options on futures restrictions or gotchas?

N

Nick Nikolo

I've had it with traditional instruments like stocks, leveraged etfs and options - whether you're a pattern day trader or not it is too easy to pick up a violation when you trade on margin - 4 violations and you're out.
These markets are too heavily regulated and non professional traders can be crippled by intricate rules. So I transferred my assets to a futures only brokerage.
Question about options on futures
  • if you repeatedly enter and exit positions throughout the day, do you run afoul of some regulation that limits the number of trades you can carry out (like in traditional equity options)?
  • while you're expected to exit all futures positions at the end of the session, there is no such expectation of your option positions, right? You can hold them for several weeks if need be, right (even though it makes little/no sense to do so)?
Any good hands-on training materials that you'd recommend?
 
  • As far as I know you can trade as many times in and out as long as you meet the intra-day margin requirements, or the overnight margin requirements (usually this is x4 the intra-day requirement) if you hold past the close at each day.
  • There is no expectation for you to exit a trade before the end of the day on futures or options on futures contracts. The "close" of some futures contracts is as little as an hour per day. Make sure you read the contract specifications for each contract as they will describe the market open and close periods.
  • The leverage on futures contracts is MUCH higher than what you're allowed in the equities markets, so be very conscious of how exposed you are to an adverse moves. Although future contracts may move slower % wise than equities, the $ is dramatically higher. I've seen a silver contract change in value by as much as $30,000 in one day.
  • As for as training materials: Option Volatility and Pricing by Sheldon Natenberg is a great place to start.
 
Not with futures to my understanding, you can trade to ur hearts content....


With future options, you can also day-trade as much as you want.

The PDD is to do with stocks. Because stocks can move like 30% on some bad news they have some stricter requirements. You won't see any futures doing that. Its to do with the fact that mbey a trader might not have enough in their account / minimal experience to deal with such a movement.

Futures, or the main ones at least won't move like that. There has really only been a big move on one of the majors when the swiss government took away its "peg". I've never seen anything like that in my time trading futures.

Why are you under the opinion that you must close ur future trades at the end of the day?

Ur futures trades have 2 different margins. A day margin and a Overnight margin. The day margin on say the SPX (ES) future contract might be $500 per contract. Now if u wanted to hold that past the close of CME each day you would need to have around $5K in your account to keep that trade open, this is the overnight margin. Its not to do with overnight, its just if you want to hold ur contracts when the CME has its cool-down, from roughly 4pm-5pm.

Yup u can hold ur options contracts as long as u want... providing u r a buyer. If your a seller, then of course you would have margin requirements.
 
Nick Nikolo said:
I've had it with traditional instruments like stocks, leveraged etfs and options - whether you're a pattern day trader or not it is too easy to pick up a violation when you trade on margin - 4 violations and you're out.
These markets are too heavily regulated and non professional traders can be crippled by intricate rules. So I transferred my assets to a futures only brokerage.
Question about options on futures
  • if you repeatedly enter and exit positions throughout the day, do you run afoul of some regulation that limits the number of trades you can carry out (like in traditional equity options)?
  • while you're expected to exit all futures positions at the end of the session, there is no such expectation of your option positions, right? You can hold them for several weeks if need be, right (even though it makes little/no sense to do so)?
Any good hands-on training materials that you'd recommend?
More...
What is the regulation that limits the number of traditional equity options trades you can carry out in a day? The regulations are pretty simple, it sounds like you're really just trying to avoid the PDT restriction, right?
 
Nick Nikolo said:
see https://www.fidelity.com/learning-c...ng/avoiding-margin-account-trading-violations
specifically "Margin liquidation example – Justin"
More...
I'm fairly certain you're still subject to " A day trade call is generated whenever you place opening trades that exceed your account’s day trade buying power and then close those positions on the same day. You then have five business days to meet a call in an unrestricted account by depositing cash or marginable securities in the account." if you are in FOP same as regular options or any other trading instrument. If you can find a futures broker that will even allow you to place an order that exceeds the margin in your account. That is due to a "free-rider" law that impacts everyone who trades, not just stock or stock derivative traders.
Is that the specific rule you were concerned about? Again I didn't see an limits on the number of options trades in the reference you provided except the PDT limit which is pretty clear cut.
In general if you're thinking about moving to futures because the rules for equity trading are too complex I'd recommend thinking again. Futures themselves are very complex and not nearly as intuitive as stocks. If you can't master the PDT rule, you're going to get killed in futures simply because you won't be able to grasp how they work. Add to that potential delivery issues that are gotcha's in a much bigger way than anything you'll ever see in stocks and you've got a disaster waiting to happen.
 

if you repeatedly enter and exit positions throughout the day, do you run afoul of some regulation that limits the number of trades you can carry out (like in traditional equity options)?

No. At least not a regulatory one (e.g. SEC, FINRA, CFTC, NFA, etc.) My broker (TDA/ToS) let's me trade the /ES options to my hearts content so long as I have sufficient margin in my account. Your broker may differ. But I can't imagine why.

while you're expected to exit all futures positions at the end of the session, there is no such expectation of your option positions, right? You can hold them for several weeks if need be, right (even though it makes little/no sense to do so)?

No. Options, regardless of what they're traded on (futures, indices, stocks, ETFs, etc.) can be held until expiration day. Or closed out minutes after opening the the position. I generally hold my options two or three days depending on market activity and delta/theta. My trading plan says to take 75% of the profit and exit the position. Or when the underlying price touches the short strike price. Which ever comes first. As I only trade spreads that have a Delta of 10 or less (90% probability of finishing OTM) I don't often experience the short strike being touched.

I trade the E-mini S&P 500 /ES futures options. That's all I trade. And only credit spreads. Here's why;

-They trade around the clock except for a short break in the late afternoon. The advantage is that you can trade using information from the Asian and European markets and U.S. pre-markets. In other words if Asia and Europe are trading up or down you can trade accordingly without having to wait for the U.S. markets to open at 9:30am EST.

-Liquidity. The /ES options are the most liquid of all the equity index futures options. Last Friday, for example, the /ES serials and weeklys traded about 3.5m contracts vice the S&P 500 Index options which traded about 460K and the NASDAQ Minis which traded 46K.

-All electronic. The /ES trades on the CME's Globex system. All electronic, no open outcry. I always have good fills usually at the middle of the spread on both legs usually within seconds of placing the order. If I don't get filled in under a minute then I know something is wrong and will adjust the order (or cancel it) accordingly.

-Lower margin requirements. The Margins on CME's futures options products are computed by the CME's SPAN (risk analysis) system. Margins are normally lower than on equities options.

-Taxes. The /ES contracts are subjected to the 60/40 gains provisions of IR Code Section 1256.

-Commissions. They are a little higher on the /ES options because, in addition to paying your broker's commissions (always negotiable), you also pay for the CME's Globex fee, CME's clearing fee, and the NFA's "assessment" fee. Those fees add up to about .20 per contract per side regardless if the options expire OTM or not. ToS does not charge a commission when I close out a postion valued at .05 or less or if it expires OTM.

For more information I recommend you spend some time reviewing all the good information on the CME's web site.

Any good hands-on training materials that you'd recommend?

Do you mean options materials, futures materials, or something else?

Best
 
Nick Nikolo said:
Any good hands-on training materials that you'd recommend?
More...

By "good" (i.e. you find to be satisfactory in quality and quantity) I assume that your looking for book(s)/materials that provide guidance that shows, or involves, a method or plan for successfully trading options.

There are, of course, dozens of books that pertain to the trading of options many of which proffer what the author believes to be the be-all-end-all of books that will, if their advice is followed, lead the reader to riches beyond their wildest dreams. These are the same people who display their knowledge on the nightly news shows about where they think the market is going to go tomorrow/next week/next month/next year. Sometimes some of them are right.

There are, notwithstanding the foregoing, some decent books available which help the novice options trader better understand the options trading world and how to build his or her own trading plan and, as a part of that plan, trading strategy.

In no particular order of preference I have in my library;

Options Pricing and Volatility (2nd Ed.)
Natenberg

The Complete Guide to Options Selling (3rd Ed.)
Cordier and Gross

Getting Started in Options (8th Ed.)
Thomsett

All About Options (3rd Ed.)
McCafferty

Trading Weekly Options
Rhoads

Options Spread Trading
Rhoads

Vertical Options Spreads
Conrick and Hanson

Options as a Strategic Investment (5th Ed.)
McMillan

The Bible of Options Strategies (2nd Ed.)
Cohen

Trading Psychology 2.0: From Best Practices to Best Processes
Steenbarger

Plus all the free literature you can get your hands on from;

Chicago Board Options Exchange
Options Industry Council
Options Clearing Corporation
Chicago Mercantile Exchange
Chicago Board of Trade (CME Group)

...and the rules by which the options game is played;

Securities Exchange Commission
Financial Industry Regulatory Authority
Commodity Futures Trading Commission
National Futures Association

Plus the Trading Plan and Trading Strategy YOU have developed that directs your day-to-day trading activities.

There is, of course, much more but reading and studying the foregoing will help you formulate your own personal plan for systematically trading options on any underlying symbol(s).


Best
 
The biggest gotcha that I discovered (with real money) about options on futures is that their market is highly illiquid. It is quite common to see COMEX bid prices that are much higher than the ask and you can never get a fill at any price. The bid size is totally misleading, it doesn't mean anything at all. It may as well be 0.

A quote from an email sent to me by support: "The only time you would be guaranteed a fill is if the last traded contract was above your Limit. It is a very illiquid market and the bid/ask prices are not always indicative of the market at that time – you may never get a fill at any price".

I am not referring to some fringe security either like lean hogs, I am referring to precious metals (for example) where a wide range of bid/ask prices (of option chains) are posted at all times. Incidentally I find the support email inaccurate, you can't get a fill even if the last traded contract is above your limit.
 
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Nick Nikolo said:
The biggest gotcha that I discovered (with real money) about options on futures is that their market is highly illiquid. It is quite common to see COMEX bid prices that are much higher than the ask and you can never get a fill at any price. The bid size is totally misleading, it doesn't mean anything at all. It may as well be 0.

A quote from an email sent to me by support: "The only time you would be guaranteed a fill is if the last traded contract was above your Limit. It is a very illiquid market and the bid/ask prices are not always indicative of the market at that time – you may never get a fill at any price".

I am not referring to some fringe security either like lean hogs, I am referring to precious metals (for example) where a wide range of bid/ask prices are posted at all times. Incidentally I find the support email inaccurate, you can't get a fill even if the last traded contract is above your limit.
More...
Are you saying that bids and asks aren't honored or that the bid/ask spread is just wide?
 
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