Interest Rate Futures Options | Trading Futures
good day everyone john mcnichol here and welcome to another fantastic week of education with td ameritrade you've reached trading futures and our topic today will be taking a look at interest rate future options so stick around all right hey it's great to see those you that are live with us today uh let's see we got vj tm daryl dan g h rex laura and everyone else thanks for being here uh we got mr ken rose helping out on the chat any questions i am unable to get to today he'll be more than happy to help do appreciate him being with us and also do appreciate those you listening to the archive session as well you can follow us both on twitter you can see my twitter handle on the screen throughout the presentation on the lower right just underneath that subscribe button which you're welcome to click and subscribe to trader talks ken can be followed at k rose underscore tda great way to learn more about your instructors along with the markets as well let's go ahead and take care of disclosures folks we'll get right into the discussion contents intended for educational information purposes only non-investment advice or recommendation of any security strategy or account type options not suitable for all investors spread straddles of the multi-leg option strategies often involve greater more complex risk than single leg option trades also can entail substantial transaction costs including multiple commissions keep mine short options can be assigned at any time up to the expiration regardless of the in the money amount likewise a long call or put option places the entire cost of the option position at risk now you're encouraged practice what you learn here today with tools such as paper money application which is for educational purposes only and successful virtual trading during one time period does not guarantee success of actual funds during later time periods market conditions change continuously futures futures options trading involves substantial risk not suitable for all investors and the futures and futures options trading services are provided by charles schwab futures and forex llc those trade privileges are subject to review and approval not all clients will qualify make note of the transaction fees and while this webcast may discuss technical analysis other approaches include fundamental analysis may assert very different views past performance of any security or strategy does not guarantee future results or success our agenda folks for today uh time permitting towards the end of the session there uh we'll take a look uh seeing how the equities markets are set up for the week as we are in the midst of earnings season but figure we'll take a look and determine some of the characteristics of interest rate futures options uh maybe a bit timely as we've seen i believe yields a spike to a three-year high before backing off a little bit here we'll see if that continues talk about the impact that economic reports and monetary policy may have on interest rates and bond futures uh so we'll look at some of the calendars there as well uh some of the considerations for risk define option spreads what we'll do is basically apply some of the same principles that we've learned in our options trading courses uh utilize and define risk spreads uh in an attempt to profit from moves or lack thereof in some cases of some various futures contracts and we'll go and talk about some of those entry exit and trade management techniques as well as determine an individual's risk level by utilizing position sizing kind of the hallmarks of our education here at td ameritrade on helping define risk and identifying position sizing there well let's go ahead and continue here and hope everyone enjoyed their weekend as we'll transition the screen here whoops now some of you may be uh new to futures uh this is one of two futures classes we have ken rose does have a getting started with futures and beyond which is on thursdays make note of that on the schedule there but just kind of an overall review on comparing the options trading for futures versus equities there are some similarities but also differences there uh one of the uh main attractions uh as uh with everything concerning inflation as well as with war in ukraine with ukraine and russia uh commodities have been kind of on the forefront and commodities are accessible as far as trading uh via the futures market so we have a wider variety of asset classes not only just stock indices which we did do a hedge last week on our practice account utilize utilizing s p micro futures uh we'll take a closer look at that later on today uh energies natural gas i believe hitting some multi-year highs today interest rates which will be our topic here today as well as medals i saw on the chat someone asked if medals were available for trading they are i will review that in an upcoming session examples such as gold and silver being some of them also access to trading futures on currencies as well as on the agricultural area of the market likewise as we know with equities different companies sectors different indices more leverage or potentially more leverage as far as with futures on how they're calculated uh so a little more capital efficiency as well not only with that margin as far as being able to lock up a relatively small amount uh to control something of greater value now that can cut both ways there are certainly risks to that another attraction is 24 hours virtually 24 hours a day six days a week as a future started trading uh last night uh particularly on the equities market whereas on equities themselves are available during regular trading hours there is some after hours trading um speaking of trading no pattern day trading rule when it comes to futures that's not an endorsement uh of uh day trading but rules are different uh versus on the equity side one has to maintain a certain amount of equity uh as well as uh you would otherwise would not be able to trade uh more than i believe uh four times in a five day rotating period now expiration this is uh where we need to get a better understanding of some of the different options contracts as each contract is different so we under want to understand what some of the uh contract specifications are as well as what occurs uh with an options contract at expiration uh as well as potentially an underlying futures contract if one happens to have a position in that as well and that's going to vary and we'll talk about that so let's go ahead and continue here now let's go ahead and talk about some of the different contract specifications uh when it comes to bonds uh bonds basically are going to have a standardized contract that's going to be tied to a particular size as well as a a particular duration so we're going to see futures and futures options that cover the bond market over multiple durations some from a relatively shorter term and some going a bit further out also the quotations on some of these contracts may be a little confusing one of the few instruments that are still quoted in fractions and some of you may be familiar with that from years gone by uh so let's start off with the 10-year futures note which is one of the more widely uh traded instruments on the future side that's out there uh each contract is going to start off with a multiplier so that's kind of pointing towards our leverage and uh notice the leverage is going to be one thousand dollars times whatever the premium is for that contract uh the tick size uh on the option is going to be quoted in 64. i believe you'll typically see like a little and i'm i don't think tilde is the right name but you'll see a couple little hashes multiple hashes denoting uh that 64th and based off of it being a thousand dollar multiplier that translates into 15 uh dollars and 62 cents per tick on minimum tick fluctuation so that could be a sizeable amount uh over uh a larger price move those trading hours between 5 p.m 4 p.m uh central time sunday through friday with some minor breaks uh also what differs on futures is you may have very sent varied settlement time ranges uh in this case a 10-year bond settlement is around 2 p.m central time that's compared to for instance equities you know typically closing at around uh 4 p.m and as far as with the futures i believe settle in about 15 minutes uh after the equity market close so various times here now also we need to be conscious of the end of trading in this case these are american style options which basically means they can be exercised at any time as well as a sign now it's going to show here 4 p.m on the last friday which precedes two business days the last business day of the month proceeded in the options month this always seems to come out to be a little confusing okay well how do we calculate that uh it's not as necessary to calculate that where we can go ahead right to the thinkorswim platform go to the trade tab and we'll bring up forward slash zn as we bring up forward slash zn you can see the underlying contract uh in this case we're looking at june expiration 42 days out and then you can see the options that are tied to that and many of these options are tied to the underlying being the june contract so you can see zn znm22 notice here in brackets are going to be the days to expiration uh so as far as understanding when it expires you can go ahead and see just like on equity options the number of days expiration and manage accordingly okay all right let's go back now what occurs at settlement well with an option an option may exercise and results in a position in the underlying futures contract now that may not be a desired uh event there because keep in mind as we go back and take a look at in this case zn m22 which is a june 10-year contract if i click on the drop-down where i have forward slash zn is we can go to futures and we can also see under zn uh there's the tick size uh which is in uh 64.
actually i think it's 30 seconds actually on the underline uh there's a tick value 15 and 63 cents and then there's the margin required uh for trading that instrument now that's not the amount that uh the value of the contract but it's the amount of equity that's being tied up that can be more significant if price moves against you which may require a margin additional equity to maintain that position whereas what we'll be talking about today in case of the option we're talking more about a little more defined risk okay all right so with that in mind also another way of viewing some of these uh contracts on the thinkorswim platform is if you come up to believe the analyze tab click on that i'll make sure we plug in forward slash cn the 10 year and then go to the fundamentals tab which is up here at the top we'll click on that and right there we can see some of the contract specs for the underline for forward slash cn there's a multiplier there's a tick value now note says the settlement as far as the underlying is physical uh now many of these contracts would uh potentially settle uh in the underlying commodity or instrument that's tied to that however charles schwab td ameritrade does not allow a physical settlement of these contracts so it requires the trader to close out if they have an underlying future contract not the option but the underlying future contract would require them to close out that position prior uh to expiration and usually it's within a couple of days of that expiration otherwise the broker may force liquidate that contract uh to prevent uh that uh physical settlement there now there are other contracts that may be cash settled uh which would be different uh but uh in this case just like we've learned with some of our options strategies is looking to manage those trades and closing them out typically prior to that expiration to limit the risk of uh assignment or automatic exercise uh if it is uh uh in the money okay all right so we got that down let's go ahead and uh continue on and we'll go ahead and we'll get an example trade going on today now the other thing to consider too is options may have contrarian instructions so clients may get assigned on one option and may be abandoned on another option so do not rely uh if both options are or looking for a an automatic exercise or or an assignment there's no guarantee that that'll occur uh nor is there a guarantee that one option will offset the other hence on looking to close out these positions prior to expiration okay now go through and bring up uh some of the other durations that are out there as well such as zb forward slash cb which is the 30 year you can make note that a lot of these contract specifications as far as multipliers settlement ranges end of trading are going to be very similar as we look at some shorter durations there's a five-year note now notice some of these may actually be in a uh a smaller fraction uh of a tick size and this is usually going to be common in some of the shorter durations uh where they may be quoted in even smaller increments and may even be a little more leveraged in some cases now the five years basically quote in half of a fraction of a 64th and then there is the two-year note notice has a 2 000 multiplier and is also has a tick size uh in a half of a 64th now other ways of learning more about these contracts is via the cme group cmegroup.com also if you go to td ameritrade.com forward slash futures you don't even have to log in but tdmeritry.com forward slash futures i'll actually push this into the chat for those that are with us here today and those you that are listening the archive session uh you can obviously go to that link uh go to available products up at the top uh once there you can scroll down see the future product links we're talking about interest rates we'll click on that and you can see uh not all inclusive but kind of a snapshot as far as the symbol if there are options that are tradable not necessarily all futures have tradable options available via td ameritrade and charles schwab a lot of that may be due to liquidity or lack thereof there's your multiplier there's a minimum tick size the settlements again if you see physical settlement those positions need to be closed out uh prior to expiration on the underlying if you have an underline along with those trading hours okay well let's go ahead and talk a little bit about some of the impacts uh as far as with interest rates and uh obviously it's a sensitive subject out there as you know with inflation and rise in interest rates uh the cost of money uh is more expensive and that's also translating into uh more expensive things across the board uh but uh and as we go ahead and look at some of these events you can see what how some of these can impact interest rates and a lot of it's going to be based off of economic strength when we have a more of a stronger economy one may see pressure on uh bonds to possibly drop uh as there may be more attraction into riskier assets such as equities um however uh bonds may rise with equities as well if there is more of the fed supporting those interest rates by keeping those interest rates down now we realize now that the fed is not as accommodative uh taking more of a hawkish move on hiking interest rates and with a hike in interest rates or rise in interest rates that would have pressure on bonds themselves to drop more of an inverse relationship okay likewise with inflation reports such as the consumer price index ppi which we've seen come out the previous week they were you know still on the high side although some speculating that we may be seeing a peak uh in that uh basically a greater uh you know demand for goods may continue to put pressure uh on the fed to basically raise rates and again rise in rates will have a negative impact on on bonds and so here's some of those considerations for those treasury futures options now what we're going to do is basically do an example of a defined risk option spread utilizing some of these treasury futures options and part of it's going to be speculating well what is the thoughts over the next maybe 20 30 days if interest rates rise treasury futures decline in price so if we're looking for those futures to decline in price then one's idea is that you're expecting those yields to continue to rise over the period of the trade however if one's expecting that the interest rates may fall over a period of time then one may be more bullish on those treasury futures looking for those treasuries to rise in price as we already mentioned those futures can be impacted by economic reports and monetary policy treasury options on futures are american style so they can be exercised at any time very similar to uh one may experience on the equity side and again ari kind of pushed as far as the links on getting more specific of those option strategies now let's go ahead and bring up the thinkorswim platform and go over an example here today and so let's start off with the daily chart and we'll take a look at forward slash zn as we can see the trend of this 10-year treasury note has been to the downside now if we look a little more closely at it and some traders may look at this as an example of you know trying to catch a fallen knife but we did have a low from last week and even though we hit kind of a three year high i believe on some of the yields notice we're seeing prices come off of those lows here so is this a potential base that may be forming you know over the next you know 20 to 30 days uh is one expectant you know that bonds may get a bounce and possibly at the very least a counter rally after selling off well off going back to the summer of last year okay we take a look at from a longer term perspective it may have to go a lot longer term you know here's what we've seen uh as far as with bonds going back uh 15 years going back to the great recession bonds have overall been on a a bullish run longer term but we can see that being challenged as we can kind of see where some of the lows were from back in 2019 and kind of break in kind of back down in that range now some traders may have uh bullish traders probably would have liked to have seen in this case this 50 percent retracement uh hold which is kind of going back into the base that we had from the bond reversal back in 18. so we are kind of breaking a little bit below there now it is earlier in the week as well we uh last week we had a little more of an indecision and starting this week we're kind of inside that previous week now again a little more contrarian but you know maybe seeing a little shift in momentum as far as with the macd let's go ahead and go to the daily chart and even on the daily chart you know we do have what some traders may refer to as a bullish divergence at the downward momentum has slowed down now that may imply a base foreman it could just be a brief pause before bonds take another leg down or it could potentially be the beginning of potentially a shorter term reversal i mean all those are potential options there now let's say we wanted to do a practice trade we're looking for uh at least price levels to hold and potentially trade higher you know let's say getting back uh into the range where we saw towards the end of march that would push basically push us into around the 121 122 area so let's go ahead and do an example of a defined risk trade and we'll do a long call vertical uh long call vertical is basically looking to uh be long one contract and then we're gonna sell another contract uh preferably where one believes that the price action may be trading up to uh that would be a defined risk which is what we pay for that spread and then the maximum gain would be achieved if the price is trading at or above that short strike at expiration let's go ahead and go to the trade tab let's bring that up and let's say we'll go and we'll look at 30 days out we'll go out to june then we're going to scroll down and we're going to look at an option uh that's uh slightly uh in the money uh in this case we got the 119 strike now you'll notice here's the quotes here and notice it's showing 1 uh i believe that should be uh 42.64 and again with the quotes you know how many dollars are being tied to that remember it's a multiplier of a thousand you could simply click on buy and confirm and send that'll tell you how much equity is being locked uh as far as the cost of the trade in this case sixteen hundred seventy one dollars plus transaction fees now this is an example of a long call now if i go ahead and minimize this let's say we go in we look for a strike we believe the price may be trading above at or above in the next 30 days uh mentioned about the 120 here's 121.
so if we go ahead and we take a look at let's say the 121. i'm going to hold the control key and i'm gonna hit sell so we're long the 119 sold to 121 long call vertical going from 119 to 121 this would be a bullish trade notice there's the debit which looks like comes closer to about a thousand dollars right on the button there so if we were able to get filled at this debit this would be the risk on the trade now what's the maximum game pardon me no part of me there for a sec uh what's the maximum gain maximum profit is going to be a thousand dollars so it's kind of like a one to one however notice the break even is at the 120 mark so we don't have to go all the way to 121 for the trade to be profitable if it's above 1 20 minus any transaction fees this would be a profitable trade now what we can also do from profit management is if we're able to capture about half of that maximum gain at any time let's say 500 we may look to possibly close out that trade sooner particularly if we do more than one spread i'm going to do two spreads for this example so if we hit confirm and send risking about two thousand dollars to make two thousand now when i looked at this prior to starting it was actually a higher reward risk because bonds were a little bit lower earlier in the session but notice a define risk define reward i'm going to go ahead and we'll send this one through see if we can get that filled and notice we did get that filled as an example now let's go ahead and take a look see what questions you have here and then i want to show you some other tools so we can go ahead and look at some of the uh events that may be coming up later this week as well as possibly over the duration of this trade here let's see here it looks like ken's been helping out on the chat taking care of those questions there i don't see anything that sticks out to address thank you ken all right let's go ahead and bring back up onto thinkorswim platform now if we go back to the charts uh one of the tools that one can bring up on the charts is seasonality if i right click on the chart and go to style and once on style you'll see a link that says chart mode so right click on the chart go to style go to chart mode if i click on that chart mode notice there's a link for seasonality so if i click on seasonality now you may see one or two different views uh usually by default let me just go and switch this back you may see something that looks like this what this is in green is showing the current contract zn and then in the other color here this is the performance of the 10-year treasury futures on average for the last five years so knows from a seasonality standpoint as an average the bias has been for you know the bonds to be a little more flatter to going higher now that's not a guarantee that that'll occur over the next 30 days if one wants to break this down a little more you could go to the gear up at the top and under appearance right next to the display we're looking at the average seasonality chart but if we have seasonality and go ahead and select yearly and average then we can see plots for the last five years there's a color scale up at the top i do apologize i am slightly colorblind uh once again for those of you trying to bring up seasonality you can whether right click on the chart go to style and go to chart mode standard charts is what we're looking at right click style chart mode seasonality another way again there is just go into the gear on the chart under appearance and then chart modes up at the top you can change whatever mode you want seasonality we're looking at yearly and average we'll apply that and then now you can see uh here's the current and then you can see over different years uh what that bias may have been and i believe uh four out of the five years were up with the exception of 2020 which would potentially make sense uh since the market had hit a low in march equities uh were picking up more inflows at the expense of some of the bonds there okay now again this could be applied to you know any type of future contract uh you know even on equities so would encourage you as you look at different futures contracts you know here's natural gas one can go ahead and look for different patterns over different periods of time all right it's going to bring up forward slash zn again again if i want to go ahead back to the normal chart we can right click style chart mode go back to a standard chart okay so that's what we got in there right now if we go back to the monitor tab and take a look at uh that existing position there it is right here uh we can keep an eye as far as the p l you can simply go to the gear on the chart here or on the monitor tab click on that gear and let's go and look for p l percent double click on that and we'll move that up on the list here you can left click and drag this will keep track of the p l and on this spread you know if we're able to get about uh 50 percent of what we had put at risk then that may be an opportunity to scale out of this trade the other consideration is well what if we do not reach a profit target well then we'll look at the number of days and just as we've learned uh in uh trading spreads on equities is uh we're typically looking in less than 10 days once we get into that 10-day window is to possibly scale or close out this position and whether limit the loss or take whatever gain is there if we're not moving closer uh to that maximum gain okay so some will be keeping an eye on uh in the coming days and weeks i also point your attention here's the hedge that we did last week with forward slash mes which had worked favorably if we go ahead and look at the chart on the s p futures right now so we did slide back over this last week as we were talking about there may be finding some support uh at the previous resistance so we're seeing a little bit of a doji going on it stays like that traders would call that a dragonfly doji uh if traders are making the assumption that uh prices may bounce and continue trading higher uh then the consideration may be to remove that hedge uh however uh we are in the midst of earnings if we uh see some other catalysts that may push it down uh then we may look to hold on uh to that uh uh practice hedge there so we're not really seeing a key reversal one way or the other to point towards that let's go ahead and take a look uh at some other things and we'll round things out on the day here let's make sure we're on track on what we said we were going to cover here today so we're going to talk about some of the characteristics of interest rate futures options we've applied an example of define risk options spread and talked about some of the entry exit and trade management techniques we also did some proper position sizing there with uh 2000 uh on this account that's a relatively uh smaller amount okay that comes out to be in uh risk in uh what about uh less than a half a percent uh if that of the account uh let's go ahead and take a look at some of the other events that may be tied to that bear with me for a second here let's go and bring this up here uh let's see go ahead and have to go and log back into td ameritrade.com so we can actually bring up some of those events my apologies here we're going to bring up some of those events for the rest of the week here we're going to go up to research and ideas calendar as we go and bring up the calendar we're going to go ahead and bring up uh under earnings you can see some of the major companies that are coming out this week there's bank of america i'll be interested to see where jb hunt on the transportation side has to show some of the spot rates on deliveries have been dropping that can impact a lot of the trucking companies and may also point towards uh some potential slowdown there we got netflix coming out this week ibm starting to see some of the techs coming out tesla's coming out on wednesday so we're just getting started here a lot of the financials came up uh late last week uh as well as beginning with this week with bank of america you see some steel companies coming out with new core whoops let's try one more thing here and coming out on friday american express so just getting started a few of the benchmarks they're not not as necessarily heavy uh this week notice as you get into next week you can see quite a few more companies coming out and continue building here so probably not expecting as many big catalysts with our example here today if we go ahead and go to economic events at least known events if we go to economic events and take a look a little lighter on some of the news here we we had our gauges for inflation last week but we have housing starts mortgage applications jobless claims and a pmi may be one of the ones that maybe have a greater impact later in the week uh going into next week durable goods uh this one would probably have a more of a heavier impact no pun intended on interest rates as well as with growth there those are big purchases we have consumer confidence so probably next week events are probably going to have a greater impact on interest rates as we'll also see gdp on thursday and let's go into friday and then uh pce personal consumer expenditures as i mentioned uh from some of these news here that's one of the bigger ones as well to keep an eye on so probably not as much of an impact for uh next week but the following week uh we'd probably expect to see potential impact on our practice position there whether to the positive or to the negative there would encourage to practice what you learn here today folks hopefully you'll learn something new as we went ahead and explored how one can go ahead and trade a defined risk trade utilizing if they wanted to trade interest rates or on the treasuries and we did an example on the 10-year treasury i would encourage the practice which you'll learn on the paper money platform and remember in order to demonstrate the function out of the platform we had to use actual symbols keep in mind td ameritrade does not make recommendations or a term suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility if you enjoyed what you learned here today folks consider clicking like i do appreciate it and looking forward to seeing you again later this week take care everyone bye [Music] you
2022-04-19 19:01
