Welcome to our inaugural episode of The Futures Rundown brought to you by T4 Futures and Options.
With your host Mark Longo and guest Carley Garner.
The Trading Pit
- Looking at what is trading in the futures markets
Futures 101: Exploring the Two Types of Settlement
- Cash Settled
- Physically Settled
Futures Free for All
- Rolling futures in historical charts
TRANSCRIPT
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The futures markets can be downright scary.
Limit up, limit down.
What the heck is our Bob anyway?
Are they going to dump a truckload of soybeans on your front lawn if you click the wrong button?
Come to think of it, maybe you should just stick to your comfort zone.
Or you can break out of it with the Futures Rundown.
The Futures Rundown is here to help you make sense of these scary markets.
We’ll analyze all the top futures trading activity, explore the ins and outs of your favorite products, explain exactly how futures work, and hear from leading experts in the futures market.
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And now it’s time to break into the futures markets.
It’s time for the Futures Rundown.
Alright everybody, that music means we are back.
It is Wednesday time for the hottest new addition to the network.
Yes it is time once again for the Futures Rundown.
My name of course Mark Longo from the optionsinsider.com as well as from the network upon which all of you folks have been binged.
Let me just say here at the top, the feedback to this show and the response has been so strong, so overwhelming.
We really appreciate all of you out there who have taken the time to write in or to come up to me at various events and things and say hey, we love the Futures show.
So we love to hear it.
Like I said, we were a little reticent to launch it.
We weren’t sure if the audience was there.
Oh they’re there.
You folks are there en masse.
You were hungry for some Futures content so we’re glad to help you out here.
And of course if you want to learn more about all the stuff we have cooking over here, then make sure you’re checking out the full network.
Kind of hard to just be subscribed to the Futures Rundown because it just launched, but it’s possible.
So if you are, then make sure you’re listening to the full network.
And of course if you want to go above and beyond, you want to join us for awesome pro Q&A’s and options oddities, live streams and everything else, the optionsinsider.com/pro is the place to go to learn more.
As we learn who’s joining us on the old Futures Rundown program this week, we are joined once again by our old friend Ms.
Carlee Garner, who when she’s not talking to us, she’s moonlighting, actually writing a few books.
Maybe you got a few more in the hopper, but you may have heard some of them listeners including trading commodity options with creativity, higher probability commodity trading, and a trader’s first book on commodities.
So if you’re new to this whole Futures game, you might want to check out some of what Carlee has cooking.
So, Carlee, welcome back to the Futures Rundown.
Any new books in the hopper we should know about?
Thanks, Mark.
No, no new books.
No, no.
It’s books are a very time consuming endeavor and the good news, I mean, the best problem I have is that I’m really busy.
So at this particular time, no, but hopefully enjoy the ones I’ve already written.
You’ve covered it all.
You’ve said it all.
What more needs to be said, Carlee?
I hope you’re right.
Well, a lot more needs to be said in the world of Futures trading.
So let’s enter the trading pit.
It’s time to break down all the action that’s lighting up the Futures markets this week.
What’s limit up and what’s crashing and burning?
Let’s find out.
It’s time to enter the trading pit.
All right, everybody.
Welcome to the trading pit, the portion of the show we break down.
Surprise, surprise.
What the heck is lighting it up out there in the Futures market this week before I break down some of the volume and the quote unquote winners and losers?
We could say gainers and fallers if you like.
I know people sometimes take umbrage at the winners and losers because you can be short these at the end of the day.
But that’s what we’re rolling with right now.
But before we get to all that fun, Carlee, you are our guest.
You get pride of place.
What is catching your eye in the Futures markets this week?
You know, I’ve been paying close attention to Treasuries, which are having a really horrible week.
Just Treasuries, that’s all that’s catching your eye out there.
Anything else lighting up your tape?
Well, I mean, we’re looking at a little bit of everything, but metals are obviously moving.
So metals, stock indices are all on the radar.
All right, then.
Let’s fire up that radar and see what is lighting it up.
Let’s start in the red this week because it is an interesting week.
It’s a red day out there and across a lot of the major markets today.
We’ll get to all the fun surprises popping off today in a second.
Let’s look first.
What’s lighting up our tape this week out there in the realm of Futures?
Let’s do, I don’t know, a quick bottom and top 10, shall we, listeners?
To the bottom side, we go out there, Bitcoin, the Nov contract out there.
It’s not going all the way out to Dease this time.
Hanging out in Nov.
Bitcoin, after just rallying hard last week, giving up some Steen off almost exactly 3%.
The October micro is off exactly 3%, so giving back some of the gains out there in Bitcoin.
So that’s a number 10 and number 9.
Number 8, we got our old pal, Cash Settle Cheese.
It’s been lighting up our tape of late, the November contract now coming in a little over 3%, about 3.1%.
So giving back some of those ill-gotten gains in Cash Settle Cheese.
Right behind it, we’ve got Class 3 milk.
So hanging out in dairy this week, number 7 off 3.12%.
Number 6, off to the rates.
Today’s favorite complex, the Ultra T-bond off 3.26%.
Number 5, now we’re here into our bottom 5 listeners.
Got our old pal, the Russell 2000, taking it on the chin this week off nearly 3.5%, 3.44% right now.
All right, below at number 4, back to crypto land.
It’s the micro ether future, by the way, in October.
I hear that is off 3.81%.
Keeping it in crypto land for number 3, of course, the big ether future is also in October.
Coming in 3.98%.
It’s just a tick below 4%.
Number 2 to the dark side this week, a contract we’ve been mentioning, maybe we need to do a deeper dive on a future show because it is starting to really come on the radar.
Volume is still kind of sourcing the volume.
Still a little dubious out there, which is why we haven’t talked about it a lot.
But lithium coming in at number 2 to the dark side off nearly 5.1% just this week.
So everyone out there is talking about waning or plateauing EV demand.
Clearly that is weighing on lithium, the Jan contract this time coming in 5.1%.
And the number one mover to the red this week, if you want to call it that list, and this is called lose number one loser this week.
It’s more fun, got more of a ring to it.
It’s a Coco.
Coco’s been on the rampage of late as well off 10 and a quarter percent is the DS contract.
I guess Carly, if we have a theme for the show this week, it’s winners being altruistic.
They’re giving a little bit back.
What do you think about that?
I think that’s part of the story, but I’m wondering if we’re going to get to see some big trend changes here in the next couple of weeks.
I think a lot of people are preparing for event risk going into the election.
And I think maybe that’s been priced in.
And I think maybe at this point, we just kind of the trends have exhausted themselves and we start rolling back the other way.
So it’s going to be interesting to see what happens.
Always interesting.
As we move to the green listeners, number 10 to the upside this week off to cotton, cotton number two.
To be precise, the DS contract up 2.5 percent.
On number nine, we’ve got platinum.
So off to the metals, the jam contract up 2.63 percent.
Number eight to the livestock.
Man, we’re just running the gamut this week.
That’s why I love this show.
Lean hogs.
DS contract up 3.09 percent.
Back to the metals this time are going to, as the Brits call it, aluminium.
Rolled aluminium, the jam contract up 3.4 percent.
And then we got corn coming in.
Actually, this is number six.
Number seven, number six here for corn up 3.4 percent as well for corn, the DS contract.
And then here we go into the top five ethanol, the Nov contract number five.
Don’t talk about ethanol a lot.
Remember those heady days?
Listen, it’s not too long ago and ethanol was going to solve all of our energy woes up 3.5 percent this week.
Number four, keeping it precious, it’s palladium up 3.56 percent.
Number three to the eggs.
This the beans, this time soybean oil, DS contract up 4.15 percent.
Number two, canola.
How often do we talk about canola?
We’re going to do it right now.
Listeners, the Jan canola contract up 5.8 percent and the big dog in the futures game this week.
Uncle Mike will be getting in fact, I talked to him on Monday.
He was quite giddy.
It is silver.
The DS contract up 6.12 percent.
Carly, it seems like you and I on some other shows and indeed on this program have been talking about silver quite a bit.
It seemed like maybe the balloon was starting to come off the rose and then bam, just quite a turnaround this week in the shiny stuff.
Absolutely.
Silver is one of the most difficult futures markets to trade.
The price action is very herky jerky for lack of a better word.
It’s not smooth.
So anybody that’s using stop orders to protect their futures is going to have a really hard time because a lot of retail traders have a problem getting stopped out before the market goes the way they want to.
It’s not the easiest market to trade, but on the bright side, when it moves, it moves like we’re seeing this week.
So this has been a spectacular week for silver.
I do see pretty heavy resistance around 35, though.
So be careful.
It seems like for the last month or so, we’ve been talking on our other program this week in futures options that there has been a lot of strange.
Let’s call it speculative trading to the upside in silver.
Some of it pretty far out there.
So we’re not quite there yet, but I guess they’re looking a little bit happier this week.
Carly, we were kind of scratching our heads like what are these people up to in silver?
This is some wild paper.
And at least for this week, they’re looking OK.
For this week, they’re looking OK.
The thing is, the secret to this game is keeping it once you make it.
We’ve seen silver do this before.
We saw it in April, May of this year.
We saw a giant rally, and it gave most of it back.
So this is kind of par for the course.
So be very, very careful if you’re long silver up here.
We haven’t seen above 35, really, in several years. 50 is the all-time high, but it’s probably unlikely we get much above 35.
So for your clients, are you counseling, take some profits, get the heck out of Dodge?
Or what are you telling the folks who are long some silver upside right now?
Absolutely.
Anyone long silver should absolutely protect their profits and move on.
This is not a market that you buy and hold forever because generally that’s just not how the price action works.
So any surprises I should say to you, Carly, in our list of the quote unquote, first off, do you take umbrage with that terminology, winners and losers?
Are you OK with that?
I’m not going to nitpick that.
I think it’s just fine.
Some people get bent out of shape in the futures world for whatever reason when I say winners and losers.
Right.
See, it’s been universal praise for this show.
The only point of umbrage and contention they have is that it’s funny.
So that’s why I just do it more now just to kind of turn the knife a little bit.
It works.
Any surprises for you in our list this week?
I will say that Coco is kind of surprised, not necessarily that it’s selling off sharply this week, but that it’s waited so long to do it.
I mean, Coco has been one of those.
It’s been just an unbelievable year and a half for Coco for anyone that’s participated in that market.
It’s been rough.
Let’s just put it this way.
I think there’s a lot more money lost most likely than made.
There is no price limits in Coco.
And so once the the ball started rolling and everything got out of control, it just really got really, really out of control.
And so to be honest, I think Coco probably eventually trades back to 2000, which is where it stuck for a decade before we had this big rally.
But it’s taken a lot longer to do it than I expected it to.
Yeah.
And the short run of this show, which is now coming up on two months now, Carly, which is crazy.
Coco has been just running away with it.
It’s been our it’s been our number one leader for quite a while.
The other one that kind of catches my eye here, we definitely have to go deep dive into Coco and the contract specs and everything on a future show because clearly the performance merits it.
Maybe not the volume.
It’s not an E-mini or anything like that.
But performance wise, it certainly merits it.
The other one that’s kind of been on my radar, I think on the radar of a lot of our listeners of late, it’s on our number two to the to the losers to the red.
This week is, of course, lithium.
The issue with that is it doesn’t really trade in a lot of the venues, quote unquote, that we really know and contract easily here on the show.
But it’s an intriguing contract and one I think maybe merits further study here on the show.
Is this one any of your clients have have urged you to dabble in Carly or have you talked him out of it?
You know, our our clients tend to be a little more option oriented than futures.
We have lots of futures traders, but more most of them are trading options and or at least in conjunction with their futures.
So lithium is really not something that our particular clients trade a lot.
And to be honest, I think, as you mentioned, there is kind of a liquidity issue in lithium.
And a big part of the problem is not all brokerage platforms offer it.
And so it’s it’s one of those markets that maybe speculators, unless you’re really experienced and you know exactly what you’re doing, maybe just kind of paper trade it and let it let it be.
That’s probably good advice.
Paper trade the lithium for now because you’re going to get some funky fills.
And then maybe as the product and as the marketplace matures, you could start dipping your toes and doesn’t seem like you want to dive in there right now anyway, at least to the upside that might be catching a bit of a falling knife.
But definitely another one we have on our radar.
So I know some of you writing in asking about lithium not quite there yet, but intriguing.
None the less.
Let’s look really quickly.
What’s lighting it up today?
Then we’ll get out to I think a fascinating, maybe contentious futures 101 segment out there.
Talked about the week.
Let’s just look really quickly.
What’s lighting it up out here today?
We’ll do a quick top and bottom five today.
What’s surprising us to the upside?
We got rough rise to Jan contract up.
Let’s just talk in terms of just standard deviation, make our lives easier.
So up 9.9, almost a full standard deviation.
So rough rice popping hard today.
Orange juice right behind another one.
FCOJ.
I was joking about this on the show last week, but everyone loves it, remembers it because of trading places.
We might have to do a deep dive into that one as well as the Jan contract up about 1.2%.
Everyone associates it with Florida, but of course a lot of this actually comes from South America now.
Florida is kind of just as the remnant, which is kind of interesting.
Again, we discussed that recently on the show.
Then we have something called the VIX.
You may have heard of it.
The Nove contract listeners up 1.3 standard deviations just today.
Surprise, surprise.
Equity markets are selling off.
Vol is popping.
So VIX making it on.
That’s on the Volview show last week.
VIX does make it onto the futures rundown on occasion.
Here you go.
The VIX Nove future up 1.3 standard deviations just today.
I like talking in standard deviations as well because it gets away from the people who get angry when you say percent of a percent with VIX.
It drives some people crazy.
So there you go.
Standard deviations.
No one can get mad at that.
The Dollar Index Dies contract up one and a half standard deviations today.
And Sugar, our old pal Sugar, number 11, the March contract up one and two thirds standard Dies to the dark side.
ETH, micro and the big futures off about almost two standard deviations just today, about one and three quarters.
So taking it on the chin today, the NASDAQ right above it up about right around one and three quarters standard deviations as well.
And the number one surprise today, the South African Rand, bet you didn’t have that on your Bingo card listeners.
The Dies contract off two and a quarter standard deviations.
Man, we are all over the place on the show this week and I love it, but we’re about to get weird.
We’re about to get wild listeners.
So settle in.
It’s going to be a fun Futures 101.
It’s time to shine some light on this mysterious marketplace.
It’s time for Futures 101.
Love the music on this show too.
So jaunty, so fun, so epic.
A lot of fun tunes on this show.
Can you tell listeners I’m having a good time, almost as good of a time as I think a lot of you listeners are.
So it’s a mutual appreciation society here on the show.
All right, Carly, are you ready to get weird and wild with the nuances and the mysteries of settlement, Madam?
Always.
Let’s do it.
All right.
Let’s do it.
Let’s get the easy one out of the way first.
I remember when we talked on the first show listeners, there’s two different types of settlement effectively.
The one a lot of you retail Futures traders are going to encounter.
The one that a lot of your brokerage platforms are going to push you to.
A lot of them don’t even really even have the backbones to allow you to take delivery even if you wanted to.
So you’re going to be looking at cash settlement for a lot of the contracts.
And a lot of the big exchanges know this as well.
They want to really facilitate and draw in a lot of retail clientele.
In particular, they’re going to do two things.
They’re going to make the contract smaller, hence the array of micros and minis that are littering the Futures market right now.
And also they’re going to turn even a big physically settled contract.
When they make it smaller, more bite size, they’re also going to make it cash settled because I know you folks don’t want a thousand barrels of oil crashing on your lawn in the middle of the night.
So let’s go to cash settled first.
It’s pretty straightforward.
Again, like the name says, you’re settling it out in cash because it’s Futures.
They are marked to market every day.
So you’re going to settle up every day.
So the no real long term buy and holds out here in the world of Futures.
Your account is going to be debited or credited how much you made or lost every day on your Futures.
It’s pretty straightforward.
Doesn’t get much easier than that, which is another reason why a lot of people are gravitating towards cash settlement right now.
It’s just easier for people to understand.
Let’s use kind of the flagship contract for cash settlement as an example.
Let’s go out to the E-mini S&P 500.
When we put this together, it was around 58 half.
Obviously selling off a wee bit since then.
A little bit shy of 5,800 right now.
So a little bit of downside out there in the S&P, which actually plays into our example perfectly.
Remember, we talked about on our early episodes all the nuances of the E-mini.
The minimum tick is one quarter of an index point.
So obviously four ticks per point.
They’re 12 and a half bucks for ticks.
So four ticks per point.
It’s going to work out to 50 bucks per full index point per contract.
So let’s say in our example, you come in, you buy, by the way, the notional value of that contract.
When we calculated this yesterday with S&P a little bit higher, it was close to 300,000, $292,500.
So it’s a beefy contract, even though it is a mini size notional value.
Now of course, you don’t have to put all that up.
We covered that in earlier episodes.
In our case, we have an average here of close to 13,000. 12,667 is what your initial margin is going to be to put on that trade.
So again, a decent deal, somewhere around 4%, a little more than 4% of the notional value of this contract is all you have to put up to have that exposure.
So if you like a little bit of leverage, futures have you covered.
Now let’s say what’s happening right now in the markets is playing out with your futures.
You come in, you buy the future, one contract, 58 half is your level.
It drops around 50 points into your day, which is pretty close to what we’re seeing right now.
You’re close to 1%.
Remember, we said you can do it a couple of ways.
We said it’s $50 a point, 50 points, that’s $2,500.
Or you can do it the tick way, which some people prefer.
It could be a little bit more laborious, but that’s another way to do it too.
Obviously 50 points times four ticks per point equals 200 ticks, 200 ticks times 12 and a half dollars.
You can see why I say it’s more laborious for some people.
That’s still the same math, $2,500 at the end of the day.
And your account is debited.
And if you’re just doing an intraday trade, that’s it.
That’s the entirety you put in 12, 667, the end of the day, you have $10,167 remaining.
You could take that money, do what you want with it, live to fight another day with your account a little bit smaller.
Carly, anything you want to add on the cash settlement side?
Yeah.
So one thing to keep in mind, like if you’re holding positions overnight, they are marked to market, but there’s not a cash transaction that takes place over, like for example, if you’re long on the S&P going into the close, you’ll receive a statement at the end of the night and it does show you how much you’re making or losing and that’s removed from your account balance, but the actual cash transaction doesn’t occur unless you actually exit it.
So if you did exit it in the same day that you got in, the cash transaction would take place then.
Or if you exited two days later, the cash in and out of your account would take place then.
If you held all the way to expiration of the contract, so that would be like on that E-mini S&P, third Friday in March, June, September, or December, then at that point you go into the official end of contract cash settlement, which is a little bit different, and you basically, to be honest, I would never recommend any of my clients do it.
We tell people to get out prior because what happens is, first of all, the cash settlement price may not be exactly where the contract stops trading, so it can get a little confusing and it’s almost like you’re just leaving it up to some random calculation and pencil pushers to decide exactly how much you made or lost on your trade.
It just doesn’t make sense to go into that process.
But also it will hold your capital, like your margin will be held back in your platform that you can’t trade on that money, even though the trade’s over, it’s going into cash settlement, you can’t make or lose anything more than what the settlement price already entailed, but sometimes some platforms will hold that margin until everything is completely clear with the exchange the next day.
So anyway, in my opinion, you’re better off not going into the contract expiration cash settlement.
Here I am, Carly, trying to keep things simple for our folks.
I’m just going intraday.
I know.
You’re in, you’re out, and you’re just throwing all these other nuances.
I’m just kidding.
That’s why we have you here.
That’s why we appreciate you coming on the show, because Futures is such a highly nuanced market.
Everyone thinks, oh, a future is so simple compared to options.
It’s just Delta One.
What do you need to know?
Well, all this stuff, there’s so many nuances.
Every product has its own rules of engagement.
And if you don’t learn them, you’re kind of out of luck.
So there you go.
That’s the quote unquote simple side, the cash settlement.
Now, Carly, are you ready for the fun stuff, the physical, physical settlement slash delivery?
Yep.
Let’s talk about it.
All right.
Let’s get into a listener.
This is the stuff that we kind of joke about in the intro to this show.
We’re going to get a truckload of heating oil or soybeans or whatever dumped on your lawn in the middle of the night.
First off, let’s just dispense with most of that.
It’s not going to come on your lawn, even if somehow you were able to take delivery on one of these contracts.
You’re a big institutional player.
It’s going to be shipped to some sort of distribution center, a warehouse in the case of metals, and a lot of ag, some sort of refinery or other platform in the case, obviously, of energy.
It does kind of vary by product.
And so that maybe is another thing maybe we’ll explore when we get deeper into the specific contract specs because they all have their own nuances of delivery, whether it’s the ags or obviously the metals where, of course, every ounce of every metal is closely tracked.
And so you’re going to shift it from maybe one warehouse to another, but you’re not getting a truckload of gold bullion dumped on your lawn in the middle of the night.
Same thing with energy.
A lot of interesting nuances to explore there.
It’s maybe when we get into specific contract specs, we can’t explore maybe some of the nuances of how the delivery process does work.
But again, for most of you, this is not going to be a concern.
So if you’re worried about it, even if you are trading, let’s say, a physically settled contract, your broker and your platform, you should check with them, whoever you’re working with.
Most of them on the retail side are not really set up to have you take delivery.
So they will probably contact you and have you close out the position before any of this can even come to pass.
But Carly, one of the reasons I wanted to have you on today, in addition to bringing the heat on the nuances of cash settlement, is also to get into some of the fun, get into some of the weeds.
You’ve obviously been around the future space for a while.
We could probably spend five hours talking about all the many and varied nuances of what goes into actually taking delivery of a product.
But let’s start maybe with some of the complexes.
In your experience, you’ve been doing this for a little bit, a lot of different clients.
Which clients are the ones that in your experience are most apt to want to take delivery?
Is it the AGs?
Is it the energy producers?
Is it something else?
What complex do you see folks wanting to take delivery the most?
So it’s usually metals, gold and silver.
But what I’ve been doing this 20 years and I don’t, well, a little over 20 years, I’m getting old.
I don’t recall anyone ever actually going through the process.
We’ve had a few people that are interested and we start getting them all the information and then they look at the numbers and they say, “You know what?
Forget it.
I’ll just sell my futures contract and then buy it in the cash market.”
From almost everybody, it depends on where you live because if you do take delivery through the futures markets, there’s certain warehouses throughout the country.
So if you live a long way from a warehouse, it doesn’t make sense.
If you live in New York City, it might make sense.
So it’s very rare for people to actually make or take delivery.
It happens, but as you mentioned, most brokerages don’t allow it.
The reason being, it’s a lot of risk to take delivery or make delivery.
You have to put up quite a bit of money, the full contract value.
So if we’re talking about corn, it might be 20,000, 30,000, depending on where corn’s trading.
So it’s not a simple process.
Let’s just put it that way.
It’s time consuming.
There’s risk for the broker.
There’s risk for the client.
So most brokerages just say, “You know what?
No, don’t do it.”
But here’s one thing I will point out that most people aren’t aware of.
Depending on your broker, if you’re trading with a deep discount broker or a broker dealer that’s just really huge and they don’t have a lot of customer service, they may not tell you that you have an open futures contract in a physically delivered product that is going into the delivery process.
They might just liquidate your trade.
We hear about this happening all the time.
Somebody that was long corn or soybeans or whatever the case is, and they wanted to remain long, but they didn’t realize that they were going into first notice days.
So instead of someone telling them, “Hey, you need to roll from March to July,” the broker just liquidated the trade.
So they checked their account three or four days later and they realized they’re flat and corn has rallied 30 cents without them.
That happens a lot and that’s probably a big part of the reason you see when we’re going into first notice day and a lot of these physically delivered contracts, you normally see the market extend itself in the direction of the trend.
Then as soon as first notice day is behind us, the trend switches and goes the other way.
I think it’s probably unfortunately because a lot of unsuspecting retail traders are getting their positions liquidated by their brokerage without them understanding that that’s happening.
And then once that’s out of the way, the market’s free to go the other way.
So be very, very careful.
It’s a very simple process.
It’s not that hard, but you want to keep up with things and/or make sure you’re with a broker that’s going to help you and not just systematically liquidate your position without helping you roll it.
All right.
You just dropped a fun term on our audience that we have yet to cover on this show, which is of course first notice day.
I think they can probably reasonably intuit what that means, but break it down for our listeners.
What is first notice day?
What should they be aware of on that date, Carly?
Okay.
So anyone that holds a position into first notice day, meaning you should be out of your position before first notice day.
If you’re just a retail speculator and you don’t want anything to do with the delivery process, get out a couple of days early.
But if you did hold your position into first notice day, that’s the day that the exchange starts matching up buyers and sellers for delivery.
So if you’re long a futures contract, the exchange might issue you a delivery notice, and that would basically match you up with a seller.
So it gets a little more complicated, but I’m just going to keep it simple.
So always make sure you’re out of your position before first notice day unless you actually do intend to participate in the delivery process, which most people do not.
And again, most brokerages don’t allow you to.
So a lot of brokerages basically just on the day before first notice day, liquidate everyone’s trade.
We don’t do that.
Higher quality brokerage won’t do that.
But some brokers, I mean, you get what you pay for.
If you’re at a discount broker, you can probably expect that that’s what they’re going to do.
No one ever wants to be liquidated without a notice.
That seems to be a poor way to go about doing business.
Wait, I thought I was long all this corn.
Wait, nope.
You are not.
Some people might assume and for obvious reasons that first notice day lines up with the expiration of the futures contract.
But that’s not really the case, is it, Carl?
It is not.
And a lot of people get confused and a lot of platforms.
I’m glad you mentioned that.
A lot of trading platforms will show you a column, a data column with expiration date.
And the expiration date for options is really easy.
The expiration date for futures, most people assume that that’s actually the date that they need to get out.
And that’s not the case.
You need to make sure you know what the first notice day is.
The first notice day is usually, well, almost always.
There’s a few weird exceptions, but almost always before first notice.
I’m sorry.
First notice day is almost always before expiration day.
So make sure you’re out before first notice day.
Don’t pay attention to expiration date.
That’s the date, like if you were going into the delivery process, that you would focus on.
So the speculator first notice day is the day you want to pay attention to.
Yeah, it’s all those options guys who look down their nose if you, oh, they’re so simple.
Yeah, I know.
Just all these nuances here that on the options front, you don’t really have to deal with.
So it is kind of a very different beast.
So there you go, listeners.
If you are trading, you’re trading one of these physically delivered, physically settled contracts.
I was talking about WTI recently on the show.
The big WTI contract is, of course, going to be a physically settled contract.
So you will have to be out if you have the capital to swing that one.
If you’re playing big in the WTI, in the crude oil game, you like the big contract for whatever reason, you will have to be out by first notice day or at least have some plan for what you’re going to do around that time.
Lest you start getting into that process.
Now, if they don’t liquidate by first notice day, is that it?
If they have a little bit of wiggle room, you know, each brokerage has, has different rules.
And I will tell you, if you remember in 2020, I think it was April, the April contract of crude oil in 2020 that went negative, like it started the day at $16 a barrel, something like that.
I’m kind of rounding.
It might’ve been a little lower.
I must have missed that day.
Yeah.
But then at some point during the day, it was negative 46, I think is the low.
So it dropped like over $50.
Now that was actually exactly what we’re talking about.
That was that contract was going into expiration.
I think that that occurred on the day before first notice day.
And so a lot of brokerages had locked that, that contract up.
So if someone like a client of ours actually would have been rejected.
So if a client of ours would have tried to buy or sell that contract, they wouldn’t have been able to.
Because our system would have said, Hey, this contract is expiring.
First notice day is tomorrow.
There’s no reason for you to be in this.
So it would have rejected their order.
A lot of brokerages did that.
So some people were able to put orders through it.
It was a very small number of people.
And so the, that big $50 sell off was literally, I don’t remember the exact volume, but it was like maybe a couple thousand contracts.
It wasn’t, oh, it wasn’t the masses.
And so we always tell our clients for that reason and that experience roll or get out.
And when I say roll, that means basically get out and get into the next contract month.
So either roll over or get out two or three days early.
Don’t wait till the last second, because then you might get caught in the whirlwind.
Just like those people got caught in crude oil, not understanding the risks that they were taking, holding all the way to the end like they did.
People forget that was pretty much isolated to the front month, that issue there.
People the second month out contract never got negative.
I think it got down to around $20 or something like that.
But so you’re right.
The handful of contracts that did sneak through.
I guess if they bought it at negative 20, it went almost to negative 40.
They weren’t too happy.
But if they managed to scoop the bottom, they were probably pretty happy out there at the end of the day.
So there you go, listeners.
Another reason why the devil is in the details when it comes to these contracts.
Just some clarifications here, of course, as you’re looking at this process.
Again, that’s something most of you will encounter.
Carly even said for the handful of her clients who did want to do it when they actually got into the meat of the process, the nitty gritty details, they decided, yeah, you know, this isn’t really for me.
Because of course, we mentioned we talked about initial margin in the case of the S&P.
It was a little bit shy of 13000.
But the notion of value of that contract was 300000.
If that was a physically settled contract, guess what you’re ponying up to actually take delivery?
Yes, the full value of that contract.
So again, just something to bear in mind.
You’re not getting all this just for your initial margin.
You have to pay the full value of the contract.
Plus, there’s logistical details, as Carly was talking about, depending how far away you are from the delivery point or the warehouse, that’s going to all be calculated into it.
So at the end of the day, let me know if there is someone listening to this.
And you know, I’m sure a lot of institutions have done this and there are institutions listening.
But if there’s someone on the retail side who managed to sneak through by taking a delivery of some product right into us, let us know what your experience was.
I am very curious about that.
This is definitely a topic we will revisit on future episodes, especially as we get into some of the nuances of particular products where delivery is a big component of the process.
I kind of wanted to do an overview today, Carly.
Anything else you want to share with the folks in terms of the nuances of the physical settlement delivery or maybe any fun horror stories you may have encountered over the years?
So the biggest horror story is the crude oil example that I just mentioned to you.
But I want to point out, like, if you really want to train yourself not to hold all the way.
And here’s one thing that one mistake people make is let’s say you’re in a bad trade.
Let’s say you buy soybeans and soybeans just continually dribbles lower all the way into close to contract expiration.
Human nature basically encourages people to just hold on right to the last minute, the close before first notice day.
And for some reason, this happens constantly.
The market will continue to sag, sag, sag.
And then people just give up.
They don’t roll over.
They exit the position.
And then sure enough, literally the next day after everybody was forced out of their poor performing trade, the next day, the market goes up.
And then they have FOMO.
And it’s very stressful.
So I always tell my clients, make sure if your intention is to be out, get out.
If your intention is to roll over, roll over three, four days, maybe even a week early so that you’re not caught up in all the expiration mess.
You don’t want to be caught up in the herd that is forced to sell, not because they want to, but because they have to, because their first notice day is coming.
You want to be making decisions based on your trading strategy, not any arbitrary timeline of delivery and those sorts of things.
There you go, listeners.
Again, kind of an overview.
Again, 99.999 repeating percent of you will never encounter this.
But again, something to be aware of for no other reason than maybe it puts your mind at ease when you’re thinking about trading these for the first time, because I know people have reached out to us.
That is still a concern for them.
If they trade the wrong product or hit the wrong button, all of a sudden bam, here come the soybeans in the middle of the night.
Not going to happen.
It’s not going to come to your lawn and regardless, it’s going to come to a distribution facility or a warehouse.
So you don’t have to worry about that, the big truck coming into your neighborhood in the middle of the night.
But yes, just something to bear in mind.
We’re going to get more into this in particular products down the road.
Kind of just wanted to do an overview while we had Carly here.
But now it is time to ring the bell for a little bit of the futures free for all.
Ring the bell.
It’s time to take on all comers in an epic Q&A battle royale.
All questions can enter, but none can leave without an answer.
It’s time for the futures free for all.
Man they are crushing it on the music for this show.
Don’t you feel fired up now Carly?
Don’t you feel like you’re having some fun here?
On the show.
Let’s see.
Definitely inspiring.
It is.
It’s something.
Let’s see if the listeners can deliver as well Carly this week.
We’ve got a couple.
Like I said, the the love fest for the show continues.
Thank you to all the folks who are really responding out there.
Let’s go first to Jerry.
He says, thanks for the timely episode last week.
I’ve been wondering how to handle rolling futures in my historical charts.
I think that front month only is the way to go over the 30 day constant maturity future.
That just seems to add complexity where none is needed and also obscure some important data points.
I keep fighting the good futures fight.
Well, thank you Jerry.
I will keep fighting the good futures fight.
It obviously is a fight that needs to be fought because there’s a lot of madness and a lot of misinformation out there.
But yes, that was an important one that we did last week because anyone who has even encountered futures briefly and maybe even just pulled up a chart and look back historically at whatever the E-mini WTI pick your poison.
You’ve probably encountered this.
You thought, wait a minute, what is this data that I’m looking at?
Because we all know futures have an expiration date and you don’t have a chart probably just for 30 days.
You probably have it going back longer.
So now what are you looking at?
Where is the rolling processing happening?
How is all this working out?
We went deep into that last week and I think you’re right, Jerry.
I think we touched on this on the show last week as well with our guest for 99.9% of you listening to this show.
That 30-day constant maturity future, it’s a highly nuanced process.
You’re right.
It does add complexity kind of needlessly.
And also, as you point out, does obscure.
I mean, Carter was just talking about when crude oil went negative.
If you use that 30-day constant maturity future, you’re going to miss that entirely.
It’s going to settle out to effectively that second month contract, which got to about 20.
And that rolling 30-day constant maturity futures chart, crude oil never went negative.
That’s a historic data point that you are completely missing.
So yeah, great point, Jerry.
Carly, is this something you’ve encountered with your clients, the issues of looking back at historical futures data and how do you prefer to tackle it?
Do you like just the front month only charts or do you have a different approach?
Well, I actually, when I’m charting and doing market analysis, I use the front month because I think that’s where the stories told the clearest.
But when it comes to trading, there’s something that I should point out.
I should have pointed this out earlier.
If you look at commodities, let’s say a commodity like crude oil that has an expiration month every month.
So there’s a January, February, March, April, so on contract.
The front month is always a little more volatile than the second month.
And then the second month is more volatile than third.
So as you go out on the structure, the volatility drops a little bit on the future.
So for example, if the front month’s up $2, three or four months back might only be up 80 cents.
So some of our clients prefer a smoother ride.
They know they’re not going to make as much money if they’re right, but they’re not going to lose as much if they’re wrong.
Usually, now this can change if there’s some sort of weird event where the spreads change.
But generally speaking, like for example, if the front month in crude oil is December, like it is now, if you’re aggressive and you’re day trading or something like that, you might, the December might be fine for you.
But if you want a little smoother ride, you might actually want to go out to June or March, somewhere between March and June.
It’s going to be smoother.
There’s the volumes a little lighter.
But if your plan is to buy and hold, it’s going to be a much more comfortable ride.
And you don’t have to worry about rolling over every month.
Now the downside of that is each market has generally has contango.
The front months are usually priced a little lower than the back months.
So that’s a problem.
But it depends on your strategy, but it’s just something to keep in mind.
So you don’t have to trade the front month.
You can consider going in the back months and enjoying the ride a little better.
There we go.
Listen, we got one more here.
We got a product request coming in from Chris.
Chris Lovell, that name sounds familiar.
He says, Hi, I wore my red.
Oh, he’s one of our pro members.
He says, Hi, I wore my red options insider shirt that I wanted to pro crate on the salary.
That’s awesome.
I was looking for your studio to take a picture in front of it.
Well, yeah, you can’t.
We’re easy to find.
We’re right across in the big.
Well, it used to be easier to find.
We were right across from Boeing these days.
I’m not sure the building still says Boeing.
Boeing did move, but we were that made it easy to find our studios here in the West Loop area.
But I digress.
He has a request.
He says for the future is run down.
Love the new show.
Well, thank you.
You join many who are having a ball with this show, including us.
We’re having a fun doing it.
He says, I’ve morphed into a futures options trader.
So I love hearing about the nuances of the underlying futures.
Would you please do a deep dive into all things?
So far a multi-grat see Chris.
Well, Bob and a Chris.
So far, yeah, you know, so far is quite the beast.
Carly, we’ve touched on it a few times on Twi fo.
I have been toying with doing a full episode into all things.
So for course, secured overnight financing rate, if you’re not into the acronyms, they’re a listener does a ton of paper.
We were just talking about it on Twi fo a couple of weeks ago, I believe, with Carly’s nemesis, Russell Rose, and it did over eight million contracts that week.
So on the options side.
So it is a beast from the volume perspective.
But with that comes a lot of nuances.
I don’t know, Carly, we obviously don’t have time to do it today.
That requires probably a full hour in and of itself.
But what do you think?
Are you down for a full episode, a deep dive into So far?
Or are you going to pass and leave me hanging up to holding myself?
No, I would love to talk about so far.
I’m old enough to remember the euro dollar contract.
The So far basically is replaced the euro dollar.
It’s a long story.
But as you mentioned, it’s really the most liquid futures contract in the world.
So it absolutely should be talked about.
All right.
Be careful what you agree to, because I’m legally obligated.
I’m the host of the show.
I have to respond to these.
But you you can duck out.
If you want to choose for maybe a little easier product, I would totally understand.
I’m not available on So far day.
I’m in.
All right.
Carly’s down.
So, Chris, there you go.
And maybe on our next appearance, we will do a deep dive into all things.
So far strap in for that one.
Listeners, it should be epic.
All right, Carly, we did it.
You survived another run through the futures rundown.
How was it, Jeff?
I did.
It was it was a blast.
Thank you.
Epic show.
We went all over the place today and we didn’t even have time to get to So far.
That’s a whole other hour in and of itself.
So crazy delivery stories, all sorts of crazy products.
Lithium making it on the show.
Coco all sorts of madness on the show this week.
And Carly, in between the folks, maybe you want to check out your books or maybe they want to reach out to you.
They have questions along the lines of what we’re seeing right now.
Where should they go?
What should they do?
Well, for starters, I did write a ground zero futures book.
It’s called Traders First Book on Commodities.
It covers the very, very basics, how to calculate profit and loss, that sort of thing.
So that might be a good good fit for you.
If you want to find us our websites, the Carly trading dot com, D E C A R L E Y trading dot com.
There you go.
Check her out.
Listeners, I definitely encourage you to check out her books as well.
The search for Carly Garner, G A R N E R.
If a lot of you were coming to this show, you’re newer to the world of futures.
And as a result, also the options on the futures.
She touches on both in her book, but some of those things, even the more basic stuff like calculating profit and loss might seem simple.
When you get into some of these products with the highly elaborate ticks, wait till we get into FX listeners or everything’s a ratio and it’s all inverse.
The ticks are crazy and the notional value is wonky.
Wait till we get into all that fun.
So yes, it is not as straightforward as you buy a stock.
It goes up five dollars.
You have a thousand shares, bam, five thousand bucks in your not quite as simple as that.
Listeners, so I highly encourage you to check out her books there.
They will serve you well.
And of course, while you’re checking things out, make sure you check out our friends over there.
C T S futures dot com.
The place to go to kick the tires and light the fires and learn more about all these products we’re talking about.
And maybe you want to dip your toes into one of these products for yourselves.
That’s the place to go to check it out.
It’s going to do it for us on the network today.
Back again tomorrow with our usual double header coming at you first with the option block, of course, with our friends over there at SIBO, followed by this week in futures options.
Carly’s other stomping ground when she’s not hanging out on the futures rundown, where we’ll talk all things futures options with our friends over there at CME Friday, of course, volatility views, talking international vol with our friends at your ex as well as some fun stuff on the domestic front with our friends over there at public, all sorts of fun.
And then of course, we’re back again next week.
Another episode of the futures rundown.
Stay safe out there, everybody.
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