available for trading as we go ahead and we take a look we can see the multiplier stand out which is going to be a hundred times the premium as i'm trying to get some of my drawing tools uh working here it looks like we're having a little bit of a problem here today i've had a few software updates and uh unfortunately i've not been able to uh get my drawing tools functioning as well so we'll have to follow the big mouse pointer there so multiplier of 100 times the premium that translates in a tick size of 10 cents and that 10 cents equates out to 10 dollars per tick you can see the trading hours essentially uh close to 24 hours there again this will vary from sunday to friday and then notice as i mentioned uh not only with the multiplier but settlement times can vary as well in this case with gold even though it may continue trading the daily settlement which is calculated is going to be at 12 30 pm central time likewise with the end of trading and i've explained this in the past this may look a little convoluted uh when we read the description expiration occurs four business days prior to the end of the month preceding the options contract month at 12 30 pm central time okay well knows that ties in with the daily settlement so end of trading naturally may end close to that time all right uh if we go ahead and we take a look uh on the settlement of expiration and well let's talk about end of trading here uh if i go to the thinkorswim platform go to the trade tab uh once on the trade tab we'll type in forward slash gc as far as understanding uh the expirations we can see that pretty clear here up at the top listen to futures you can see what the current front month is forward slash gcm m represents june's contract uh that's the shorthand for it however fortunately on thinkorswim there is an expiration column so you can see june 22nd the underlying future is 21 days expiration uh understanding the options if you scroll down you can see under the option chain and brackets will represent the days to expiration so this will help you understand uh as far as when those contracts would expire now not only are there are standard contracts but there are weekly contracts as well so you can see that there is some variation as far as selection of time however keep in mind with some of the more non-standard contracts there can be some larger spreads between the difference between the bit and the ask however these do not look exceptionally wide here but can be wider and also you can see what contract that it's tied to the underlying for instance going out to these june expirations they're tied to the underlying for june's contract gcm if we go further out notice there are other expirations that are actually going to be tied to an underlying contract for q which is the august contract that's 80 days out and interestingly enough not seeing at least at the moment uh contracts that may be tied to the uh july contract which is gcn in this example okay let's go back and what happens at expiration uh well some futures contracts may be cash settled however many of them may result in a position in the underlying futures contract so with uh any of these examples for instance if we were looking out to june 22nd here 25 days out uh if this was going into expiration and whether in the money uh you know as far as a long or short that can result in a an assignment or an exercise it would result in an underlying position contract in gc q22 now keep in mind we're going to talk about the fine risk as far as with the options however when one has an underlying position in a future i'll go to gc here click on the drop down uh when you're in the drop down on the chart and we go to futures there's gold futures there you can see that there is an initial margin sometimes referred to as a performance bond on how much equity needs to be locked up into that position per contract in this case seventy nine hundred dollars uh seventy seven thousand nine hundred and twenty dollars now that's not the risk on that contract that's the amount of equity that's tied up in that contract so if we go ahead and let's say we look at a daily chart of gold and i'm going to go ahead and maximize this let's say hypothetically one had went long uh gold futures right at the top here uh in march and you know as with many instruments you know we've seen a correction we've seen a slide back although i don't think gold's been necessarily uh hit as hard uh as other instruments uh but nevertheless looks like that's probably about a 10 percent draw down there if i was go ahead and take my mouse pointer go to a drawing tool take a diagonal line and go ahead and draw from the high down to where we currently are look at the number of points uh that are there under gold uh retracement about 10.4 percent uh losing about 216 points okay now remember as far as 216 points uh we would go ahead and take that you know times the multiplier right remember uh each tick uh is worth ten dollars or a hundred dollars per point so if we go ahead and we take that 216. i know it's a little more simple math but i didn't have my coffee here this morning we take 216 right basically add a zero but times 10 or times 100 be two zeros okay that's 21 600 so notice that greatly exceeds that initial margin of 7 920 so the risk is not as defined when it comes in in the future underlying future contract does require additional funds i.e you know a margin call uh to
continue maintaining that position so you know there are some of the challenges with leveraged instruments they can go ahead and cut both ways whereas if we were bearish on the position that would be a gain of upwards of about twenty one hundred or twenty one thousand six hundred dollars okay so hopefully that gave a a good visualization on understanding the risks associated with trading futures once again leverage can cut both ways we are locking up a relatively small amount of funds to control something of greater value now let's go ahead and break it down some more here some of the impacts uh as far as with gold gold futures and a lot of those things are have materialized and continue to uh work itself through is pertaining to the dollar dollar is relatively strong in fact it's been on a very strong run uh for some time if we go ahead and we take a look and bring up uh as an example uh dollar sign dxy representing the dollar index we've seen that surge in the dollar as commodities are denoted in dollars so a lot of markets need dollars uh to purchase those commodities uh also uh just with a lot of the um i guess the imbalances that are going on uh with the war in ukraine and russia uh the dollar still is reserved currency and uh some consider more of a flight to safety there however as we look at it over about the last week and a half that momentum of the dollar has slowed down so what does that mean if we look at something such as uh gold now go ahead and bring up forward slash gc notice that kind of inversely you know gold has gone down but notice that that downward momentum has gone a little more sideways albeit did roll over again a little bit today okay uh so we can kind of see that inverse somewhat of an inverse relationship as far as with the dollar versus gold since gold is denoted in dollars another thing looking at economic strength depending on what fed you're listening to you have some europeans particularly the uk talking more stagflation that means slower growth rise in prices you have others a little more optimistic that things may be a little slowing down but we may be seeing a little peak at least nearer term on inflation and speculation economic growth will be picking up uh in the second half particularly with countries such as china that are shut down with covid and planning to aggressively reopen towards the end of the month we'll see if that occurs interest rates another impact as well as we go ahead and we take a look at tnx representing the 10-year yield yields have gone higher continue to go higher now that does typically have pressure on gold to the downside rise in rates mean that as far as as far as with credits more expensive uh also with interest rates uh making yields more attractive gold doesn't have a yield but if uh bonds do rise pushing yields down that may have a positive benefit uh on gold usually the idea too is if yields are falling fed's not as aggressive therefore gold may be a speculation against inflation however as we look at as a whole as far as with gold yes year to date uh we can see that gold is positive uh on the year if i go ahead and we take a look at uh let's see going back to around december 31st so we can kind of get that approximately here you know approximately gold's up about three and a quarter percent uh not high it was as high as about 15 16 percent uh this can also be some of the arguments as far as things slowing down uh but also more mainly with the strength of the dollar uh is for some of the more recent movements there but relative to equities uh gold's still pulling out a little more of a positive performance okay let's go ahead and take a look at some of the other factors here and inflation uh we're going to get some gauges on inflation this week primarily with the cpi if you go ahead and you take a look on the td ameritrade website or on the thinkorswim platform primarily possibly a little bit easier on the td ameritrade website going to research and ideas we'll take a look at the calendar once on the calendar there we take a look at some of the economic events which will categorize that little light on monday but as you can see as we go into wednesday thursday friday latter part of the week more economic events to be concerned about we can scroll through some of these small business optimism on tuesday wednesday is going to be a big one for inflation cpi and core cpi uh see if there's any indications of uh inflation over the near term peaking or continuing its ride higher there as we go into thursday we're gonna get the producer price index ppi sometimes you can click on these and you may get an indication sometimes there may be an explanation otherwise there may just be a chart uh you can see things from historical perspective so we can see what the trend of the ppi has been if we go back and look at the cpi you can see those peaks there which again some in percentages we haven't seen in about 40 years all right as we round things out going out into friday uh looks like consumer sentiment will probably be the big one going into fridays all right now let's go ahead and take a look at some of your questions here and we'll uh continue on with our practice example do you want to make sure that we're covering down on things for everyone here and let's see what we got going on bear with me as i make a few adjustments in the background here once again do appreciate connie for helping out on the chat i'm uh not seeing any particular questions coming through i will keep an eye on that some comments on a great week to be short there could be some possibilities with that if we go ahead and we actually take a look uh just a snapshot of the market at the moment here looking at forward slash es and we had discussed this from the previous week as far as some of those key supports we did see a break in support hasn't necessarily cascaded uh well below that support but nevertheless below it so uh bulls are certainly uh challenged this week if we go ahead and we take a look at some of the other ones look at some of the cash indexes which will be tied to tied to the futures there's the s p gapping down hanging around the lows maybe seeing a little hammer in action there this one looks at things intraday here's kind of the entry day on the s p futures you can see the overnight action from friday going into sunday night there's that 24 hours there price is attempting to hold those lows daily pivot is at around the 41.08 so at 4100 area probably a psychological area of support and resistance notice that will take us kind of right into the post market action from friday there a lot of people probably keep an eye on the nasdaq as well looking at nq and a deeper slide as gross stocks continue to be hit hard a bit off the lows from earlier in the session trying to get up some of the pivots daily pivot upwards around the 12 700 area weekly pivots are significantly higher pretty much going back into the high range that we saw from friday there okay we do the same thing with gold if we bring up forward slash gc we can see gold doing something uh similar as you know prices kind of coming off their lows retracing back a bit uh their weekly pivot uh not as far away uh kind of around the 1880 uh notice that that would probably be potentially a sign of a reversal uh if price action uh is able to get above some of those this downward slide and potentially seeing a break at least over a shorter term uh of that downward slot now if we go ahead and look at a daily chart for gold price action is trading lower but looking at kind of these previous areas of support previous resistance where gold had broken out in february uh broken resistance may have a tendency of acting as new support as we saw here and whether that continues to hold may be determined that's looking at around that 1844 mark now that's a level that we'll keep in mind here okay uh looking at the comments uh charles mentioned about divergence yeah that was actually a topic uh that i'd been discussing last week in some of the webcasts uh as well as in some of our affiliates there let's see if i can highlight this a little bit more so we have price action that's making lower lows but we've seen a positive divergence in the macd which is implying this downward momentum is slowed down now it does not necessarily mean it's going to be an all-out bullish reversal but it may build a case for at least more of a base to form in that price action kind of similar to what we saw back here in february where prices still went down uh there was a bit of a positive divergence there as that downward momentum slowed down it continued to slow down building up a base now there's no guarantee that that would continue to occur but we'll uh we'll see that also has been applied on a believe a weekly basis too uh as prices have gone lower yet the macd uh not lower in this case now traders may look for more of a confirmation of that candle reversal now likewise if we look at gold forward slash gc there's no example of a divergence at the moment prices are just sliding back the argument here is as we look at a weekly chart possibly a longer term support okay now let's go ahead and continue on with our setup here we'll talk about grains in a future segment as well but here's some of the considerations for commodity options and what we're looking at attempt to do here today if you're already trading options on equities you can use the same strategies for options on futures after all an option is an option regardless of the underlying asset we can review the economic calendar which we did for government reports and events related to each commodity group now in this case even though we're doing it for illustrator purposes uh if if the cpi and ppi come in a bit hotter that may benefit gold if they come up a bit softer that may not be as much of a benefit for gold likewise interest rates are a driver as well uh if yields soften uh post uh cpi or ppi that can potentially benefit gold a slightly inverse relationship now most commodity options uh on futures are american style which means they could be exercised or assigned at any time for expiration uh that is uh in the case of equity options as well so that shouldn't be as much of a surprise now contract specifications it's important to stay up to date on these we have two resources one is td ameritrade dot com forward slash futures the other one is cme group dot com which many of these commodities are traded much more in depth uh resources on the underlying commodities there as well we encourage you to take a look on the td ameritrade website td ameritrade dot com forward slash futures we're going to go ahead and push that one out so those of you that are live you can click on that link those of you that are on the archive session td ameritrade dot com forward slash futures you can see links as far as how to start trading some considerations and then here's the available products if we go here and look under futures products there is a link for metals now we're highlighting gold as an example which is forward slash gc it has tradable options which will do an example here today there's a multiplier of a hundred so i can blow this up a little bit more i think i can do that make it a little bit better keep it on the screen uh there's a tick size now notice it says physical settlement now keep in mind if one not on the option but if one has the underlying future may result in a physical settlement of that contract however td ameritrade and charles schwab does not allow physical settlement of these commodity contracts which means that similar to equity options we look to close out the position prior to expiration the underlying option can translate into an actual futures contract which can potentially be physically settled however once again td ameritrade charles schwab doesn't allow that to occur so there would potentially be a forced liquidation prior to that settlement or uh physical uh prior to that settlement and which would uh trigger a physical delivery basically closing out the position preventing uh that uh settlement okay some may be cashed and as you scroll down there are some other contracts if one wanted to speculate uh on gold these are underlying futures contracts that may have smaller multipliers however these don't necessarily have options or tradable options so uh still have the same issues as far as the underlying contract you're locking up some equity and that equity is not necessarily defined but it is less leveraged uh silver is tradable uh probably can bring up a contract specification in the future on silver they are optional uh there's the multiplier there notice it's a lot larger and each tick is worth about 25 dollars let's take a quick look at forward slash si as i'm trying to type in the right character it's an i not a one as we look at silver no silver's kind of been in a bit of a range for some time some bulls may look at that as being bullish if they're able to get a bounce and trade up in that range uh however been hanging around that support multiple times silver is a little more industrial as well so it could be tied to some of the economic growth if that was the breakthrough resistance there could be some more downward pressure okay all right let's go ahead and do a practice trade here on gold forward slash gc and for our example i was looking considering on doing example of a short put vertical let's say the idea is expecting that the lows will hold uh over the course of the duration of the trade uh and therefore not necessarily being directional if one was being more directional looking for more of a bounce uh you know may consider an example of a long call vertical if they expect prices to trade up to a certain level we actually did that with uh forward slash zn on the bonds uh that so far has not uh worked so well we were looking for a counter move for the bonds to be trading closer to the 121 level i believe uh we have 11 days left and it's pulled further away and you can see in this example there's our risk i believe i was risking about uh two thousand dollars uh on the trade uh we're down about fifteen hundred and we know where that defined risk is likewise the hedge uh that we have on forward slash es short is still working i've been working for some time and working well today uh so let's go ahead and take a look on forward slash gc we'll go to the trade tab we'll apply the same principles that we've learned with short verticals now if you are unfamiliar with short verticals uh we'll show you some resources before we leave here today uh let's say i want to go out uh you know upwards anywhere from around 20 some to 50 days here now if we go ahead and we take a look at this june strike this is going about 25 days out this is a weekly option we got expiration in 25 days we can look at the spread the difference between the bid and the ask the smaller the spread the better we'd like to see the spread being no more than 10 percent of the ask price we're seeing relatively smaller spreads here some traders may look at volume and open interest which notice here uh not a lot of volume and open interest on these contracts yet you know there are uh some potentially marketable spreads here some of them may get a little wider out if we go closer in let's see if we can find look on the standard contract here that's four days of expiration your 16 days here's the standard contract here notice that the open interest is a bit larger in some of these areas not necessarily seeing a lot of uh volume there actually let's get closer to the market there we go and we can see where there's some more volume in open interest now if we did go with this for the sake of liquidity we don't necessarily have enough time if if we're wrong on the assumption of that over the next 16 days we don't necessarily have enough time for the price to recover let's go ahead and see if we're able to get a reasonable premium in this example we'll go to layout let's look at the delta and let's look at a greek that's somewhere or a delta somewhere in that 30 to 40 looking at the probability of the option expiring out of the money and we can see here at around the 1835 mark 1830 if we go and look at the chart where does that reside uh notice that 1830 uh would reside below this support area so we basically have a spread with the expectation of the price stay in above that strike now again some traders may look for more of a bullish candle as a technical trigger to possibly improve the the technical probability of the price holding that support notice right now we're looking at things intraday a little more bearish on the downside yet off the lows the idea is expecting that those lows will hold this would also point to possibly a higher premium being closer to that support as well so let's go back to the trade tab let's say we go in we look at the example of the 1830. i'm going to right click and i'm going to do cell vertical so this is a short put vertical which is bullish neutral to bullish by its nature we're potentially selling about a dollar 40 credit however keep in mind there's a multiplier there's a hundred so it's a buck forty times a hundred if you hit confirm and send you can see the aspects and similarities to what we had with a any other short vertical on the equity side our maximum gain is the credit received in this case 140. the maximum loss is 360 dollars that's the spread five dollar wide times a hundred the most this could spread can be worth is five dollars times that multiplier so there's your max gain max loss contained within that there are transaction fees notice they are more than equities and on equity options important factors should be considered when evaluating any trade and then there's a break even 18 28.50 if the price basically stays above 1828.50
over the next 16 days then the idea uh is that this would be a profitable trade okay uh whereas if the price uh does trade lower let's go up into that if the price does trade lower and goes below 18 30 uh that can result in an assignment uh keep that in mind uh therefore we look to close out this position prior to expiration usually an idea here and let's go ahead and position size this let's say i do this three times basically risking about a thousand to make 390. that's over about a 30 percent return on risk i'm going to go ahead and click send and we did get a a fill there on this practice account now your results may vary keeping in mind if i go to the field order here you know there is a spread the difference between the natural price and the mid price i think we kind of fell a little bit in between when we had placed it and therefore increased the probability of that being filled all right the ways on managing this trade is uh keeping an eye on the profit so if we sold about a buck 30 if i take a buck 30 times and let's say uh 20 percent if this credit drops down to 26 cents you know let's say less than 30 we've realized about 70 to 80 percent of that maximum gain so that would be a profit target so if gold shoots up or holds that support with the passage of time that time decay would benefit and we look to capture that gain now if we don't reach that profit target then we'll focus in that last week of expiration now remember this is 16 days out so therefore basically requires much more closer management as we get in that last week so pretty much sometime towards the end of mid next week is keeping a closer eye to see if we're coming close to those objectives or managing that trade for a minimal gain or potentially a minimal loss seeing if the price direction actually is favorable whether price holding that support or gold going up higher maybe some of the catalysts with the cpi and a ppi this week all right now i did notice folks there is a survey here so as we go through the summary i would encourage you to go ahead and click on the survey helps us out a lot i do look at all the comments uh for those of you that are listening to the archive session you can vote as well by just clicking like that'll let me know you enjoyed the presentation there's also a comment below for those that are here live connie will push out that survey click on it fill it out just takes a few moments appreciate the feedback and you can vote twice uh you can go also click like if you enjoyed the presentation as well that allow others uh to see this content too so we went over some of the characteristics on commodity options in this series we started off with metals we'll take a look at some other ones in the future such as energies and grain we did a defined risk option spread very important just like we can do the same thing on the equity side we can apply this on the commodity side as well as we did a short put vertical and we talked about identifying potential entry exit and trade management techniques support bounce spread below support target in a 70 to 80 percent of that maximum gain as well as managing that trade in the last week of expiration now for those of you if you are new to that particular strategy i would encourage you to go ahead and take a look uh on the td ameritrade website or on the thinkorswim platform via the education tab you can go ahead and go to options uh we have a trading options course that's listed there that goes in great detail we also have a webcast if you go to the webcast uh i believe it's on wednesdays unless they change the schedule ken rose every wednesday short verticals it's going to be at 11 a.m eastern time so encourage you to take a look at that all right so hopefully you accomplish everything we intended uh today folks do appreciate the support as always and remember uh in order to well well hey make sure you practice this as well on your paper money account uh select a short vertical uh on an option to consider practice trading on paper money and remember in order to demonstrate the function out of the platform we did have to use actual symbols keep in mind td ameritrade does not make recommendations or determine suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility thank you folks have a great week we'll talk to you again real soon bye now [Music]
2022-05-12 03:02
