Trading Futures | John McNichol | 6-7-21| Asset Class Review & Hedging

good morning everyone john mcnichol here and welcome to trading futures what we're going to do is we're going to take a look at some of the different asset classes here at the market open as we start a new week and we'll also discuss hedging with index futures so stick around [Music] all right hey do appreciate those yeah live with us today such as vd vj sandeep david shree charles jenkins radio wayne krishna and everyone else uh we got ken rose sami is with us too we have ricardo and ken rose is helping out on the chat for any questions i am unable to get to um apologies those you that are here live as uh you know some software updates uh just want to do them when they like to uh but uh no impact here as we're starting off the week with tda education td ameritrade education special shout out to those you listening to the archive session as you can see my twitter handle on the screen at jmcnickel underscore tda if you wish to follow myself along with other fine instructors such as ken rose let's take care of disclosures folks and we'll get into our discussion here today presentations for educational purposes in order to demonstrate the functionality of the platform we're looking at actual symbols keeping 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 futures and futures options trading is speculative not suitable for all investors if you and those trade services are provided by td ameritrade futures and forex llc those trained privileges are subject to review and approval not all clients will qualify options as well not suitable for all investors please look at the risk disclosure uh provided for you for characteristics and risk of standardized options transaction costs important factors should be considered when evaluating a trade and we encourage you to utilize the tools such as the paper money software to practice what you learn however it is for educational purposes and successful virtual trading does not guarantee successful investment of actual funds during later time periods market conditions change continuously all right and here's our agenda we'll take a look at the market open uh reviewing some of the asset classes see if we're seeing any shifts there and we're going to go ahead and utilize index futures as an example for hedging an account uh let's bring up the thinkorswim platform uh point your attention over here to the right let's see if we can get my drawing tools reset here as well i thought i got everything configured here is i had to do a last minute uh reset and there we go if you wish to follow on twitter there's my twitter handle at j mcnichol underscore tda this is part of the trader talks channel here so if you enjoy what you're learning uh make sure you click subscribe and more importantly for this video click like uh the the chart that you see here there's the code for the shared chart i have on the screen and as we look at some of the indices uh certainly the talk of the town is uh the s p is very close to those uh all-time highs there you know kind of dancing around that area as we can see kind of on the daily chart opens up from sunday evening you know kind of hanging around that area there and as we look at some of the intraday uh activity on the five-minute chart let's go ahead and maximize that you know price action continues to be uh bullish uh from uh last week not a big move in the market but all the major market indices uh were up positive uh notice again you can see we're kind of dancing around uh some of those highs some traders may look at this as a you know kind of a cup or potentially for a cup and handle and looking for a breakout outside of that range there prices are above the weekly pivots as well as on the daily pivot starting the day so we can kind of get an idea of the lower range uh for today and a potential pivot if things do not uh transpire as much to the upside uh with some of the news uh you know coming out this week we do have uh you know a bit of a fed talk some central bank action not necessar in the us but between canada and the eurozone uh that could give some insights we are going to be seeing some inflation numbers this week uh as well on this the uh consumer core interest rates uh as well as a consumer uh confidence uh at the end of the week there so you know we may see a few things go back and forth see if there's any catalysts for continuing to push that market higher if we look at some of the other indices so we're looking at forward slash mes which is the micro contract for the s p futures uh that is one tenth of the value of the forward slash es which charts the same just a matter of a different level of leverage there and if we go ahead and take a look at some of the other things here such as forward slash nq and looking at forward slash nq the nasdaq is uh still a bit off uh from their highs in april there and as we can kind of see at the opening kind of hanging around the higher part of this range for the last two weeks and traders may be looking for a breakout uh of this range if we switch to the five-minute chart and you can kind of get an idea of that resistance range and at least on the first five minutes kind of backing off of that at the opening let's look at forward slash rty which is for the small caps as you know small caps have been trading in a range for uh quite some time although they've been demonstrating some outperformance over this last month as they're trading up in the higher part of the range but we can still see that we're still settling in in that higher part of that range there some resistance there at around that 23 just a little bit about that 23 area there and if we go ahead and take a look at the intraday chart in the pre-market russell was kind of struggling uh down below both the daily and the weekly into pivots see an example of a kind of an inverse head and shoulders there so break out there kind of around the four o'clock hour at least on local time here uh as uh some of the didn't catch on the european markets but uh some of the asian markets uh were up uh in the overnight i think some by as much as about a third of a percent and i guess we'll look at the dow forward slash ym and the industrials much like the s p i believe the uh the dow futures did have a higher close and we can kind of get an idea some of that intra-day so that would probably uh lend if we were to look at the sectors uh possibly uh some of the industrials maybe doing a bit better here uh or some of the core industries we got real estate energy health care industrials on positive territory materials communication services and financials a little bit on the negative side now if you go and take a look at some of the other asset classes uh and you know a good guide for you if you are new to futures is go into the futures home website that is uh td ameritrade dot com forward slash futures i'll go ahead and i'll plug that into the chat for those of you that are with us here today and as we go ahead and uh take a look here uh education and resources how to start trading uh if you're uh considering futures uh some of the ins and outs and if we go here to available products we had just looked at some of the major market indices uh for the nasdaq russell s p and the dow you can see examples of both the mini contracts and some of them with a micro uh contract main difference is going to be in that multiplier uh where uh you know on the s p micro it's a five dollar multiplier per point uh we're as on the mini it is a fifty dollar multiplier that's going to be important as uh we're going to consider this on our hedge here in a few or an example of a hedge looking at some of the other asset classes and notice as we go through here too if one is trading options and we will be starting another cycle on uh on the options as well but you can see which contracts are optional if you want to do a defined risk trade utilizing some of the same concepts that we teach in the trading options course uh let's take a look at crude forward slash cl and i've been discussing this uh on not only on crude but on some energy stocks as well we can see a a pattern some traders refer to as a a cup and handle uh which is a bullish continuation pattern uh you know discussed on how on a daily basis that you know crude had been trading in a range you know in the uh you know high 50s to around the mid 60s here we did have a break over the last week as we're also hitting a high of about 70 uh on these futures if we go back a bit further there's the three-year chart there you can see we're already breaking above uh above the higher ranges pre-covet from 2019 and early 2020 if we go back even farther let's go ahead and bring up a longer term chart you can see we're basically pushing back in the ranges from back in 2018 uh here's around the mid 60s and here's around the mid mid 70s question mark is you know will we be easily trading up into those mid 70s we're kind of right around kind of the mid-range right now at around that 70 area so certainly an area to keep an eye on as far as driving demand as well as supply going into the peak of the summer travel season there look at some other areas natural gas ng gas has been uh a bit uh muted there although showing a similar pattern and uh you know also in the news uh with uh with natural gas you know potential impacts with uh uh and we can see a draw a little bit of a drop here in natural gas where uh crude's higher natural gas being impacted potentially with the uh biden administration removing uh some of the sanctions against russia uh on their north stream two uh gas line which is basically a big gas line going from russia uh direct to germany uh they already have one line uh they build a second one which doubles their capacity they're at 95 percent uh and this is an area that has uh not only economic but strategic uh complications as well uh as ukraine is a big producer of natural gas as well as the us and so there could be some impacts there as well okay uh so as we look at these different commodities these can also give us a gauge as far as the impacts of inflation as well potentially uh gold which we've reviewed in the past and did well with our spread trade to the bullish side after coming off on the bottom still trending up and uh as far as a reversal let's go ahead and bring this out a little bit more there's a longer term uh chart of gold uh you see utilizing a fibonacci from the low to the high uh of the previous swing gold had held that 61 retracement supporting that overall trend now if we're looking at it from a nearer term we can remove this and looking at this downward move we can go ahead and take that fibonacci tool draw from the high down to the low and notice we can see that 61 retracement from the downward side on kind of what the next leg up potentially would be for gold uh to see this uh correction continue to reverse traders would probably would like to see a break above that 1927 mark or so so something to kind of keep an eye on this week as far as with some of those inflation numbers as well as with fed action or fed speak on where that takes the direction of gold while we're here too something we haven't reviewed as much in this class but i believe uh ken uh who is helping out on the chat here today uh does have a webcast later in the week if we go to webcast calendar he also has a futures class which is on thursdays at 12 p.m eastern time futures basics and beyond i know he's uh chatted about bitcoin uh in the past as well if we go ahead and take a look at that under the available products i believe it was following under the index here yes i could have sworn i saw that there uh the contracts for uh bitcoin both the uh the standard contract as well as the micro contract now this is not to be confused with the cash index uh or the cash i should say bitcoin which trades 24 hours this one almost trades uh 24 hours pretty much from sunday evening uh going into uh friday afternoon uh with a few breaks there let me make sure i got that right symbol there mbt or you can look at btc if you're just trying to get a gauge for it now notice mbt has been trading as much since it's uh recently been introduced let's bring up forward slash btc let's go and take a look at a daily chart and we see bitcoin's been uh struggling a bit we can apply some of the no pun intended you know looking at some of the common uh technical analysis on applying uh support and resistance and that price action we see a bit of a squeeze forming that triangle there so looks like bitcoin may be looking for a catalyst one way or the other for that break whether it's dealing on inflationary front whether it's dealing on just overall speculation as uh you know a lot of discussion of bitcoin on social media with high profile people if we go ahead and drill down on some of the other assets here looking at the bonds remember rising bonds fall in yields fallen bonds rising yields we can see them over different durations let's take a look at the ten-year note forward slash zn we'll go ahead and bring that up forward slash zn for the 10-year and we can see how you know the bonds have been you know somewhat muted here uh throughout a good part of april as well as may there's a pretty good bounce on friday you know helping equities uh go higher as well which means i would put some pressure on the yield which would be tnx as an example of the 10-year yield and you can see the band for as yields and notice the inversion uh of that compared to the bonds so again another question mark you know is there a catalyst or does it need to be a catalyst for bonds to push higher yields to drop or vice versa or is this kind of a goldilocks for equities just kind of maintaining a little bit of a range there looking on the ag side from the grains forward slash z c for corn and we've talked about some of these grains in the past on on the big runs that they've had but notice uh may uh was not a great month for commodities as we've seen a bit of a pullback notice here on corn though a little pop to the higher side there and uh a similar pattern on materials as a whole on is this a kind of an inverse head and shoulders and looking for another run uh in some of these commodities there some of the news and reports this week could be a catalyst for that looking at zw those kind of same uh characteristics here on whether we're looking at a reversal here something to kind of keep an eye on this week uh on the grains and uh zs for soybeans you know a bit of a break and a pop this morning a little bit of a fade so we'll see if that settles down and kind of retests where that break was and then kind of rounding things out on the currency side uh currencies can be impacted this week with uh some of the central banks on talking about their policy there uh like i said i believe we're gonna hear on canada this week uh as well as on the eurozone uh two of the major ones that are optional is forward slash 6e for the euro and also the pound which is forward slash 6b so go ahead and take a glance at that so so far in looking at some of the areas it seems the uh commodities area on on the grains has been the one area it's been showing some signs on potentially breaking higher uh and then we also looked at crude as well um gold has a little bit to potentially move here looking at the pound again a similar pattern to what we were looking at on uh on energy and you know go figure you know energy is a big part of um of the british economy uh but another cup and handle as the pound's kind of settling up at some resistance there keep an eye on some of the reports this week to see what type of break if any we may see there let's bring up the euro forward slash 6e and we can see the euros have been on a a strong run from from early may a little bit of a consolidation here typically the euro does have a tendency of rallying and moving stronger when equities are stronger kind of more of a risk on whereas a dollar would have a tendency of being stronger so if this falls that would imply that dollar is stronger a little bit of a squeeze here reports coming out of the eurozone could be a catalyst on which way that euro breaks and then you know as far as these other ones here you know one may be able to take a look and get a uh some idea on how some other raw materials are doing some of these are not necessarily as widely traded and if you're interested in options uh do not have tradable options but at least give you an idea of different contracts like for instance in the news you know random lumber uh has been a big discussion as concerns with uh construction so we look at forward slash lbs lbs almost kind of looked like the euro there for a minute we can see that you know the pressure has came off over the last week even kind of gap down today but the trend still relatively strong so traders may be keeping an eye on this to see how that impacts uh that could also have an impact on possibly on real estate as well you know maybe look at home builders you know the price on uh some of that lumber uh maybe impact some of those builders there although it may take a little while for it to get in their supply chain but notice here again similar pattern uh on some of these builders that had sold off in may you know kind of question mark is this an inverse head and shoulders are we looking for a break uh outside of that area or is this going to be more of a continuation to the downside so a few ranges this week to be keeping an eye on folks let's go and take a look at the chat and see if anyone has any questions here again we'll move on to our hedging there appreciate ken answering those questions yeah vj mentioned about uh you know on the different schedule you know if we uh go up on the education tab and you go to webcast there once again that webcast calendar will keep you up to date on uh what's going on with some of the different classes and when they're being taught and also vijay mentioned about the technical analysis workshop so on our live events uh if one's on the education tab and goes to uh in-person events we're starting up the technical analysis workshop tonight i am the instructor so that starts at 7 p.m eastern time these are live only if you saw some of the techniques uh that i was applying actually let's go ahead and make sure we're sharing the screen there we go uh let's make sure everyone saw the webcast calendar but if we go to the education tab and go to in-person events that is where you'll go ahead and see the technical analysis workshop and again i'll be instructing that that is four evenings here 90 minutes each live only and if you're new to technical analysis uh this is a cam miss and if you're not new to technical analysis great refresher and a good opportunity to bring a friend someone maybe that you're mentoring uh on the markets there and uh give them a great introduction uh on the basics of technical analysis and how to be able to apply that okay and then if we go ahead and take a look let's see here question is on the s p futures es and related cash index do they move independently of each other well technically they do but you can go ahead and actually do a comparison chart uh if we bring up forward slash es as an example we can right click on the chart uh you can do it through your edit studies as well by clicking on the beaker and just do a comparison double click on that it'll automatically default to the spx anyway so we'll just go ahead and apply that and here you can see and overlay the cache index on the future so you can see on how they pretty much run in tandem if you want to apply the the candles you can right click edit study you can change that to a candle you want to compare those bar to bar all right great question there uh if we uh go ahead and let's go ahead and remove that example and sanuva says can we trade some futures uh you can certainly trade some futures if you sign up for them but let's go ahead and clear this out and we're going to take a look at our hedging uh one second here we're going to x out of that click ok let's take a quick glance one of the reasons i haven't placed uh or done an example of a trade setup uh for today is based off of some of the setups that we've discussed so just kind of a quick run through some traders may go ahead and fade going into the previous close and as far as that uh there was a fade going into that previous close i've been relatively quickly and it's kind of hard to go ahead and review that right at that market open uh likewise if the price gaps down in the overnight traders may look to trade into that previous close other setups is looking for a bounce at that pivot point we reviewed that i believe in a previous week and since we're a little ways away from that not looking at that example there one's looking for an example of a practice trade whether a may look for a bounce off the low range of the day and see if that holds or looking for a break uh above that resistance now since we are looking at the sap futures let's go ahead and apply this as far as in our hedge uh and i try to keep this simple uh by on the monitor tab on this practice account i just went ahead over on the far right and changed this to an old layout now you can configure this under the new layout it will just take a little bit of work to position um you know all your positions there or whatever ones you're trying to group but the old layout does is it gives us a view of um and for some reason it's not displaying the headers here uh where it'll go ahead and display the greeks uh up at the top where we have uh it looks like something's a miss here let's try this here one more time there we go um we have uh deltas gamma thetas and vegas we're focusing on the deltas here for our example today and as we look at all these positions here focusing on the deltas this practice account has a a delta long deltas of 28.33 now that's in dollars what that implies is if every one of these positions went up a dollar uh this would be the impact uh to the account about 2833 dollars but as you can see there's quite a few positions here they all have different deltas some of them are a little negative as well i mean implying more of a bearish position and if we go ahead and take a look at all these different positions i think probably a lot of people recognize that you know a stock like zoom is probably a bit more volatile in a stock like microsoft uh or you know a company uh that is tied into you know energy you know is going to be more volatile than a company such as in the telecom so we basically you know what i like to call a fruit basket where we got all these different fruits uh that have different uh characteristics and it's kind of hard to potentially get a gauge as far as risk to that portfolio unless we look broke down each and every one of these individual positions hence where the term of beta weight comes in uh which is a tool on the thinkorswim platform if we go up to the top here we have a link called beta weight and then we can go ahead and wait the volatilities of these various stocks to one instrument and a common one would be the s p 500 so we'll plug in spx okay with spx entered we can go ahead and see a list of these different stocks now notice these deltas have changed these deltas are now reflective theoretically on the volatility of the s and p so right now we have a long delta of 69 just shy of about 70. so what does that imply well that implies that if the s p moves one point or up one point go back to the daily chart you know right now the s p 500 is down about six points so that implies is the impact to the account would be six times seventy to the downside so if we do six times seventy to the downside six times 270 and that's 420 now again this is a theoretical folks because notice here this portfolio is actually down about 871 dollars you know there could be some news events spikes in volatility on some instruments you know that can certainly skew this so this is not exact okay now if we want to hedge our bullish exposure if one assumes that you know the market you know may struggle at those highs pull back uh you know looking to reduce some of that bullish exposure yet still if the price breaks out you know still have that bullish exposure we just need to keep that delta positive so enter the uh enter our index futures both forward slash es and forward slash mes now the way to look at it and simple application is forward slash es is going to give you a delta equivalent of 50. so for instance if i was to sell

one contract of forward slash es uh that should reduce this bullish exposure uh from about 70 down to closer to 20. that'd be hedging it by about two-thirds now one can do that but uh if one didn't want to hedge by that much they would have to have an instrument that's a little bit smaller so in this case we got forward slash mes which is the micro contract this one has a multiplier of five so for this example if we wanted to hedge this account and let's say we wanted to hedge it by uh a third uh we can go ahead and you know take what that 70. try that again times 0.3 you know that would be 21 deltas so if we have a multiplier of 5 for that forward slash mes theoretically we can sell five contracts let's do that as an example so i'm going to go ahead here to forward slash mes i'm going to right click cell single as you go and you take a look you can see what the impact on the buying power is uh you know as far as the margin keep in mind there's also commissions too and they can add up particularly from the active trader side which is one of the challenges for uh you know potentially day trading or very actively trading uh futures is uh one would should be looking for some larger moves because as you can see those commissions can add up if you're trading some size on the micros in particular so that's about uh we're using this as a hedge so there's your commissions you also see how much equity is locked up as well you know when you are on the chart and you go to futures you should be able to see not only the multiplier is but what that initial margin is now that's not the amount of risk on that that's the amount of equity that is locked up uh and you know one may have to put up more funds uh if their account falls outside of that margin but here we're utilizing as a hedge i got five contracts there and if i go ahead and do a confirm and send and send i didn't fill right away i think we actually put in a price that was a little bit above the market i'm just going to go ahead and slide this down here and send that through okay so we got to fill there now if we go ahead and go to our monitor tab uh actually i did a little bit more that was 25 i should have done four my math's wrong my apologies so i actually hedge it a little bit more by about 25 deltas so that's a negative 24 and then notice as we go down and take a look our exposure was reduced down to 44 deltas so what that would mean is if the price if the market goes down potentially the downside impact of our portfolio would be limited but the price does break higher we still have some bullish exposure and one can consider uh you know whether adding or removing you know adding that hedge or removing that hedge based off of your bias uh you know if the market goes ahead and breaks higher you know one can close out that hedge or reduce it a little bit if the market breaks down uh one may consider adding to that hedge you know in some traders albeit may do it temporarily they may switch based off the size of the hedge switch temporarily to more of a negative delta which implies more of a bearish bias there and even though that one may be taking hits on individual positions maybe they do not wish to sell the hedge would offset some of those losses depending on how much it's hedged all right so if you learned something new with that you know this is a a simple way uh that individual investors and traders can potentially hedge an account against some of the downside risk that can occur with those micro contracts being fairly new it does give some flexibility to account holders with smaller accounts to utilize those types of futures whereas some of the larger contracts kind of hindered investors by being able smaller investors to be able to hedge their portfolios by a little percentage we encourage you to do is uh practice with this tool on the thinkorswim platform you know list out your positions uh go ahead and utilize the beta weight by checking that box and comparing it to a benchmark now we use the s p 500 you know if you're very uh heavily weighted let's say in the in a growth nasdaq related stock you know some traders may utilize the nasdaq ndx uh as a benchmark and possibly use the nasdaq futures as a way to hedge against that okay uh and uh and if you have a paper money account too you can utilize that uh to practice that on paper money on some of your hedges as well uh looking at the chat i require a good analogy yes i i don't play the piano but do appreciate the comment and uh ken sharing a link for uh for the swing trading class uh that'll be the next class uh actually yeah that'll be the next class that'll teach it's actually tomorrow afternoon where we do focus uh more on equities trading bounces and breakouts let's make sure we cover on what we covered today we went through the market open and reviewed some of the asset classes kind of maybe set the stage for the week on where some of that direction may be as equities are pushing at those highs if we see some moves and commodities breaking to the upside we can potentially possibly see some of those indices at least attempting to take out those highs if prices do not hold those areas there you know understanding how to hedge a portfolio with different tools we utilize index futures other traders may go ahead and utilize tools such as index options and likewise make sure you take a look at the td ameritrade.com forward slash futures site to learn more with our educational resources and if you're seriously on trading how to start trading and some of those benefits there as well as the cons and also continue following us on our education tab via the webcast so for instance next we got cameron may with getting started with technical analysis and if you want to go ahead and search for a classes by instructor you can go ahead and do that and as mr ken rose mentioned uh swing trading will be uh tomorrow at 3 pm eastern time wednesday we got technically speaking and breakouts and if you want to learn the basics of all things swing trading and breakout reversals make sure you join us for the in-person event starting at night for technical analysis virtual workshop all right now remember folks 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 terms of suitability of securities or strategies for individual traders any investment decision you make in your self-directed account is solely your responsibility have a great day folks ken thanks for helping out we'll talk to you again real soon bye now you

2021-06-13 12:34

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