Trading Grain Futures Options | Trading Futures

good day everyone john mcnichol here and welcome to trading futures we'll go ahead and we'll continue our discussion on various commodity contracts this week we're going to take a look at grains soybeans wheat and corn so stick around [Music] okay well it's great to see those yet alive with us today such as frank uh tm we got eddie tony jack chuck anthony and everyone else joining us we have mr ken rose helping out on the chat today so any questions i am unable to get to uh he'll be more than happy to help ken along with myself have been instructors uh for quite a bit here at td ameritrade education and have quite a bit of experience ken has previously taught our futures webcast uh he also teaches some of the spread strategies that we incorporate into this class as well short verticals being one of them so make sure you keep an eye out on the schedule for that webcast at td ameritrade education you can also follow us both on twitter i'm at j mcnichol underscore tda you'll see that at the bottom of the screen throughout the presentation can can be followed at k rose underscore tda great way to learn more about your instructors as well as about the markets as well here's our disclosures folks contents intended for educational information purposes only non-investment advice or a recommendation of any security strategy or account type options not suitable for all investors spread straddles of the multi-lake option strategies often involve greater more complex risk in single leg option trades short options can be assigned at any time regardless of the end of money amount likewise a long call or put option position places the entire cost of the option at risk you're encouraged practice what you learn here today with tools such as paper money software keeping in mind the paper money application software application is for educational purposes and successful virtual trading during one time period does not guarantee success of actual funds during later time periods market conditions change continuously futures and futures options trading involves substantial risk not suitable for all investors and those trained services are provided by charles schwab futures and forex llc trade privileges are subject to review and approval not all clients will qualify keep in mind trading on margin uh trade trading on margin increases your level of market risk downside financial risk is not limited to the amount of equity in your account uh charles schwab futures and forex llc may liquidate any or all of your positions at any time if your account equity drops below required margin levels and keeping in mind that the house maintenance margin requirements uh may be increased at any time and make note of that okay transaction costs important factors should be considered when evaluating a new trade and while this webcast may discuss may discuss technical analysis other approaches include fundamental analysis may serve very different views all right here's our agenda folks coming up on the screen here those you have been joining us over the last several weeks we've been going through some of the different asset classes in a little more detail with commodity futures we started off talking about energy contracts such as crude natural gas we've also talked about treasury uh treasury notes we've talked about gold and other metals and now we're going to talk about grains some of the characteristics with emphasis being on corn soybeans and wheat we'll show you some of the resources and some of the economic uh impacts uh on these commodities and as we've been doing for the last several weeks as well we'll do a defined risk option spread position size and appropriately in an attempt to define risk on each and every trade and along that we'll discuss some of the potential entry exit trade management techniques revolving around some of these instruments here okay let's go ahead and get on with the show here hope everyone enjoyed their weekend here if you are new to this webcast welcome we do have a companion webcast a little more on the beginner's side which is getting started with futures i believe that's on thursday with my good friend mr fairborne and after we get through some of these asset classes probably in about another week or two uh we'll refocus on the technical trading on some of the indices that has had a lot of interest here all right so uh compare and trading options on futures and options on equities our emphasis here has been focusing on the diversification uh the access to uh different markets outside of just stock indices uh we've also explored that these instruments do trade virtually 24 hours 6 days a week pretty much from sunday evening going into friday afternoon likewise not that this is an endorsement but for very active traders there is no pattern day trading rule when it comes to futures as it does with equities and another important distinction here on commodities is understanding what happens to an option at expiration that option may be settled in an underlying future which we do have an example i do have our bond spread i left it as an example for an an exercise on a uh long option that occurred and how the dynamics of that margin changes uh likewise uh other options may be settled in cash it's important to note when that underlying future contract expires as sometimes it could be relatively close to the option expiration also keeping in mind that td ameritrade charles schwab does not allow physical settlement of underlying future contracts meaning that they need to be liquidated prior to expiration okay uh likewise uh those are familiar on equities you know the settlements typically going to be in an underlying equity uh as well at or settlement in uh cash all right let's go ahead and hit through some of the contract specifications here and with a time permitted on the end there we'll go ahead and take a look at the uh index futures and seeing how they're setting up for the week after we did have a bounce on friday there so looking at uh soybeans forward slash zs is the root symbol for that uh when we look at this as well some of the other commodities for grains the contract specifications are going to be relatively similar as far as the multiplier it's 50 times the premium so we have a multiplier of 50 dollars the tick size is going to be in a fraction of a cent in this case an eighth and uh seeing it's a 50 multiplier i the tick size or each tick is worth about six dollars and 25 cents uh notice on the trading hours again uh almost 24 hours there is some breaks there in between sessions there and likewise another thing to keep in mind is that depending on the commodity uh settlements are going to vary they're going to vary as far as the time of day even though they may continue trading uh the daily settlement is going to be at a particular part of the day in this case 115 central time for soybeans there likewise the end of trading is going to vary as well in this case trading terminates at 1 15 pm central time on the last friday which precedes i always love explaining this proceeds at least two business days the last business day of the month prior to the contract month okay um again a little convoluted you know everyone's kind of trying to do the math in their head we do have a good guideline here on the thinkorswim platform if we go ahead and bring that up so we go to the trade tab and bring up forward slash z s we got that up on the screen uh notice you can see here as far as the underlying contracts currently the active contract or the front month is zsn22 n is the expiration month uh that's a short sign for the various expirations that is july which is 37 days expiration now that's for the underline we're looking at the contract specifications for the options as we look the current front month for soybeans is a july contract notice it says 32 days to expiration the underlying that it's tied to is forward slash zn 22 which happens to be the current front month contract knows a difference between expiration 32 days versus 37 days so there's only about a five day gap between this july contract expiring versus the underlying now notice as you go into sequential months such as august on soybeans that august contract is tied to the zsq which is going to be the next contract in that series okay so hopefully that clarified a little bit sometimes a little better to visualize that the settlement and expiration option exercise results in the underlying futures contract now it says here these options have contrarian instructions so contracts can get assigned on out of the money options and abandon on into money options kind of in short what that means folks is that when one is trading options uh just like on equities some traders may have assumptions that if a spread for instance is in the money those contracts would offset each other now there's a tendency for that to happen but there's not a guarantee of that occurring likewise in the futures market even more so which does require more active management as we do in equity spreads is potentially closing out that spread prior to expiration okay and kind of an example of that we'll go back to the thinkorswim platform uh those you that had been following along on previous weeks uh we did do a call spread a short call spread correction a long call spread on the 10-year treasuries forward slash zn where we had a a debit spread and we were looking for a counter move for the price to be trading through 121. okay now as we go and look at the chart on this let's go and maximize this forward slash zn we did get a bit of a counter move uh not uh as strong as we anticipated in fact the bonds actually did dip lower uh over the course of this trade before trying to make a run up again we're looking for it to be trading closer to that 121. fell a little short now what happened was uh as we go ahead and we look uh at this we we were long a 119 and we were short the 121. so notice prices fell in between that spread so what happens when prices fall in between a spread some of you may know this answer here i'm just kind of highlighting approximately where that spread is well that may result in an assignment or an exercise on the option that is in the money since this was a long call spread the 119 was the option that was in the money and therefore if that's carried into expiration that would result in an exercise the out of the end or correction the short option was out of the money that one expired worthless now i actually did attempt to close out that spread going into friday's expiration had some issues not sure if it was a technical issue or may have been a liquidity issue on closing out the spread but it did not fill and even tried come in underneath the market now one thing i didn't do uh and may possibly do in the future is attempting to close them out individually uh see if that would have done anything but i thought what i would do was allow an exercise to occur so we can see the impact of that for this class so as i go to the monitor tab go to activity and positions okay right here is the current open position for zn so notice what it says here we have zn m22 that's the june contract for the ten year treasuries notice it says plus two and this is now the underlying future okay so just kind of similar as far as on an equity option may result in an exercise or an assignment of a stock position the exercise of the long call resulted in an assignment a correction resulted in an exercise since long option an exercise of that contract now what does that do the dynamics of it well previously this was a defined risk trade if we go ahead and we take a look at whether on the chart for zn on the drop down on the chart we can go to the futures tab and there you go forward slash zn notice the margin initial margin is eighteen hundred and seventy dollars now that would be times two which means we have about 38 39 40 close to 4 000 essentially of equity tied up in the trade now as we mentioned in disclosures that does not mean that that is the amount that can be lost if the bonds were to drop and continue to drop remember there's a multiplier that's associated with that and that multiplier in this case uh and it's a it's a little more convoluted uh with uh with the ticks here but let's go ahead and let's actually show you something here if i go ahead and right click there with me for just a moment and i do need to go full screen it's going to bring this up here i'm gonna go to the analyze tab and there's a fundamentals page here for the bonds and i did already know this but i haven't had my caffeine this morning so i always have to double check my numbers forward slash zn on the fundamentals page we also have your contract specifications here there's a multiplier of a thousand each tick about 15 and 63 cents so just kind of show you as far as the risk on that we have a multiplier of a thousand and that's going to be times two since we have two contracts if i go to the chart and let's say hypothetically if we maintain this position and bonds went ahead and dropped back down some of these previous lows such as 117. well that would be a a two percent move uh that would also be two points uh essentially or you know if or two full points should say a little more than that if i was to go ahead and go to the calculator switch to gadget we have a thousand dollar multiplier times two contracts okay and then if i times that by that expected move two points that's four thousand dollars so just going down to that low this is just an illustration of leverage would essentially be taken taken out that margin that is already associated with that contract now if one has a larger contract there would just be more funds that would be allocated to that position to maintain it if one doesn't have the funds that would result in a margin a margin call and likewise if the funds are not provided that would be liquidated okay and that could be at a greater loss than one anticipates so i want to make sure we have that illustration there now if i go back to the monitor tab on this one you know looking at the current position uh not as bad as it was when we had uh looked at it last week uh but uh overall the p l for this position uh since all the all the positions were open is about 187 okay in fact going into the expiration uh it was profitable so you can kind of see the impact again as far as with the spread being broken up and taking an underlying position so i want to go and show you that so we can see uh clearly the risks associated with that and we can see how that's applied here as far as what occurs to settlement at expiration let's go and move on talk about some of the other commodities and then we'll integrate the economic calendar into the mix here the other more widely traded futures for on the ag side is forward slash zc which is for corn notice that the multiplier is still the same tick size trading hours settlement and everything we had talked about on end of trading as well as settlement at expiration so we got forward slash z s for soybeans forward slash zc for corn and then we also have forward slash z w for wheat again same multiplier same tick size trading hours settlement range end of trading and as we discussed as far as settlement at x expiration now some of the economic reports that are tied to it a lot of these come out via the usda website uh the wasde crop report world agricultural supply demand i believe report usda economic research service also usda national agricultural statistics service there's also commitments of traders report we'll probably take a look at commitment of traders report next week and look in aggregate for some of the uh various commodities that we've been talking about over the last few weeks let's focus a little bit on the usda here and we'll go ahead and bring up uh on the internet here by the way there i am on twitter at mcnichol underscore tda a couple websites uh one is a usda.gov

and once you're on that website you can typically go ahead and search for different reports so there's the wasde world agricultural supply and demand estimates uh when does this report come out comes out every month last report came out on may 12th and if you scroll down you should also be able to see the calendar uh for this report next report is going to be coming out june 10th so for instance any practice position that we take on here more than likely will go through that particular event by the way i went ahead and sent that link for the usda gov coming out there you can see it comes out in various uh various formats there such as pdf if i go in and click on that for may that report will come up as we scroll up here probably uh has not missed anyone's attention here uh that uh the war between russia and ukraine uh has increased the uncertainty of agricultural supply and demand commissions in the region and globally so these reports can be volatile not only when the information comes out but also what may occur after that there but as you go through here you can go ahead and see what some of the outlooks are on various commodities here in this case in wheat and a lot of things that are common is reduced supplies exports domestic use stocks and higher prices shocking okay looking at projections as far as that supply being up or down and i'm not sure if it's mentioned specifically in this one here too but we are in a drought and that's been getting increasingly worse in certain areas there that may impact the yield here and as we can see here projected to rebound significantly from last year's drought but there are still some concerns for this year keep scrolling down you can see information on corn and a common trend from some of these reports is lower production domestic use exports ending stocks higher prices um now that we'll have a tendency of changing at some point and remember this is not meant to be a necessarily a time sensitive report although markets can react to it when it comes initially comes out there's oil seeds here which soybeans would fall into that again making comparisons between uh season over season and we can see where some of the increases are and some of the projected uh increases there all right and let's see another website is the agricultural marketing service which is ams.uda.gov some traders may utilize this along with other resources as far as research i'll push that one out as well and as you can kind of scroll down you can see news and announcements you can go to links to reports they can be tied to any number of areas in the commodities since we're talking more along the food area there people may be looking at the food value chains as well as commodity purchasing let's go back out here as far as i'm seeing some of the reports on when they may come out on a calendar let's see if we can go ahead and bring something up directly on usda let's back out of here go ahead and look for uh let's see did i spell that right nope i did not let's try that here we go even though i didn't spell it right uh here's the ers economic resource service calendar if i go and click on that this is where one can kind of keep up to date on various reports that are coming directly from usda i'll go ahead and we'll up also put that in the chat for those of you that are following along you can follow those same instructions let's push that through and we'll back out of this also if you're on the thinkorswim platform on the td ameritrade website you can bring up calendars this way as well for instance go into market watch tab selecting calendar and then under econo day event although there could be a lot of other unrelated reports maybe a little bit harder to navigate through where hence going the usda site may be uh more of a one-stop shop to bring that information up likewise if we go ahead and go to the td ameritrade website researching ideas go to calendar when you click on economic events and see what some of the events are coming out uh this week a little late on news um for today uh but as we go into tomorrow we got new home sales durable goods is going to be a big one a lot of these going to be impacting our uh indices that we'll take a look at towards the end here uh fomc minutes coming out so a lot of tied to growth gdp natural gas inventories are coming out we do have a practice position on natural gas and as we go into friday again gauges as far as inflation pc prices core personal income personal spending so a data rich environment that is going to potentially impact some of the market and whether we see some continued upward momentum or we just continue seeing that volatility back and forth let's go ahead and break down an example trade that we'll take a look at here and let's go ahead i was looking at corn forward slash zc as we go look at this example we are actually seeing a little bit of a weakness notwithstanding what we saw on some of those reports price is making a lower high we also saw recently a lower low is potentially rolling over today whether we're seeing it possibly re-test the trend now if traders were opt to be more bullish they may look for more of a bullish bounce here i like to do is uh kind of evaluate and take a look at an example of a short call spread and that's along the same premise that we're looking at with uh natural gas on possibly at least staying off of their highs over the next uh 30 days or so we'll take a look at the corn see if we can do the same thing good forward slash z c i'm going to go ahead and go to july that's 30 days out and we're going to apply the same method that ken may teach in his webcast we're going to look at a delta that's somewhere around 30 to 40 delta if we look at around close to a 30 delta there's the 815 level go and look at the chart where's 815 815 is right around this area here so the idea is expected over the next 30 days that the price would not be above this previous high now as a matter of timing uh we probably would have had a larger credit uh off of this initial resistance bounce this is basically looking at the support uh to drift lower let's go back and look at this if we go ahead and right click on this 30 delta and do a cell vertical select cell vertical gonna go ahead and bring up a five dollar wide spread however keep in mind it's not five dollars it's a fifty dollar multiplier so as far as doing the math on that we have a credit of a buck twelve there's a little bit of a spread there between a dollar and a buck 12. we go to confirm and send here we go ahead and see that we have a times a multiplier the maximum profit is actually 56 dollars maximum loss 193.75 now that's about a 20 uh 25 return on risk if we go ahead and we take the loss divided by the profit there or actually the profit divided by the loss let's see if i can do that real quick come up here take 56 divided by 193 approximately i should say 194. it's just under uh 30 percent so i'm going to go ahead and bring this up as far as position sizing we'll position sizes to a max loss let's say we're willing to risk 500 in this example trade actually i think i've been doing a thousand uh lately on some of these trades so let's am willing to risk a thousand that will enable us to do four times i believe maybe just shy of five let's do five so there's our risk defined around 937 potential gain 312. that's if the price stays below 8 15 going in expiration and we have a break even of 8 16 25.

i'm going to go ahead and send this one through now notice here and this was part of our discussion earlier max loss in profit does not reflect underlying price moves below zero that's disclosure since we saw oil go to zero back in 2020 actual profits and losses may be greater than displayed information please note non-standard option series liquidity and settlement risk that not aware of that is typically going to come up on many futures contracts so let's go ahead and or options should say let's go ahead and send this through see if we can get that filled we do have practice trade that did get filled there we'll go and continue monitoring that and let's go ahead and bring up some of our considerations for commodities and then we'll go ahead and take a look at some of the indices how they're setting up for the week remember if you're already trading options on futures you can use the same strategies for options as we did here today an option is an option regardless of that underlying asset we can review the economic calendar government reports and events related to each commodity group and most commodity options on futures are americanist american style and can be exercised or assigned at any time before expiration as i was illustrating with you on the treasury one now as far as contract specifications they're going to vary on various products showed you some of the resources on the thinkorswim platform but you can also go to td ameritrade.com futures as well as the cme group so let's go ahead and make sure we got those resources here td ameritrade.com forward slash futures i'll share that with those you that are in the chat that should be coming across if you go ahead and we take a look at available products over here on the left or correction on the right and scroll down our topic was on agricultural if i click on agricultural you can see there's corn soybeans and wheat these are the ones that are optional that's why we focused on those ones today there are some mini and some other contracts that are available but notice that there are no options available okay all right now just make a note before we move on and take a look at how the indices are set up for the week i did notice there is a survey so if you can click on that survey provide some feedback do appreciate that for those of you that are listening to the archive session you can vote as well by clicking like as well as you can go ahead and subscribe on the bottom here too if you've stumbled on to this trader talks channel you can be informed on other events that are popping up throughout the week but at least click like that'll let me know you enjoyed the presentation and for those of you that are here live fill out the survey you can vote twice by clicking like too so thank you so much and like to appreciate ken for helping out there let's go ahead and take a look make sure we're following along on our agenda here and as we go and bring this up basically we're enter in as an example with the price action breaking down as far as targeting and exit on the short spreads we are usually looking for a a profit of about 70 to 80 percent of that maximum gain so we have basically sold about i believe 56 dollars per contract so if that credit was a drop down to uh 10 times uh five that would be about uh 50 we may buy back those contracts and lock in whatever gain had depreciated on that and that's part of our trade management that we'll continue doing speaking of that trade management if we go ahead and take a look on our existing trades we had done gold where we did a short put spread looking for gold to hold the 1830 level that was on a support bounce that one is doing pretty decent with two days left expiration now if i go ahead and bring up forward slash gc now gold did dip below that 1830 and then came back above it but we are pretty close to that uh as we are close to that spread that could result in an assignment of the short option if we do fall in between since we do have a gain on there there's only two days left let's see if i can actually close this one out right click create close and order to buy back that spread notice there is a little bit of a a spread here between the uh natural price or actually i'm selling it this was a short one so we actually have to buy it back i'm going to go ahead and come in between here a little bit let's see if i can close that out it looks like we did get a fill on that so unlike uh the case of the bond one we're able to close that one out for a game and then we have natural gas we're still 36 days out on this one this was another example of a short call as far as managing the gains similar that we'll take a look at with corn is go ahead and add a column we can click on the gear over on the right click on the gear and look for p l percent p slash l percent we can add that so allow me to there we go and move that up in the list there click ok and we can go ahead and keep an eye on our profit for the amount of risks that were taken now the natural gas one's kind of flat we'll continue managing that one to see where we're at let's go ahead and take a look at some of the indices and we'll wrap up for today forward slash mes or actually do forward slash mes that's the micro contract for the s p talked about how we had a bounce on friday kind of at a key fibonacci level that's 61.8 around that 3830 mark we did trade above the high that little bit day but notice a bit of a fade still headwinds for bulls as that long range day notice a mid-range of that potentially acting as resistance that's at around the 50 percent retracement looking at around the 4 000 area being a psychological area this is going to be an area to be keeping eyes if the market's able to get above it or if it's going to stay below it this week with a lot of the news events that are coming up as we look at the entry day it's a dancing around the weekly pivot point it is above the daily pivot with the daily pivot showing support at around the 38 86 area so we'll see if that level holds with it being a little more of a lighter news day traders may possibly expect a little more of a range waiting on durable goods fed minutes and some of the other reports that we mentioned okay so you're looking at some of the questions comments there real quick beau says would you say that rising market prices of future contracts are just a result of people trying to buy and early before the price gain not necessarily forecasted or targeted price so there's reasons why commodities may go up and down as far as on the future certainly supply and demand is a big part of it as we're reflecting uh in those reports but there are different market participants there are hedgers there are producers and consumers of those products that will enter in the futures market to hedge prices for instance oil producers may be short energy to basically cap downward moves but if they're more speculative as far as prices rising they may remove those hedges airlines not all of them hedge but some of them have a tendency of doing that but there's also managed funds there's also speculation that regard that is in regard to that area as well all of those are factors that can impact those traits and we'll take a look at the commitment of traders report next week that may highlight some of the potential trends of those participants okay let's take a look at forward slash nq for the nasdaq and you know a theme that we have talked about in some of my various webcasts is you know we've had some positive divergences uh in some of the indices to at least find some support but not much follow through as we're starting off this week so the momentum had been slowing down into some support areas but starting off the week we're not seeing that follow through and the nasdaq kind of at the flat line below the weekly pivot barely trying to hold a daily pivot so traders maybe keep an eye on this see if those prices drop yields can have an impact on that as we already have our practice bond position i'll probably end up closing that out later on today seeing if we rather get a bounce or a little bit of a failure here as far as on the yields remember yields rise bonds fall and looks like we're seeing a little consolidation with yields there after dropping considerably over the last couple of weeks that typically would have a positive impact on equities but it's been more of a flight to safety on treasuries as a lot of these asset classes have taken a hit let's look at the russell russell's another one to keep an eye on uh this week they did find some key support at around the 50 retracement around the 1700 area they've been demonstrating some relative strength compared to other indices whereas the s p nasdaq uh clearly tested some of those lows or took them out the russell has actually helped now we're not seeing the follow through on friday's action again these long range days can act as resistance notice how those intraday pushes are kind of in the mid-range of that candle bulls will be looking for prices to be breaking outside of that range uh much like the nasdaq russell is trying to hold that daily pivot again this is very short term you can kind of see the weekly pivot so kind of pivot areas to keep an eye on for some direction here all right well that kind of rounds things out i think my voice made it hopefully to your satisfaction a lot of you know i've been uh challenged a little bit uh over the last week with my voice so if you learned something new today would encourage you to practice what you learned by doing a practice trade define risk whether a short spread uh or a long spread on some of these grains maybe you're maybe bullish and you may be looking at more of an example of a bullish spread remember folks in order to demonstrate the function of the platform we did have to use actual symbols keep in mind td ameritrade does not make recommendations or determine suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility so thanks for joining us folks fill out that survey go ahead and click like and we'll talk to you again real soon bye now [Music] you

2022-05-26 19:20

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