Iron Condor on Index Futures Options | Trading Futures

good day everyone so from friday's price action strongly to the downside and a little more follow-through in the post markets uh friday as well as going into sunday uh as markets react to both the hawkish moves or at least talk from the federal reserve as well as from the ecb so where can markets go this week well volatility may have a tendency to be in play what if we go ahead and look for a potential defined risk trade that tries to see if prices may stay in a range however wide we'll take a closer look today on trading futures [Music] all right hey it's great to see those that are live with us today such as frank brenda tony rebecca and everyone else coming online uh let's see join my good friend pat maloney starting off the week with me uh as we go through this trading futures webcast do appreciate him joining us i believe he's covering down for a good friend ken rose i was taking a well-deserved vacation i believe he's took the trip up to uh alaska there so wish him all the best with this family there and appreciate pat helping out to answer some of your questions if i'm unable to get to them you can follow both of us on twitter you can see my twitter handle on the bottom of the screen throughout the presentation at j mcnichol underscore tda pats uh has his twitter handle in the chat at p maloli m-u-l-l-a-l-y underscore tda that's a great way to learn more about your instructors as well as learn a little more about the markets let's go ahead and take care of disclosures contents intended for educational information purposes only not investment advice or recommendation of any security strategy or account type futures are not suitable for all investors uh please read the risk disclosure that's provided for you here likewise futures and futures options train services are provided by charles schwab futures and forex llc those trained privileges are subject to review and approval not all clients will qualify keep in mind trading trading on futures margin increases your level of risk of market risk downside financial risk is not limited to the amount of equity in your account as charles schwab futures forex llc may liquidate any or all your positions at any time if your account equity drops below required margin levels uh keep in mind stop orders are not accepted on futures options transaction costs are important factors should be considered when evaluating any trade and the paper money application which are encouraged to utilize is for educational purposes only in successful virtual trading during one time period does not guarantee success of actual funds during later time periods mark conditions change continuously a stop-loss order will not guarantee an execution at or near an activation price once activated they compete with other income and market orders as well as options which some of you may be familiar with also applies in the futures market as well not suitable for all investors spread straddles and multi-leg option strategies often involve greater more complex risk than single leg option trades and here's our agenda coming up folks what we're going to do is uh we're as we've talked about last week we did kind of more of a broader overview of some of the different asset classes uh we'll go ahead and we'll take a look at the s p futures this morning uh it will be a bit of a tie-in to our discussion point today on some of the characteristics of index futures options uh how this may be a transition for people that are interested uh from equity options uh to options on futures utilizing some of the same strategies you may already know we'll explore some defined risk option spreads that'll be a topic here today as well as in some coming weeks as we look at some other asset classes that are tied to the futures market we'll discuss potential entry exit trade management techniques and some considerations uh for determining risk level and position size and you'll probably see that's going to be very similar to what you may have already learned and may already be applying when it comes to equity options so let's go ahead and bring up the thinkorswim platform to see how things are starting off with the market uh equity uh futures are down a little more of a continuation post-market uh last uh on on friday however we have been seeing kind of a bit of a base form in here as we're looking at forward slash es let's maximize this a little bit you can see the drop from friday a bit of a a gap in friday afternoon with some of the post market talk and we can kind of see we're in a bit of a range it looks like there may be an attempt to uh close this intraday gap there's a little bit of a stab at it or earlier in the morning after midnight potentially looking to see if it closes that up now whether we move into positive territory we shall see so traders may be keeping an eye on this range to see which way it breaks go back to that daily chart keep in mind long range candles can act as support and resistance looking at that midpoint let's go ahead under our drawing tools and take that fibonacci retracement we'll just utilize this as a bit of a ruler uh from the top of the candle to the bottom of the candle kind of look for that 50 percent level and we'll go ahead and we'll mark that there's there's a bit of confluence with the mid part of that long range candle and going back to the opening and closing range of the s p futures on the 23rd and the 24th respectively there so a potential if there's any type of counter move to the upside keep in mind how a broken support can also act as some resistance also got some fibonacci uh areas there as well we've discussed fibonacci and some of my other webcasts uh touched on it here too uh we basically have had a 50 retracement of the run-up from mid-july that was the low preceding the breakout of the trend and so a little bit of a focus today as bulls attempt to hold on to that we see some failures here you know looking at the next level psychological 4 000 some traders are keeping an eye on holding on a break below that we can see the potential on that next fib level which is around a 39 54 area there so a few things to keep an eye on if we look at some of the other indices uh this morning looking at the small caps similar price action although it looks like the small caps did fill in that intraday gap and we're very early in the market but backed off just a little bit there and let's look at the nasdaq forward slash nq nasdaq looks like it attempted to do the same thing a lot uh pretty much in working its way into pre-market and a pop there at the opening there so i may not be out of the ordinary or see a little more of a consolidation uh or a base form after a long range day as we saw a bit of a pause and again a bit of an exercise may want to look at is looking at the midpoints of some of these averages there correction midpoint of these candles as some potential resistance there all right let's go ahead and move on here okay so what we'll do is we'll we'll take some of that some of the technicals there and we'll probably broaden out things a little bit on the indices and then let's apply this to a little more of a defined risk potential trade on an index and like i said this is going to be a little more of a transition from some of you that may already be familiar with doing this on equities think about what some of the common equity spreads that you may have applied such as verticals both long and short iron condors even potentially calendars and diagonals there now what we'll do is we'll probably utilize some verticals here and doing a defined risk trade applied to some of the index options and possibly even make it a little more neutral within a bit of a wider range we'll see if we're able to construct that okay and let's go ahead and break it down a little bit more some you may be fairly new to futures but kind of making that comparison we started talking about this last week as we broke down those asset classes it's the access to different asset classes not only just indices uh which there's very instruments that we can utilize to trade stock indices but also in the energy market interest rates such as bonds yields have been ticking higher there we've also had a i believe the two-year yield is pushing three and a half percent on the heels of the fed there so traders may find some opportunities to do utilize futures of futures options to do that uh metals currencies agricultural these are all different asset classes will be covering down in the coming weeks versus on equities are tied to you know different companies as well as potentially different sectors as well and indices so more equity based futures may provide possibly a little more capital efficiency compared to other instruments there again you want to kind of compare those trading hours unlike in the equity options options on futures do trade virtually 24 hours a day six days a week that's a bit of a difference there there is no pattern day trading rule when it comes to futures however that's not an endorsement of uh day trading uh so less capital uh maybe uh less capital uh may potentially be traded but keep in mind uh as it comes with any method and and any instrument that one trades being well capitalized is pretty important uh don't uh look at margins as uh well that's the you know the minimum that i need to have to trade it is from a technical standpoint but you know having a little more of a buffer as far as equity uh to limit the chance for margin calls and liquidation uh would uh probably be important otherwise expiration uh keep in mind that these various contracts may settle uh differently compared to equities whereas usually for equities they settle in an underlying equity or if it's an index uh settles in cash futures will actually settle in an underlying futures contract or a cash uh itself that's usually going to be the same case with some of these equities here now it's important to note that the underlined futures contract also expires so what that means is for those of you that have traded options in the past between uh equities in particular an assignment or an exercise may result in a position or a short position in an underlying stock now that position may be maintained for a considerable period of time whereas when it comes with options if there's an assignment or an exercise a position in an underlying futures contract may be held which will increase that risk and that potential risk likewise that futures contract also has an expiration and sometimes it's relatively close to the options expiration and and it would require some uh effective and uh or at least some attention uh to potentially close out that position uh and that's a very important to work around these different expirations same with equities to make sure we manage those trades particularly in the last week going into expiration all right so there's a breakdown those comparisons folks get into some of the instruments forward slash es which is a common index that we have looked at focuses on the s p 500 futures the cash index that many of you may be familiar with uh each futures contract is going to have a multiplier so in the s p as when we were doing a lot of the technical trading uh fifty dollar multiplier now there is a micro contract uh that is five dollars one tenth of the value so keep that in mind so one has some control over a type of leverage that they may be interested in working with the tick size which are quarter points and when you have a fifty dollar multiplier that's about 12 and a half dollars per quarter point and you can see the breakdown on options that are priced lower uh maybe a nickel again keep in mind that multiplier talked about the trading hours you know essentially 24 hours from sunday evening into friday afternoon and make note although this is within the range of what we've saw with the equities market the daily settlement about 15 minutes after the equity close when we look at some other futures contracts going forward these daily settlement time ranges can vary now if we take a look as far as the end of trading notice there are different styles of options here uh american options uh the standard months which expire on the third friday of the contract month american style means those short options can be assigned at any time however there are weekly as well as end the month options which are european style that would refer to those options can only be exercised or assigned at expiration so if one's trying to avoid or mitigate us the risks of early assignment albeit not likely it can happen one can look at some of the european styles keep in mind liquidity is important as well and a consideration and make note that the settlement at expiration the option exercise results in a position in an underlying cash settled futures contract oh i skipped to the nasdaq one let's keep it on the es for slash es so as an example if we go back to the platform here and let's say theoretically we had done a spread and we'll make that theoretical inaction here in a few here uh let's say forward slash es see if we can find it here here's forward slash es notice the underlying futures contract has a requirement initial margin of eleven thousand dollars now when we take a look at some of the spreads you know one may only be locking out locking up a few hundred dollars uh in that spread as one option the uh the right or right offsets the obligation but if there's an assignment that occurs one may have to take some action such as closing out that futures position to basically reduce that risk on the trade otherwise if one maintains that position they have to recognize that they're going to be tying up a lot more equity and the defined risk in the option would go away or potentially go away at least after expiration okay all right there we go there let's go back to the slides some other instruments forward slash nq which is for the nasdaq 100 similarities on the characteristics uh as far as trading hours daily settlement end of trading make note of the multipliers in this case a 20 multiplier for the nasdaq and you can see that translated into the tick size looking at forward slash rty which is the mini russell fifty dollar multiplier similar to the s p uh however small caps do have a tendency of being a little more volatile than the s p and you can see again as far as with the contract specs very similar across the board now notice uh there was no ym now with the information i brought up for you that was kind of more for informational purposes kind of trying to bring things up in one area but as we've showed in previous sessions the great way to get the latest and greatest is go to td ameritrade dot com forward slash futures let's go and bring that up i'll go ahead and i'll copy and post that into chat for those of you that are live for those who listen in the archive session you can go to td ameritrade.com forward slash futures don't even even need to log into the platform and you'll see some helpful links everything from educational resources some considerations on trading futures and likewise as you go ahead and take a look at some other things such as available products and scroll down a little bit you'll go ahead and see which contracts are available for trading and which ones are optional uh missing is the is the dow um as of right now uh showing that there are no options available for trading on the dow now uh without confirming this this is tradable option so technically there may be options uh available for some of these contracts but td ameritrade uh does not allow trading on those instruments at that time a lot of it may be tied to liquidity but there have been some additions uh on the micro side for both the micro nasdaq 100 there's nothing on the micro russell but there is also options available on the micro s p which is a five dollar multiplier and on the micro for the nasdaq it's a a two dollar multiplier keep in mind uh when it comes to some of these newer products as well keep an eye on liquidity and also with the smaller size and less leverage uh that can impact the returns can potentially be impacted with the commissions that can add up all right okay so there's a breakdown there are those different contracts now some of the considerations uh and we've talked about this in the past keep an eye on economic strength and conventional wisdom things are slowing down inflation going higher uh the fed the ecb are in a bit of a pickle on they know they need to raise rates to slow things down and that may risk a recession and the market is potentially trying to price that in now and looking at other things that are tied to growth such as retail sales durable goods you know we've seen some numbers come out on those that have been some good some mixed uh interest rates in the forefront likewise there's inflation and some of the reports that are tied to that with more recently uh comments coming out of jackson hole now if we want to go ahead and drill down as far as on those economic reports see what may be coming up that may impact our practice position on the day go and log in and see if i can whoop let's try one more time hope everyone's enjoying their day even though it's a monday it's another week there we go all right under researching ideas go to the calendar as we look at some of the reports now this is not necessarily uh all-inclusive of events but if we come over here to the far right click on economic events you can scroll down and then go day by day on those events uh not much news at least on this calendar here today if we go into tuesday going to get consumer confidence uh housing is something that impacts the economy as well as people feel a little more richer when their houses are more highly valued and less so when their prices drop and we'll get job openings as well see if the companies are scaling back on some of their hiring going into wednesday there's a pmi some employment changes crude inventories which are a little uh a little more sector based but can have some impact on the markets as we go in the latter part of the week probably not as intensive as we saw from last week and and pat if there's any other uh information that uh may uh be coming out this week that you're tracking let us know on the chat it looks like a lot of it's going to be tied to labor and employment this week there is the ism manufacturing index construction spending as we go forward factory orders so very much more on the employment front this week you can also go ahead and look ahead on things for next week and we're still probably going to be probably about another three weeks out before we start seeing some more inflationary numbers coming across the board all right let's go ahead and go back here now some of the considerations for index futures options is if you're already trading options on equities you can use some of those same strategies for options on futures index options on futures can be american style european style as we discussed the latter can only be exercised upon their expiration and as i shared with you as far as those specifications for the contracts and we'll be reviewing them some more on other assets td ameritrade.com forward slash futures likewise the cme group.com for even a deeper dive would be warranted to learn about some of the other contracts that are available let's go ahead and go to the thinkorswim platform we'll bring up forward slash es now you know as we go ahead and look at the daily chart and sure there's probably varied opinions both bullish bearish and neutral and one can probably make an argument across the board you know we we did have uh at least a strong counter move bear market rally uh breaking the downtrend that we had saw going back to the beginning of the year prices have sold off uh considerably from the more recent highs if we go ahead and measure this see we can go ahead and get a diagonal line and we've seen a pullback of about six and a half to seven percent uh since uh mid august you can also see as i made reference earlier a fibonacci retracement at least from the low preceding the breakout 50 percent retracement that's fairly common uh in different trends although stronger trends may pull back a quarter or a third uh 50 percent kind of more tough the dow theory uh is not out of the ordinary the 61.8 level

may be a potential make or break point that's below that psychological level as we mentioned about 4 000 and as we mentioned at the very least you know markets just trying to regroup after a dramatic drop on friday but going further out you know let's say one was speculating that things may be a bit more choppier as we go in october and kind of be in a holding pattern for next earnings or seeing what the uh the fed is going to be doing believe the fed is kind of uh markets are pricing in i believe uh about another point and a half or point and a quarter going into the end of the year uh that's that's been fluctuating pat if you have any additional information on that let me know uh but you know notice this for far as we're seeing the price right now uh you know going back into may you can kind of see that range here uh what if price was just happened to be a bit more choppier over the course of the next you know 30 to 50 days you know can we go ahead and construct a little more of a neutral strategy limited risk uh that may generate uh some income or a credit to do that that would be an example of an iron condor so i'm going to do is go to the trade tab here even went ahead and constructed one prior but let's go ahead and piece one together here uh going out as far as different expirations uh notice you can see examples of those weekly options in the month which are european style the ones that are the standard months which is the third week for instance october uh third week of october uh this one is more of a standard contract and would be american style traders may go ahead and look at things such as volume and open interest although we'll take a look at the spreads and this is not a recommendation on futures indexes versus other indexes that are available but since this is a futures class we we will explore it but you can see you know not a lot of volume some open interest in some cases some relatively larger open interest here not sure if there's a problem here on the call side but looks like more open interest on the put side here although if we go a little bit deeper we may see some on the calls as we look explore some on the weekly side so one of the considerations if one's trying to avoid uh trying to avoid potential for an assignment they may look at the weeklies but one of the concerns can be as you go into some of these possibly even worse on volume and open interest and spreads may be a bit wider here as well for instance if we just kind of go to let's say kind of more at the money and those here a bit better i was probably a little too far away there with 32 days out we can see more activity as far as with open interest and as well as volume spreads a bit smaller uh we got about a dollar a 75 cents to a dollar you know that's less than 10 percent of the ask price there and that's for the end of month going into september if you go uh out to let's say 53 days on the standard month scroll down there there we go notice the spreads here at least you know looking at closer at the money somewhat similar there so it's really a matter of choice as far as time and again if one is trying to avoid the risk of an early assignment we may go ahead and look a little closer in so let's say we do go ahead and take a look at one of these other ones i so i think we're looking at there's the end of month let's go out in the first week in october how they're looking spreads are kind of similar here let's say we go ahead and we take a look at we'll look at those 32 days now you know one of the trade-offs here too is if things are whipping back and forth some traders may wish to have a little more time if one side gets threatened uh there may be more time for the price to back out of that also if one's not concerned about assignment you know they can potentially close out the position they may still stick with more the standard contract i'm still gonna i'm gonna go out the 53 days uh you know based off of the difference between uh these these spreads here and you did want to kind of push things out into the october time frame i'm going to go ahead and switch this to the greeks we'll bring up delta gamma theta vega and kind of a similar application on what some traders may have done with iron condors is we're going to take a look at out of the money call spread as well as an out of the money put spread and let's say we go out closer to that 20 delta i believe earlier i was looking at the 4310 notice uh the difference between the bit and the ask are fairly tight only about 50 cents now keep in mind that's a there is a multiplier involved with that so it's more than 50 cents but the quote is uh relatively tight there i'm going to right click here and i'm going to do vertical so we have an example of a call vertical and notice that spread would be reflected in the difference between the natural price which is the market price versus the mid price which is in between so if one was just bearish and they believe that the price may stay below 43 10 between now and that option expiration then they may consider a trade similar to this let's say we go back to the trade tab and look at the put side and do the same thing we'll go out to again somewhere around a 20 delta there uh prior to the session i did have some 20s that were i believe at or below the 3700 which could be a psychological area uh we'll still focus on that i'll do the 3710 3700 i'm going to hold the control key and then i'm going to right click and do cell vertical so we have here is we have ten dollar wides on each side uh there's a potential credit although one may need to uh try and come a little more closer to the natural price i will let that continue to be dynamic here now i'm going to right click and we're going to analyze trade it's going to go to the analyze tab i'm going to go ahead and unlock the price and if we uh go ahead i'm going to reset this here next to the plus sign we can go ahead and select set slices to break even going into that october expiration some reason this date normally changes i have to usually come back up here and change it go without going into uh that friday expiration uh you can see the probability of a break even a little more than uh 50 percent some traders may look for that to be a bit higher but you can also see the probability of being relatively low of being whether above or be below uh the put short put strike or the break even i should say and a 26 probability of being above the higher end or the higher break even so expectation as far as profitability is that prices kind of may chop back and forth potentially between this range now i'm going to go next to the plus sign here again where we did the set slices to break even you can also set the slices to the charts kind of bring in some of the technicals there so i'm going to click on the first box that's going to go and go to the chart and you can see what the idea is for the next 30-some days is the expectation that the price would stay below these highs now if one was bullish this may not be uh the trade but expecting that the price may just keep chopping back and forth in this range based off of where the current price is you know the call side maybe threaten a little more uh if there's a little more bullish bias there we may possibly look to manage that as far as rolling it another consideration too although we're just putting this all together uh some traders may look to lag into a strategy like this like when price is backed off of that resistance they may consider selling a call spread and then when prices pull back possibly a little closer to a support area may look to sell the put spread and kind of lay it in uh to that range there okay and then no one knows for sure on where the market is going to go but that's based off of that idea now let's go ahead and position size this if i hit the confirm and send we'll see with one contract there's the break evens here's the potential maximum profit there's a potential maximum loss now we'll position size this to that potential maximum loss let's say we're willing to risk a thousand dollars we should be able to do this three times we'll do that three we'll hit confirm and send so there's a potential gain there's the potential loss now keyword i say potential uh because remember uh if there's an assignment or if someone allows the spread to go into expiration there's also potential for an exercise that can result in an underlying futures position now this one's focusing on the december contract uh e s z so if we did have a position in december contract one could potentially close out that position uh keep in mind that expiration is in december so between october versus december at least we're not right up on that expiration now notice as far as disclosures there and i think i already explained that does not reflect underlying price moves below zero uh that's kind of tied into with crude prices earlier uh last or in 2020 i believe also we have a non-standard option since we're looking at a weekly we already discussed how liquidity can have some issues at times and then again non-standard so a little double disclosure there i'm going to go ahead and we'll send this one through now notice that did not fill right away your results may vary with that remember when we had put that through and let's see if we can bring that up i'm also up well before i said anything looks like we did get that filled we'll see that under filled orders here so it looks like we got a a 4.25 credit now keep in mind the multiplier notice right here on the symbol there's the 50. now you take 425 times 50 that was the credit that was sold four dollars 25 cents times five zero that's a credit of 212 50 times three since we did three contracts at 637 dollars and 50 cents now also keep in mind i was a bit remiss we cannot uh forget this as well remember transaction costs are part of it notice with those contracts it's a multi-leg option so we got four legs times three that's twelve knows those commissions can add up and should be a consideration when you compare the credit received here this is a relatively small amount compared to that credit there's our net credit of 601 dollars and 50 cents all right so we went in we got that through folks let's see if we cover down on the things we said we were going to cover down to we went ahead and did a little transition from equity options into futures we went ahead as well and explored some defined risk options doing an iron condor talked a bit about the entry now uh as well as trade management on our initial entry now as far as the exit one of the considerations uh would be just managing the spread as we would some other transactions here now let's see if i can go ahead and bring up the trade i forgot to go to my futures example here let's move this to our futures account or a futures group i should say and let's see here for some reason where did it go i'm going to go and take a closer look at it later up there it is let's move to group the futures options go bring that up all right so as we go ahead and we take a look at that iron condor we can go ahead and post a p l percentage p l percent looks like i already actually have it in here but we can go ahead and move that up in the list if we're able to capture about uh eighty percent of the maximum gain on each leg uh that we may look to go ahead and lay out of the trade for instance let's say if the price drops and the put side increases depreciates we can buy that back for a cheaper credit notice when you go to create a closing order you have a few combinations here as far as closing out whether the call vertical or there's the put vertical and you keep track of those quotes now we'll continue managing this over the course of the coming weeks remember we got about 53 days on this trade and so if we're able to eat uh heat if we're able to meet hopefully we're able to eat a little bit later if we're able to meet our profit objectives then we'll look to close it out at any time now if we don't meet our profit objectives we're going to be keeping an eye on the time similar to equity options and look to close this out in the last week to expiration now if we see a major move against one of these spreads we may possibly look to roll the option if we're able to do it for a credit kind of give us a little more of a breathing room now let's go and see if anyone has any questions or final thoughts before we close things out uh i do not see a survey coming through today folks but if you did enjoy what you learned here today would consider you having click and like that'll let me know you enjoyed the presentation there's also a comment below and uh yes agribot yeah it certainly looks like as an example volatility is still probably going to be in play here as the market tries to figure out going into the next earnings season and what the impact is on earnings likewise the actions that the fed takes on top of what they've already talked about and then nevertheless uh emerging issues in europe as well great yep so no survey so you go ahead and click like whether you're here live or listen to the archive session i do not see any additional questions there but it would encourage you to practice what you learn here today it doesn't necessarily have to be an iron condor but any type of defined risk spread on a individual futures index option whether it's an iron condor as we did today maybe it's a short vertical maybe a long vertical if you want to be a little more directional and these are things that i actually teach in my long verticals diagonal class every thursday uh at uh 11 a.m eastern time well let's go and let you go here folks and enjoy your day do appreciate your time as always and remember in order to demonstrate the functionality of the platform we had to use actual symbols keep in mind td ameritrade does not make recommendations or terms of suitability of any security or strategy through the use of our tools any investment decision you make in your self-directed account is solely your responsibility thanks for being with us here folks we'll talk to you again real soon and i saw a little alibi there uh eddie as i mentioned uh we'll be taking a look at that last week uh last seven to ten days expiration and we haven't met our profit goals to close out the entire position all right thanks everyone have a good day now bye [Music] you

2022-09-01 20:09

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