Day Trading/Swing Trading Futures

BMK

BMK

I have never traded futures. I trade options on equities and index ETFs (e.g., DIA, SPY, QQQ). I have only the most rudimentary understanding of futures. And I am not jumping into them LOL. Our account is not even approved for futures trading.

But I would like to understand how people do this. My questions are pretty naive. I do not expect anyone to explain their "system," or their private algorithms. But I would like to understand, on a superficial level, what people are doing with futures.

What the heck is a spread in futures? There are no strike prices. The only variable is the month. So is it a calendar spread? Or do people go long the future on one underlying and short the future on a different underlying? Or something else?

Do you bet on short-term directional movement? Or are you employing nondirectional strategies that bet on volatility?

How do you trade volatility with futures on the S&P or Nasdaq indices?

With options, you can buy or sell straddles, or you can trade spreads on VIX. I don't understand how this kind of thing is done with futures.

BMK
 
I think the following written by my colleague John Thorpe are excellent references that can help you further:
a good article here about etf vs futures

Another good one about basics of futures here

and the following from our blog:

Traders looking for new market alternatives to Equity Index ETF’s ETN’s Unit Investment Trusts, should consider the advantages of smaller thinking. Smaller in capital outlay efficiencies but NOT smaller in opportunity.

The electronically traded E-mini S&P 500 has been more popular in recent years than its big brother, the S&P 500 futures contract. E-Mini S&P 500 margins (performance bonds) refer to the original deposit of money required to have in your account to enter into a contract. E-mini S&P 500 contracts are referred to as "E-mini" because they are E for electronically traded, rather than Pit Traded and just 1/5 of the scale of standard S&P 500 futures contracts. The many futures contracts that also offer an E-mini variant include:


  • S&P MidCap (symbol EMD)
  • NASDAQ 100 (symbol NQ, 100 largest NASDAQ companies)
  • S&P Sector contracts including but not limited to the Healthcare sector, Utilities, Materials, Technology, Consumer Staples, ETC.
  • Dow (symbol YM, traded on CBOT exchange)
  • Russell 2000 (symbol RTY), small cap index
  • Metals and commodities such as Copper, Gold, Silver, Corn, Wheat, Soybeans, Natural Gas, Crude Oil, Heating Oil and Unleaded Gasoline
  • Forex rates versus the US Dollar such as Euro, British Pound, Swiss Franc, Japanese Yen, Australian Dollar, Canadian Dollar and Chinese Renminbi

E-Mini S&P 500 Margins~ Capital Efficiency

In the futures market, the margin, good faith deposit or performance bond refers to the initial deposit made in an account in order to enter into a futures contract. This margin is referred to as good faith as it is the money that is used to control each contract and is set aside from the rest of the funds in your account. The current E-Mini S&P margin is $13,200.00 to hold the position from day to day to day. Typically, the amount of money required is between 2% and 10% of the cash value of the contract and varies depending on the product and contract size. Preferential margins are a reality for many products during the daytime sessions that bring the good faith deposit required down to just $1320.00 per contract. Yes, during the day, you can control 1 contract of the E-Mini S&P if the current price is 3125.00 x $50.00 = $156,250.00 of equity for as little as $1320.00. The minimum overnight initial margin required is determined by the futures exchange. Such fixed initial margin levels are continually reassessed by the exchange, at times of strong market volatility, the initial margin criteria may be adjusted up or down..




When you offset your open position, the initial margin plus or minus any gains or losses that may arise will be added or subtracted to or from your cash balance. In other words, the value of your account changes, real-time, marked to the market, when the value of the asset in your account changes. This is called the Net Liquidating value of the account. Your Cash, plus or minus your open trade equity.






About The E-mini S&P 500 Futures

Introduced in 1998, the E-mini S&P 500 futures (ES symbol) on the Chicago Mercantile Exchange trades through the GLOBEX trade matching servers.It was the first vehicle of it’s size for both hedgers and speculators to take advantage of capital efficiencies in trading a broad market index




E-mini Capital Efficiency Compared To ETFs

E-mini offers greater capital efficiency compared to the use of the Exchange Traded Funds ( ETFs) on the stock exchange. This efficiency is one of the primary reasons why this future index has been so successful. For example, the full cash value of the E-mini is equal to the index price of the S&P 500 x $50. In other words, if the S&P E-mini were priced at 3125.00, the full cash value will be $156.250.00 per contract (3125.00 x $50.00). The intraday margin requirement is only $1320.00. For $132.000 you can control only $1320.00 of the SPY in your cash account, or $2640.00 worth of the SPY in a margin account that also charges you interest!. Futures margin has no interest expense.


Benefits of Trading E-mini S&P 500 Futures Contracts

  • As it is based on an index that is in turn, based on a large stock basket, individual stock news, earnings, price gaps, dividend payments, IPOs etc. do not have a major effect on its price.
  • All trades needed to comply with the CME clearing rules as well as the Commodity Futures Trading Commission CFTC (sister regulatory body to the U.S. Securities and Exchange Commission) and National Futures Association NFA regulations.
  • It is a truly electronic market with all market participants large and small, institutions to proprietary trading shops having access to Level II data as well as bid/ask spreads; in other words, it is a level playing field.
  • Good market scope and liquidity allow fast online order execution with limited slippage.
  • E-mini may show smooth and repetitive patterns over long periods of time. 23-hour trading makes the E-mini an attractive investment for traders around the globe.
 
BMK said:
What the heck is a spread in futures? There are no strike prices. The only variable is the month. So is it a calendar spread? Or do people go long the future on one underlying and short the future on a different underlying?
More...
In futures, there are inter market spreads (two different markets, e.g. ES/YM). Examples are buying one index and selling another, or like buy CL sell NG. The index spreads are heavily traded and you can leverage them up much more (gross exposure) than outrights using SPAN margin. Go to the CME site to learn about that. Intra market spreads, are spreads involving futures in the same asset but different settlement dates. Traders call them calendars. In indexes, the differed contracts are used by swing traders for long holds and not much else. If you go long/short a contact like ES, you're just gonna be trading something that's arbed against LIBOR...it's not gonna move and it can be iliquid.
BMK said:
Do you bet on short-term directional movement? Or are you employing nondirectional strategies that bet on volatility?
More...
You can scalp, daytrade, and swing trade index futures. ES is the most liquid for scalping, NQ the most volatile, YM is less liquid, and so is RTY. These are all used for index spread trading (hedge index exposure with a related index, e.g. buy NQ and sell ES). Non directional in this space means trades with a reduced beta and some of the index spreads are used for that.
BMK said:
How do you trade volatility with futures on the S&P or Nasdaq indices?
More...
You can trade the VIX futures, or you can just use VIX and the VIX basis spread to get reads on ES direction. When large vol transactions are hedged with ES, it can and will move the market. Vol trading will affect the ES price action and vice versa.
 
There are inter market futures spreads, like Unleaded Gasoline versus Crude Oil, or Two Year Notes versus Ten Year Notes.

There are Intra Market Spreads - which is the same product different expiries. Many people think this is the prompt month versus second month, but there is far more to it than that. The forward curve structure in futures is essentially about supply versus demand projections, and there is constant movement in the forward months. If you look at Eurodollars and Crude Oil, for example, you will find serious traded volume and open interest for years out in the forward curve. The prompt month is really all about Speculative order flows, the other months are Commercial order flows. Personally, I never trade the prompt months unless I am doing an inter market spread.

Hope that helps add some color.

BMK said:
I have never traded futures. I trade options on equities and index ETFs (e.g., DIA, SPY, QQQ). I have only the most rudimentary understanding of futures. And I am not jumping into them LOL. Our account is not even approved for futures trading.

But I would like to understand how people do this. My questions are pretty naive. I do not expect anyone to explain their "system," or their private algorithms. But I would like to understand, on a superficial level, what people are doing with futures.

What the heck is a spread in futures? There are no strike prices. The only variable is the month. So is it a calendar spread? Or do people go long the future on one underlying and short the future on a different underlying? Or something else?

Do you bet on short-term directional movement? Or are you employing nondirectional strategies that bet on volatility?

How do you trade volatility with futures on the S&P or Nasdaq indices?

With options, you can buy or sell straddles, or you can trade spreads on VIX. I don't understand how this kind of thing is done with futures.

BMK
More...
 
DIA/MYM Hedge, Long Volatilty. Long one 201218, 50 Delta Put & Long one MYM Dec Future. Scalp future against the option. Above the strike Flatten to scalp, below the strike Add to scalp.
Front month YM futures are closest to the DIA price. Inverted Backwardation. Future price rises toward the spot price at expiration.
 
1. Find the front month, the one with all the volume

2. Work out if it's a buy or sell.

3. But or short it

4. Take a profit or loss at some stage in the future. Th future can be anything from a few seconds to many months.

5. Repeat.

As Heis said, if you can understand options, 10 mins is all you need to understand futures.
 
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