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.
Futures 101: What is a Future
- How is it different from a stock or an option
- What types of settlements are there
- What are “ticks”
- What is the contract size
- Why trade futures
The Contract Specs Segment: The E-mini S&P 500
- Taking a deep dive into the flagship equity index product at CME Group
The Trading Pit
- Looking at what is trading in the futures markets
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.
We’ll even tackle all of your wildest futures trading questions.
If it involves futures, then you’ll hear about it on the futures rundown.
The futures rundown is brought to you by T4 Futures and Options.
Elevate your trading experience with the T4 Futures and Options trading platform.
Whether you prefer desktop or mobile applications, T4 delivers low latency and professional-grade functionality for both traders and brokers.
Take advantage of theoretical sheets, strategy solver, MBO, advanced charts, and a suite of powerful features to enhance your trading strategy.
Visit ctsfutures.com or search for T4 Futures and Options on Google to register and get a free month.
And now it’s time to break into the futures markets.
It’s time for the Futures Rundown.
All right, everybody.
Welcome to the Futures Rundown.
Always exciting to have new music here on the network because that means a new show.
Yes, 17 and a half years in and not just going strong but growing.
Adding yet another new show to the docket here.
You folks have been asking us and asking us and asking us for years.
Can you add a Futures-oriented show, something that dives deep into the underlying futures markets?
And we obviously have shows that touch on them.
This Week in Futures Options, of course, a great show a lot of you love every week, has to deal with the futures to talk about the options on said future.
So we do dovetail into the world of futures on occasion.
Many, actually this year, the influx of requests for a Futures-oriented show just grew until we could ignore it.
No longer listener.
So you know what?
Ask and ask again, then ask again some more and you shall receive because here it is.
The Futures Rundown, the long awaited newest addition to the Options Insider Radio Network.
My name, of course, Mark Longo from the aforementioned network.
Very happy, very excited to be kicking off this new venture here on the program.
With our folks over there, plus 500, a new addition to the network there as well.
So check them out if you are intrigued, kind of making interesting inroads into the futures markets here in the US.
We’ll be exploring that in more detail coming down the road as well.
And you know what?
When they asked me, they said, you know what?
Who do you want as your guest on the inaugural episode of the Futures Rundown?
Who do you want to put in that prominent position?
I said, bring me Carly.
She’s the only person, the only name we wanted here for the inaugural episode.
No, no, no, the Miss Carly Garner, the author of numerous books, including a Trader’s First Book on commodities, trading commodity options with creativity and higher probability commodity trading.
Carly, welcome to the inaugural episode of the Futures Rundown.
How are you doing over there?
I’m honored.
Thank you.
And congrats on the new show.
You should be fun.
You should be honored.
You know, at the end of the day, this is something you’re going to put on the old tombstone.
You know, you’re going to put on maybe you wrote a few books, but really it’s going to be guest on the inaugural episode of the Futures Rundown.
Carly, it’s a big deal.
You’re absolutely right.
All right.
Let’s get rolling.
Carly, obviously you’ve been on our Twi-Fo show a number of times, but this is a new program going out to new people, new listeners.
So let’s start from scratch.
Give our listeners a little bit of an overview of your background in the world of futures as well as what it is you do over there at DeCarly Trading.
Okay.
I am a Futures and Options broker.
We run a boutique brokerage shop, DeCarly Trading.
We don’t offer stocks.
We don’t offer bonds.
We only do Futures and Options, so we’re specialized.
And I entered the business in 2004, so I’ve been doing this for a few minutes.
All right.
I’ve been doing it for a little bit out there, listeners.
And you know what?
A lot of you out there may listen right now and be saying, “Futures.”
Maybe that word alone either intimidates you or maybe you just don’t want to mess with those markets.
Don’t worry.
We got you covered.
It is time for a little bit of Futures 101.
It’s time to shine some light on this mysterious marketplace.
It’s time for Futures 101.
All right, listeners.
We thought what better way to kick things off than with a dose of education.
At the end of the day, for a lot of you, this will be your first foray into the world of futures.
So forewarned, foreinformed is indeed forearmed at the end of the day.
Let’s get into that, all that fun.
Even before we get into the definitions and explaining all the nuances, and they are a legion in the world of Futures.
But currently, as you mentioned, you kind of cut your teeth in the world of Futures, which is why we wanted you on.
You are a Futures native, if you will.
And I’m an options guy.
I dabble in Futures.
I was mostly forced to discover the world of Futures back when I cut my teeth as a market maker in the SPX because you had to hedge with the big S&P Future.
And then later on, of course, the E-Mini out there.
That was kind of my forced introduction into the world of Futures.
But for you, you are a Futures native.
You speak the language.
You know all the natives out there.
You know their language out there, Carly.
So let’s start there.
When you were starting off, what was it that lured you to the dark side of Futures versus, let’s say, your Teslas and Apples and spies and invidious of the world, Carly?
Well, I mean, I wish I could say it was some organized plan, but it wasn’t.
And I just stumbled into the industry and I loved it because it offered– like every day is new.
There’s literally– I’ve never had a boring day in this business.
And when I first started in the Futures and Options brokerage industry, we were calling our orders into the floor.
We were talking to guys that were– let’s just say they’re very, very interesting people, very animated.
Good bunch of guys.
But anyways, it’s a very colorful industry.
It’s not boring.
That’s why I love it.
Colorful.
That’s a good way to describe it, yes.
I recall working orders over there, the big S&P Futures pit, and yes, colorful folks, to put it mildly.
In a good way.
In a good way.
Colorful in a good way, listeners.
Let’s get into it.
Futures, what the heck are we talking about?
You might be familiar with stocks, of course.
A lot of you out there already trade those.
Futures, of course, a little bit of a different beast.
We’re talking about the underlying now.
But now we’re talking about, instead of shares of a company, we’re talking about a contract to buy some asset.
Could be almost anything.
You’ll see we’ll get to all that fun in a little bit at some pre-determined price in the future.
So you’ll see that there’s a key aspect to that, which is already going to set it apart from the stock world, which was there is a date at which the future will expire.
That’s one of the key sticking points.
One of the key hang ups for new futures traders is there is a ticking clock associated with it versus the stock world at the end of the day.
How many times have people been run over in the stock world and they say, “Okay, you know what?
Now it’s just a long-term buy and hold.”
Can’t really do that with futures.
There’s a ticking clock.
It may also say, “Well, wait a minute.
There’s an expiration date.
That sounds like an option.”
And there is some overlap there at the end of the day.
But remember, futures are all direction.
It’s all delta at the end of the day.
If you want to look at it from an options perspective, there are no other Greeks.
There’s no gamma.
There’s no theta.
There’s no vega.
All the things we talk about in the world of options. futures are 100% direction, 100% delta.
And at the end of the day, looking at very minute directional movements at the end of the day.
So something to bear in mind for all of you options fans out there.
They also trade in different places that you may be familiar with.
Your stocks trade on your NYSE or of course your NASDAQ futures going up on CME or ICE, even though those lines are starting to blur these days.
ICE, obviously the parent company now of NYSE.
So a little bit of overlap there as well.
NASDAQ starting to put up, you know, some futures products out there.
So those lines are starting to blur a little bit out there, but still different venues at the end of the day.
And now the thing we joke about in the intro, there are listeners about the truck of soybeans come in and being dumped on your lawn.
This is what hangs up a lot of new futures traders is the different types of settlement.
Carly, when you’re talking to new customers over there at DeCarly, how often do people call up and ask you and say, wait a minute, I’m going to trade these futures things.
Are they going to dump a truckload of crude oil on my front lawn?
How often do you have to deal with that?
Yeah, I hear that a lot from new traders.
I don’t know who wrote that and what book and where people are getting this.
But the reality is only 97, 98% of contracts ever go into the delivery process anyway.
And the way that the system is designed, the only people that get into that process are the people that actually want to be there.
Now it is true if you hold beyond first notice day, you might be assigned a delivery notice.
And that’s basically the requirement to make or take delivery.
But the reality is you can get out of it.
There’s a way to get out of it.
And it’s rather expensive.
You don’t even want to get yourself in that situation.
And also, I’m going to just throw this out there.
If you are with a good brokerage, they will make sure that you are aware of first notice day and help you roll your contracts into the next month because they do expire.
What happens to a lot of traders– some of you might have noticed this– when a contract is expiring.
And we’re going into first notice day– by the way, first notice day is before expiration day.
It gets a little bit confusing in some of these commodities.
But as we’re going into first notice day where everybody has to get out of their position, a lot of times you’ll see a trend exhaust itself.
So for example, when the grains were selling off sharply a few weeks ago, they bottomed right around first notice day.
And that happens all the time.
Because what’s going on there is a lot of brokerages, like discount brokerages, brokerages that aren’t holding their clients’ hands, so to speak, just liquidate the positions rather than contacting their client and saying, hey, you need to roll over or helping them do so.
So be aware of those sorts of things.
It is important which brokerage you choose.
If you’re a rookie and you haven’t done this a lot and you’re not familiar with first notice days and how it works, even if you make a mistake, you’re probably not going to end up with corn on your lawn.
But you might end up being flat when you don’t want to be flat and so on and so forth.
So it gets a little bit tricky.
Make sure you have help if you need it.
There you go.
So call up someone like the Carly.
She could walk you through it.
Or of course, check out our friends over there, plus 500.
They’ll walk you through all that fun as well.
But let’s get into it.
You know, the truckload of soybeans/crude oil, that all comes down to the settlement process at the end of the day.
And like Carly said, 99.9% of you can easily avoid this.
In fact, most of the platforms on the retail-friendly side that you’re going to trade through that allow you to trade futures don’t even allow the delivery process.
So they’re not going to let you get that far.
So even if you somehow forget about it, they, as Carly mentioned, they will hold your hand and say, wait a minute, watch out for this.
And also, thankfully, most of the products you’re probably going to trade, including the big, most popular stuff like the E-Mini I was just talking about earlier, are really cash settled at this point.
What does that mean?
You’re probably familiar with that from the options world.
Of course, at the end of the day, your account is going to be debited or credited based on how much that contract made or lost during that trading session.
So that’s really it.
You don’t have to worry about barrels of soybeans or barrels of crude oil, bushels of corn, whatever it is, changing hands and coming through and delivery and warehouses or any of that kind of stuff.
That’s only for a small percentage of products out there that are physically settled.
And for those, those are producers out there.
There are end users.
There are people out there who want to take delivery.
And for those folks, they already have the mechanisms in place.
And they are, they want to use these large physically settled contracts to do just that.
But for the lion’s share of you out there and for the lion’s share of the products, you’re going to trade.
You don’t have to worry about that.
So for the what they say in the intro, do you have to worry about getting a truckload of soybeans dumped on your front lawn?
The answer is no.
Listen, you could just wash away that concern.
Now listen, some other things to talk about that are different in the world of futures.
If you’re coming to it from the world of stocks, stock movement is pretty simple.
They all move in penny increments at the end of the day, right?
Oh, Apple’s up three cents today.
Oh, Nvidia’s down 52 cents.
You know, Tesla’s up a buck 30 today, whatever the case may be out there.
It all moves in pretty clear dollar and cent increments.
Not the case in futures.
Futures move by tick sizes out there.
That’s the minimum price fluctuation allowed in a contract that is set by the listing exchange.
And guess what?
It’s going to change by product.
So you have a whole new world of discovery out of you when you’re looking at different products out there.
Let’s go to the big dog.
A lot of you are coming to the dance for that as, of course, the E-mini.
The E-mini minimum tick size is a quarter of an index point.
I will say that again, one fourth of an index point.
So if the S&P moves a full point up or down, that is four ticks of the E-mini futures contract out there.
So bear that in mind.
A quarter of an S&P point is one tick in the E-mini.
That translates to a value, a tick value of $12.50.
So you could do the math really quickly.
One full point equals four ticks, four times 12 and a half bucks.
So a full point in the S&P is equal to $50 in the E-mini out there.
Carly, anything to add so far as we’re breaking down tick sizes in the E-mini?
Nope.
I think you’re doing a great job.
One thing going back to the cash settlement topic I’ll just mention.
Some people, we’ve had clients do this.
They get lazy or complacent or they forget to do anything with their expiring contract and they allow it to go to cash settlement.
You really don’t want to do that.
Even though it sounds like a convenient way to get out of your trade without having to worry about it, the reality is it ties up some capital in your account because it’s not an instant process.
It lingers on the statement for a day or so.
The cash settlement price is usually some sort of big crazy equation that you can’t really make sense of.
So it’s not as simple as you think it is.
So I generally tell our clients, don’t go into cash settlement, just offset your position and move on.
But if you do, it’s not the end of the world.
Yeah, it’s similar advice to what we give in the world of options, which is listening.
You don’t have to carry everything through expiration.
Most futures are closed out.
Most options are closed out before expiration as well.
You can do the same thing with futures.
You don’t need to carry it through the expiration and settlement process.
So if you are even remotely concerned about it or maybe just a little bit confused by it, take Carly’s advice, close it out ahead of time.
And then you are 100 percent insulated from any of these concerns about truckloads of whatever showing up on your front lawn or any of that stuff.
That still worries you, even though we dispelled some of those fears.
That’s still a concern.
Just close everything out before expiration and settlement and you will be fine.
Let’s dig a little bit further into the world of futures, shall we listen as we talked about the minimum tick sizes.
About every contract, man, you could trade futures on just about anything you could imagine, listener.
So the size, the actual size of that contract is going to depend on the actual underlying itself.
The contract size will tell you how many, whatever it is, barrels, ounces, whatever the case may be, how many of the thing that you are trading, you are going to trade with one contract.
For example, if you are looking at gold, the big gold futures contract over there at CMU, that is for one contract is for 100 Troy ounces of gold.
That’s a lot of gold, listeners.
If you want to sling WTI, that’s going to be for a thousand barrels of crude.
Now those are big.
There are smaller, more bite-sized contracts as well.
We are getting into those in future shows.
But just something to bear in mind, the contract size of every product is going to vary again depending on what the underlying is.
Think of the contract size kind of as similar to your multiplier in the world of options.
You multiply 100 times the price, that’s going to give you the net cost of your trade, what it’s going to cost you to buy those options in that case.
In this case, that contract size is going to help us determine the contract value or the notional value of what you are trading out there.
Again, we just talked about WTI, crude oil, just broke through $70 not too long ago out there.
So let’s say coming into the start of the show, crude oil WTI was trading at $70 a barrel.
Remember we said the contract size for WTI, the big WTI contract is 1,000 barrels.
So you can do the math pretty simply, listeners.
One futures contract in WTI is equal to $70 times 1,000 barrels equals $70,000 of notional value in WTI.
And again, that’s a lot and it is.
There are going to be micro and smaller size contracts you can trade out there.
It’s just something to bear in mind when you’re talking about the contract size out there.
Carly, anything you want to add on the contract size or the notional value of these products?
One thing that I’ll point out that may not be obvious, the way the futures markets operate and the reason they’re so liquid, and why they work so well, is all of these contracts are standardized.
The only thing that’s negotiable is the price.
So as a trader, we can’t choose the contract size.
I mean, you can do many’s, micro’s, so on.
But you can’t say I want to buy 900 barrels of oil.
You can basically buy a full contract or a micro or many or any combination, but everything is standardized and that’s why it works as well as it does.
The quality of the underlying asset is standardized.
The date of expiration, the date of delivery is standardized and the contract size.
Otherwise it would be a lot more difficult if we had to negotiate the details with each other side of the trade.
It wouldn’t work as well.
Good point.
All of this is standardized and determined ahead of time.
So you don’t need to mess about with it.
Listen, it’s all there again in the contract specs and we’ll get to some of that fun in a little bit when we get to our contract specs segment.
But let’s keep going in this Futures 101 now breaking down some more initial terms so you understand it could come to grips with this futures market.
But also something to bear in mind when we’re talking about futures is the fact that, you know, stock world, I mentioned it earlier, you buy a stock, it goes against you.
What do people say all the time?
Oh, now I’m long term buy and hold on this stock.
They put it in their accounts.
They kind of set it and forget it.
Can’t really do that with futures.
Futures as I mentioned, A, they have an expiration date so the clock is ticking and B, they are going to be marked to market at the end of every session.
So something to bear in mind, your account is going to be debited or credited at the end of every session based on the movements in the underlying.
So the notion that you could just kind of buy and hold and forget about it for two, three, five months, whatever the case may be, not the deal in the futures market.
You will have to pay more attention to it or if something happens, you fall below your maintenance level and we’ll get to that in a little bit as well.
You’re going to hear about it from your broker pretty quickly.
So you’re not going to be able to ignore that for long.
So just something to bear in mind when you’re playing in the futures market.
It is a daily reconciliation, if you will, at the end of the day out there.
But again, the big selling point for a lot of people on the futures side and also maybe a little bit intimidating for folks is the leverage.
That’s what people come to the dance for at the end of the day.
We talked about the notional value of the contract, you know, $70,000 for WTI.
And we’ll get to some specific examples in a minute when we get to the E-mini.
But you know, you don’t need to put all that money down to trade these contracts.
You don’t need to shell out $70,000 for WTI or over a quarter of a million in the case of the E-mini to buy one futures contract.
That’s the nice thing about futures.
You know, if you buy a stock, for example, you want to come in and buy a stock, you have to pretty much shell out the full value or the stock or you could buy it on margin.
And the best you could do on most outlets is 50% margin.
You can put up half of the value of the stock and borrow the rest at some, you know, exorbitant interest rate.
For options, you know, the deal, let’s just talk about buying.
We’ll forget about selling for a minute.
But if you want to buy options at the end of the day, let’s say you have an option that costs $500 each, you want to buy 10 of them, that’s $5,000.
You have to shell that out at the outset there to put on the trade.
That’s just what you have to do in the world of options.
There’s no really getting around at the end of the day.
Futures a little bit different.
Carly, you’ve been dealing with the futures space for a long time.
Why don’t you walk our listeners here through the concepts of a initial margin, what that is, and then maintenance margin.
Okay, so the initial margin is the amount of money you have to have in your account to be able to put on a particular trade.
So for example, in crude oil, I’m going to kind of round a little bit, but the margin in crude oil is roughly $7,000 right now.
And it can go up and it can go down, but it fluctuates.
Let’s assume crude oil margin is $7,000.
If you had $7,000 in your account, you’d be allowed to put that trade on.
The maintenance margin is usually about 10% below for most markets.
So we’re just going to assume, let’s say the maintenance margin is $6,000.
If you have a $7,000 account and you buy a futures contract, your brokerage will allow you to go through, the exchange will allow you to go through because you do have the initial margin available.
But if you lose a dollar in crude oil, which is $1,000, and your account balance drops below the maintenance level, which we’re going to assume at $6,000 for this example purpose, a margin call will trigger.
Now, what most people don’t realize is the margin is calculated at the close, not intraday.
So if your account dropped below $6,000 in the morning, but by the end of the day at the close, your account was back above $7,000, a margin call would not trigger.
If your account was above $7,000 all day, and then the market dropped a dollar on the close, and you’re at the closing price, your account was below $6,000, a margin call would trigger.
So keep that in mind.
And one more thing I’ll put out there is leverage with zero interest leverage, like you get in the futures markets, can be a really fantastic thing.
It can also be a really miserable thing if it works against you, and it goes both ways.
My advice to traders is you’re generally better off using less leverage instead of more.
And some people are confused by that.
The exchange is setting the maximum amount of leverage you can use, but you as a trader, you can choose to use less by overfunding your account.
So if you hypothetically had $70,000 to put into crude oil, and you open up a futures account with $70,000, you bought one crude oil futures, you basically have taken out all the leverage.
Because if crude oil goes to zero, you lose your $70,000.
If crude oil doubles, you make $70,000, but there’s no leverage.
So you’re basically giving yourself a more comfortable, more room for error type of position.
Not everybody obviously can do that, but there are micro contracts that are one tenth the size.
So you could do something similar with a $7,000 account.
Instead of buying a full-size future, you would buy a micro, and you’re basically not using any leverage.
There you go.
Well said there, Carly.
So yes, that is what lures people to the dance.
They’re very attractive from the capital efficiency perspective, but also all the nuances of margin can be a little bit intimidating for folks, as Carly just broke down, especially for newcomers.
So yes, as you mentioned, you’re buying a stock, you have to shell out all the money, or the best you can do is usually 50% margin.
Futures going to be a lot more attractive.
You know, it ranges, the margin rates are going to vary by product out there, but it’s going to range in a ballpark somewhere around 3% on the low end to north of 10, probably up to 12% plus 13% on the upside for some of these products.
That’s your typical range for what you’re going to have to shell out for that initial margin deposit, your performance bond, if you will, with the broker.
So as you can see, that’s much more attractive than 50%, let alone 100%.
And that’s really what brings a lot of people to the dance when you’re talking about futures.
And we’ll get into, again, a specific example in our next segment.
A couple of notes on margin.
First off, these are going to vary by broker, and they can even vary during the day if things get really wild.
Look back at August 5th, just a month ago out there when things were melting down out there, or even just yesterday.
We had some aggressive moves out there as well.
So just be prepared for your margin rates to fluctuate out there.
And you might say, “Well, I had enough.”
And then your broker decides to change it if you’re trading a very volatile product.
So just something to bear in mind.
And also, you know, we talk about options and how much you have to set aside if you want to sell an option versus buying it.
There’s really none of that in the futures world.
The initial margin and the maintenance margin are going to be the same whether you’re buying or selling the future, which is something that’s also attractive to folks out there.
They don’t have to go into the weeds and look at the short interest rate and how much it’s going to cost to short something on none of that.
It’s really the same for buyers and sellers.
Most of our examples are going to be from the long side because it’s easier for people to wrap their heads around that, but just something to bear in mind, that maintenance margin and the initial margin are going to be the same for buyers and sellers out there.
So let’s break down some of what we’re talking about, then we’ll get to some specific examples.
At the end of the day, you’re listening to this, you say, “Why should I be trading these things over stocks?”
Well, first off, if you trade futures, you can trade a heck of a lot more than just stocks.
That’s what Carly alluded to at the top of the show.
The universe of products is almost infinite.
Obviously, you can go into, let’s say, the metals, for example.
You got your gold, your silver, your copper, your platinum, keeps going on and on.
The ag products, they are legion, corn, wheat, soybeans.
You can get into livestock if you want, lean hogs listeners.
You can even go farther into dairy.
Maybe you want to get into lumber, dead trees, it’s all there in the ags listeners.
Maybe you want to sling some international currencies, the world of FX.
You want to sling EuroUSD, maybe pound USD.
YenUSD has been a bit of a hot one of late out there.
You can do all that in the world of futures.
Crypto, talk about crypto all the time on the network.
You’ve seen more and more listed futures in the world of crypto, most of them on Bitcoin and ETH right now, but we’re starting to see some forays into other products as well.
So if you like the notion of no counterparty risk and you want to trade crypto but have a little bit more backstopping you at the end of the day than listed futures on crypto are out there.
I was talking about energy earlier.
You can do crude oil.
You can do NatGas.
Your beloved Arbob, a whole bunch of stuff out there.
Heating oil and the energy world.
Then of course fixed income.
You can do the 30 year.
You can do the 10 year, three month, let alone the equities, which is bringing a lot of people to the dance out there in terms of equity indexes, the NASDAQ, the course S&P and the Russell being three of the most popular out there.
Also you could trade beyond traditional market hours.
Now how many people have written into us, especially during earnings season saying, man, I wish I could trade options after the close.
Well, futures are bringing it to you.
Let’s look at the E-mini again.
That’s effectively trading 23 hours a day.
Starts at Sunday, 5 p.m.
Central goes to 4 p.m.
Central.
The next day they kind of reset for an hour.
Then they go again, 23 more hours.
They pretty much shut down at Friday at 4 p.m.
Central.
They’re off for Saturday.
Then right back at it again on Sunday, 5 p.m.
Central.
If you want to say effectively 23 hours a day market with the exception of Saturday out there, then you’re going to have it out there on the futures front.
And again, you’re going to see wide arrays of trading hours based on the different products out there.
But if you want a longer trading day, if that’s exciting to you, then futures are going to bring it.
And obviously the capital efficiency, you really can’t beat it out there.
You’re talking ballpark 3 percent to north of 10, maybe 12 percent for a lot of these futures versus stock, the best you’re going to do is 50 percent.
And size.
Size is nice, too.
They’ve really done a lot in recent years to make futures more palatable to the retail audience.
So not just minis, but micros, a lot of bite size contracts that are cash settled.
So you don’t have to worry about the delivery.
The truckload of soybeans come into your house and the size is right for your retail trading account out there.
So Carl, anything you want to add on trading futures, why you should do it over stocks before we get into a little bit of the contract specs?
I do have something to add.
Futures trading is more attractive on a tax basis, and I made that in two ways.
When you’re reporting at the end of the year, when you report your futures trades to the IRS, you’re only going to report a single number.
It comes on a 1099B, either made money or you lost money.
And that’s it.
You have to list each individual trade as a stock trader.
You have to list every transaction, and it’s very cumbersome.
It’s a lot of work, or you have to pay someone a lot of money to do it for you.
Also as a futures trader, if you do make money, if you are making money and you’re profitable, you’re going to be taxed at a 60/40 blend between long-term and short-term capital gains.
Obviously this can change, but it’s been this way for a long time.
So we’ll assume it is what it is for now.
As a stock trader, some products are different, depending on exactly what you’re trading.
But if you’re trading individual stocks, you’re basically subject to long-term gains or short-term gains.
Most speculators are looking at short-term capital gain tax rates, which are going to be quite a bit higher than what you would pay if you’re buying or selling futures contracts.
So from a tax perspective, there’s an advantage to trading futures.
There you go, that’s why we wanted Carly on the inaugural episode.
Taxes, listen, not the sexiest thing, but at the end of the day, very important.
So yet another benefit of trading futures over stocks.
But now let’s get into the nitty gritty.
It’s time for the inaugural contract specs segment.
Have you ever looked at a futures product and said, what the heck is that?
Let’s find out together.
It’s time to get the contract specs.
All right, listeners, let’s get the contract specs.
And I’m looking forward to this segment down the road, because we’re going to get into some weird and wild products.
Cheese, cash settled cheese, anyone?
Our Bob, all sorts of fun in the offing down the road.
We thought we’d kick things off with the big dog, the one that’s bringing all the boys and the ladies to the dance these days on the futures front, which is of course the E-mini S&P 500 future over there at the CME.
This is the flagship equity index product over there at CME.
It averaged about 1.8 million contracts a day last year, even more on the tape this year.
So this is the big dog, not biggest in size, of course, that would be the big S&P contract, but that’s a big mouthful for most retail traders to bite off.
So a long time ago, back in the early days of Globex, they decided to make something a little bit smaller.
And that’s when the E-mini was born.
It is one fifth the size of the big S&P contract out there.
You might know it by the ticker symbol ES or slash ES, depending on your platform out there, but widely known, widely watched, widely traded out there.
So we’re going to kick off our inaugural contract spec segment with the big dog in terms of volume, at least, which is the E-mini.
Carly, would you say when you’re talking to your clients out there, is the lion’s share of their action over there at the Carly?
Is it the E-mini still?
You know, actually, we handle more agricultural traders and metals traders and even energies than we do S&P, but we do have quite a few portfolio hedgers in the S&P space.
It’s by far and away, though, like if I’m talking to the public or out doing webinars or classes or whatever I’m doing, almost everybody, because everybody’s familiar with the S&P, so it’s comfortable to them.
So that’s really kind of the gateway product of futures.
A lot of people start in the E-mini S&P, whether it’s futures or options or whatever it is, and then they venture off into the commodities after.
So it’s usually the gateway.
Yes, the gateway product for the futures market, of course, the E-mini.
Let’s get to it.
Remember, we talked about some concepts in our futures 101 tick contract size.
Let’s break it all down with some real world examples for you listeners.
So just yesterday, we had a bit of a sell off out there in the S&P markets, kind of struggling to find their footing again today.
We’ll get to some current activity in a second when we get to the trading pit segment.
But yesterday, S&P closed right around 5530 out there.
Remember, we said the tick size in the S&P is one quarter of an index point worth 12 and a half bucks.
So every one point in the S&P is going to be worth four ticks or $50.
So if you want to determine that contract size, the notional value of the E-mini contract, you have to take that 50 bucks and multiply it times whatever the S&P is trading right now.
In our example, it closed at 5530.
So 50 bucks times 5530.
Pretty basic math, 276,500 bucks out there.
So again, we talked about initial and maintenance.
You don’t need to put up $276,500 to make one E-mini trade.
No, you have to put up the initial margin.
We scanned a lot of the different brokers out there, kind of get the lay of the land.
Again, this number is going to vary depending on your broker and your type of account and everything else out there.
But ballpark out there, initial margins going to be around $12,600.
Back 12667 was the average we arrived at, I should say, coming into the start of the show, which puts it right around 4.5% of the notional value of that contract.
So again, capital efficiency, kind of hard to beat the futures.
If you want to go out and buy the buy spy, for example, you got to put up 50% of the value if you want to do it in an equities account.
You want to come out and have a position that gives you exposure to over a quarter of a million dollars worth of the S&P.
It’s only going to cost you $12,667.
So capital efficiency, it is kind of hard to beat futures.
And that’s what people are attracted to at the end of the day.
All right.
We’ll walk through a couple of examples here, then we’ll get some of Carly’s thoughts here.
Let’s just walk through a basic example of how this works in real life.
Listen, let’s say S&P drops 1%.
It’s about 50 handles.
A very common occurrence these days, we saw them down about 1% just yesterday.
So 1% no longer the big move it once was out there.
So if it drops around 50 points, about 1% out there, we can do some basic math to figure out how much this is going to cost us. 50 points.
Remember, it’s $50 a point for ticks.
So you can do it that way. 50 times 50, 2,500 bucks.
That’s being debited out of your account at the end of the day.
Remember, these are marked to market contracts.
Or do you want to do it the tick way?
A little bit more convoluted this way, but some people like to do it this way as well.
Four ticks for every point.
So you drop 50 points.
That’s four times 50.
That’s 200 ticks.
Every tick is 12.5 bucks.
So the math works out the same 200 times 12.5.
You lost $2,500 in your account.
You came in day one.
You bought a one lot of the E-mini.
You put in $12,667 and you just lost $2,500.
You dropped 1% in that.
So you could see by that math that gets you down to $10,167.
Now why is that level important?
Because looking at the variety of the brokers out there, they of course have a maintenance margin level as well.
How much money you have to maintain in your account so you can cover the risks associated with that contract.
And it’s going to be less obviously than your initial deposit.
They’re going to give you some wiggle room.
So if you get a little bit of a drawdown, they’re not going to call you instantly and say, hey, put more money in.
But if you get below this certain threshold, they are going to call you.
And in this case, the maintenance margin is a little over $11,000.
$11,122.
To be precise, as you could see in our example.
We are below that.
We are at $10,167.
So you need to put in about $1,000 almost, $955 just to get back to that maintenance margin requirement.
But one of the things that confuses people at the outset with futures is if you do drop below that, if you do get that margin call, you have to put enough money to get back not to your maintenance level again, but actually to your initial margin deposit.
That’s what confuses a lot of people.
So you have to put in the full $2,500.
Carly, I know that’s kind of confusing for a lot of people, probably confusing for a lot of your clients as well.
So what are your thoughts on that whole process?
You put in your initial deposit, you drop below your maintenance level.
Some people think they have to just put it back up to their maintenance level, but that’s not the case.
It’s not.
You’re right.
So the initial margin is what you need in your account to put on the position, but also what you’re going to need in your account to keep the position if you trigger a margin call.
So that’s the simplest way to look at it.
I’d also like to just mention one thing.
When it comes to margin, the exchange sets a minimum margin, and that minimum margin that the exchange sets is what they calculate at the close of trade.
A lot of brokers charge more than the exchange requires, but brokers are not allowed to charge less than the exchange requires when it comes to closing prices and settlements.
However, brokers can set day trading margins.
It might be a little beyond this conversation, but I just want people to be aware of it because they get really confused.
We get a lot of new traders that call up and they say, “Well, but so-and-so will let me buy an E-mini S&P for $500,” but they don’t understand the reality of it.
There are brokers out there that will give you very, very low day trading margins, and what that means is if you’re in and out in the same trading session, you do not hold it to the close.
They might let you trade on a lot higher leverage.
In other words, less margin than what the exchange minimum margins are.
That’s between you and your broker, but you have to be within exchange minimums by the close.
Just as an FYI, day trading margins can be $500 to $750 per contract.
That’s insane leverage.
I do not recommend people use it.
It’s just an accident waiting to happen, but a lot of brokerages will allow that.
Just so you know, when you do encounter that, that’s what that is.
Yeah, margin, as I said, it varies by broker.
As Carly mentioned, a lot of them are going to use this as their advertising push to get you in the door.
Advertising very low margin rates.
Now, as you mentioned, and this will get into another future episode, the different types of margin.
There’s intraday, there’s overnight if you want to hold your position, overnight.
It’s all different levels of margin.
We’re kind of just doing the basic definitions here.
I think for a future episode and a future segment of Futures 101, I think we will go into overnight margin, intraday margin in a lot more detail.
There’s more to be done on the world of margin.
Really quickly, Carly, you folks over there at DeCarly are obviously dealing with this on a regular basis.
How do you folks go about setting your margin?
Do you just tack on a little bit to CME?
What is your process over there?
No.
So we offer exchange minimum margin.
So whatever the lowest rate, the exchange will allow us to calculate on the statements at the end of the night to determine whether a client has enough margin or not and triggers a margin call.
We use exchange minimum.
For day trading margins, we actually do offer our clients $750 per contract.
So in other words, for $750, they can buy or sell $260,000 worth of S&P stock.
Again, we don’t encourage that whatsoever.
But there are people out there that are scalping and things like that, and they think that they need that much leverage to do it.
So it is what it is.
Unfortunately, it’s been my experience.
I’m not going to tell anyone what to do or how to behave.
But it’s been my experience.
The less leverage that people use, the better off they are.
When you’re using very, very high amounts of leverage, you’re leaving yourself zero room for error.
And that might work in a short period of time.
But in the long run, I don’t think I’ve ever seen it work.
So just keep that in mind.
Something to bear in mind.
Listen, another thing to bear in mind is that if that example we just gave, that sounded a little bit too rich for your blood, you know what?
Don’t worry about it.
A CME sought the same thing.
So back in May of 2019, they decided even though the mini was already one fifth of the big contract, they decided it was still too big for a lot of people, especially as the index has continued to grow.
So back in May of 2019, they launched the micro E-mini.
What is that?
That is one tenth of the E-mini itself.
So a much smaller, more bite size contract out there.
So everything else kind of holds the same, just pretty much divided by 10.
So the minimum value of a tick is still going to be one quarter of a point.
But now the minimum value of that tick is going to be a buck 25 per tick as opposed to 12 and a half bucks.
So as you could see, instead of $50 a point now, it’s $5 a point, one tenth the value as well.
And also one tenth of the notional value.
We’re talking about $276,000.
Now we’re talking about a contract size of the micro E-mini of $27,650.
So again, much more palatable for a lot of you out there who are just dipping your toes in the futures water.
So we’ll walk through that same example we just talked about, the 1% drawdown, but with the micro E-mini instead this time.
And again, it’s all divided by 10 pretty much.
Pretty straightforward math.
Remember, we lost 50 points or 1% in the S&P.
But instead of being $50 a point, it’s now $5 a point.
So that’s out of costing you $2,500.
It cost you $250.
Or you can do it the tick math as well.
Same thing, $1.25 times four times 50.
It’s going to give you $250 as well out there.
So that’s something to bear in mind.
If that’s too rich for your blood, too big for you, maybe you’re just getting started in the world of futures, then there is a micro E-mini.
All the other concepts you talk about still apply just one tenth the size.
So a little bit more bite size for you as we keep on rolling.
This is kind of a special episode.
It’s the inaugural episode.
It’s going to give you a bit of a sampler of everything we’re going to talk about on this show down the road.
And a moose-boosh, if you will, as we keep on rolling into the trading pits.
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, listen.
You can’t get out of here without talking about what’s trading out here.
And this will, of course, be a big part of the show going forward as well.
And we’ll rotate in other segments.
It’s going to be fun interview segments, listener engagement, all sorts of fun coming to you on the futures rundown in the coming weeks.
But Carly, when you and I last chatted not that long ago on this week in futures options, you said you were looking at putting some protection in your back pocket in the major indices.
And then, of course, kicking off the month yesterday, we were closed, of course, on Labor Day on Monday, listener.
So we kicked off the month of September yesterday with markets taking a bit of a tailspin, a decent sell offs across the board out there.
S&P, the major indices closing off a half a percent, if not a little more.
NASDAQ closing off about six tenths of a percent.
Other products taking on the chin yesterday as well.
Bitcoin selling off over to about 2.2 percent out there.
So kind of a pretty red day across the board.
There were some bright spots, obviously, as you would expect in a red day.
Then you might expect a little bit of upside in, let’s say, the metals and gold was up about 0.15 percent.
Palladium taking a nice little lift up about half a percent out there as well.
Coming into today, we’re seeing crude oil taking on the chin a little bit, bouncing off a nine month low very recently out there.
So crude has been an intriguing one as well.
Carly, what caught your eye in the sea of trading that kicked off September yesterday?
Well, obviously, it was an interesting day.
As far as the S&P goes, we broke a trend line yesterday.
Now, it’s kind of a hairy trend line.
It’s a trend line that dates back to the October of last year’s lows and has been persisting.
It was broken in early August, and then we bounced back and actually traded above it for a few weeks.
Then now, we’ve broken down below it again.
This to me is not a bullish sign.
This is not a bullish market.
My advice is if you’ve made some money on the way up, make sure you protect yourself because we could be going– we’ve had really, honestly, we’ve had two years of just fantastic action in the equity markets.
We might be going into some sort of a normalization.
Normalization is probably much lower than where the indices are sitting now, maybe in the 4,000 handles in the S&P.
So be careful.
The bulls out there, not going to like that.
I know when you said that on our Twi-Fo show, if you need to go, some of our bulls in our chat took Umbridge Carly, but that’s what makes the market at the end of the day.
Are you still loading up on protection to the downside or leaning, let’s say, flat to short in some of the broad indices?
Yeah, we’ve got most of our clients positioned on the short side.
We actually did take– we were using option spreads where we sell calls and then buy put spreads.
We’ve bought the calls back to just in case we’re dead wrong and this thing comes flying higher.
We don’t want to have that risk up there, but we’re pretty comfortable being net short, whether as specs and even portfolio hedges.
Let’s get into a little bit of what was lighting up the tape out there.
We’re in interesting situations.
This is our first ever episode, so we don’t have to look back very far.
In fact, we just kicked off the trading month.
We only have one day in our rearview mirror, and it was a pretty hot day yesterday listening.
Let’s break down.
What was lighting it up out there from a futures perspective on a day when a lot of the products outside of the metals and a few others were really melting down out there?
Yes, let’s do a top 10 most active out there.
It’s interesting we talk about the major markets out there as well.
Just the volume range.
Now, if you add up all of the totality of the complexes, you know, your fixed income and some of the other things, you’re going to see large volumes out there, but we’re going to break them down by actual month.
Remember, futures have expiration months attached to them, listeners.
So that makes things a little bit more palatable, and it gives you a better sense for what’s trading out there on these crazy hectic days.
Yesterday’s terms of top 10.
Number 10 was the November soybeans contract at about 7,000 contracts.
So we’re starting small and we’re growing out there, right?
Of it, we have the Dow futures.
So the E-mini Dow out there going up and the September contract.
So again, equities like to be more near dated, about 8,600 of those.
Number eight, we have the December gold contract.
Metals always like to be end of the year.
They like a little bit longer term out there. 12,300 of those on the tape for number eight yesterday.
Number seven, getting some new markets, which is kind of fun.
We’ll look forward to exploring these in the future on the show as well.
Cocoa, the December cocoa contract.
Not something we’ve had a chance to talk about much in the past. 12,500 of those on the tape yesterday.
And number six, this is a big dog out there.
This is crude oil, but the October crude oil contracts.
A little bit more near dated, which is kind of interesting. 15,800 of those on the tape for number six.
Number five, getting out to another product we don’t get a chance to talk about too much.
Coffee, the Deese coffee contract. 19,500 of those going up yesterday.
Number four, getting back to the equities.
It’s the NASDAQ E-mini. 43,000, almost 44,000.
That’s the September contract as well.
So again, everything equities is going to be near dated listeners.
Number three, getting out to another fun new potential contract to talk about in the future.
This is sugar, the October sugar future. 70, almost 71,000.
So sugar, putting up some numbers yesterday, which is kind of fascinating.
We’ve been seeing that for a while now.
I’m going to have to delve into sugar a little more on the show going forward.
Number two, number one, you can probably guess some listeners.
Number two, it’s the near dated September E-mini. 82,000 of those on the tape and the big dog yesterday was the December, a little bit longer term 10 year note, 92, almost 93,000 of those.
Carly A, were there any surprises in that list for you?
And B, do we need to have you back on for our big sugar episode?
Sugar putting up the numbers.
I can talk about sugar.
Absolutely.
No, I think number one and two being the 10 year note on S&P is very telling.
If I’m right about the S&P, the 10 year note should get a pretty big bump.
So I know we’ve seen a nice rally here in the last year or so in treasuries.
I think there’s quite a bit more to go because thus far we’ve taken back some of the overdone selling, but we haven’t really gotten everybody long and I think that’s what it’s going to take.
Let’s see what else is going to take listeners before we get out of here on the show for this week.
Again, just a sampler this week, much more to come on future episodes every Wednesday out here.
We’ll be looking at quickly some of the interesting price surprises we had going on yesterday.
Maybe looking at some things that maybe we didn’t expect that were lighting it up yesterday.
You can break that down a lot of different ways.
You can look at just net move.
You can look at how much they move from a standard deviation perspective.
And if we do that, we see a cash settled cheese popping onto our radar yesterday up nearly a full standard deviation up there yesterday.
So things lighting it up.
Maybe the game is afoot out there in cash settled cheese.
Yes, I said cash settled.
Listen, it’s you don’t have to worry about a truckload of cheese being delivered onto your doorstep if you decide to trade these.
Looking right now, cash settled cheese that front contract in October trading at 223 off slightly today.
So giving up a little bit of those gains it had yesterday.
Not exactly a banger from a volume perspective, looking at, you know, less than 500 futures on the tape right now today.
So again, not lighting the world on fire, but from an underlying movement perspective, something to keep in mind.
So something to bear in mind as we’re going into future episodes.
Maybe we need to sink our teeth pun intended into a little bit of cash settled cheese.
Obviously we also saw Vicks futures popping yesterday and the underlying moving quite a bit as well from a standard deviation perspective.
So no surprise there.
Then yesterday also feeder cattle up nearly three quarters of a standard deviation yesterday as well.
So there has been some action in livestock.
Again, we talk about intimidating products.
Livestock leaves to mind for a lot of people out there, but something to keep in mind.
So looking at some of the longer term trend, something to keep an eye on going back not just this year to date, but a full calendar year.
See what interesting trends are out there.
You might want to keep an eye on for future episodes.
Everyone knows things like cryptos up, bitcoins up, you know, all that kind of stuff.
That’s not surprising.
I don’t think to anybody out there, but maybe some names out there that are surprising, including a lot of the dairy.
Again, going back to cast settle cheese butter, also up about 26% year over year.
Cast settle cheese actually up about 24% coffee.
Just talking about it earlier up 57% year over year.
Orange juice.
Another one we don’t talk about a lot, 61%.
And then the big dog on the year right now is actually Coco.
The December Coco contract’s up 96%.
So yeah, it’s not all Nvidia out there.
Listen, there’s other things to sink our teeth into pun intended.
All right listeners, that is going to do it for us.
On this inaugural episode of the futures rundown, Carly, I want to thank you for joining us on this inaugural episode.
Again, you’ll put it on your tombstone, the first ever guest on the futures rundown, Carly.
I will thank you.
And before we go, Carly, if folks have questions, and I’m sure they will, because we touched on a wide array.
We packed a lot of living into an hour, Carly.
So folks have questions about any of this stuff.
Where should they go?
What should they do?
We really do.
So okay, decarleytraining.com is the website, D-E-C-A-R-L-E-Y, trading.com.
You can also check me out at Twitter @CarlyGarnar.
X, I should say.
There you go.
Check her out on the old Twitter slash X at Carly Garner.
And while you’re going place listeners, make sure you check out our friends over there at plus500.com.
If you want to see the details on their platform for all these things we were talking about, initial margin, maintenance margin, what they’re going to charge you for these different products, and all that fun and a whole bunch more, plus500.com, the place to go to learn more.
That’s going to do it for us on this inaugural episode of The Futures Rundown.
I’m very excited.
People have been asking us for years to add a future show to the mix.
It is finally here.
This program is only going to grow and evolve over time as we hear feedback from you, as we hear feedback from the folks out there on the network and in the universe.
It’s going to only get better.
We’re looking forward to it.
And this was just a sampler episode, if you will, to give you a little bit of a taste of what you can look forward to.
And we’ll see you back here with the rest of our usual array of content until we’re back again next Wednesday.
Another episode of The Futures Rundown.
Stay safe out there.
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