I'm new to this futures trading stuff. My broker is Interactive Brokers. I've read that they do not accept settlement of futures contracts. I am not sure if it is just the commodities futures. How are ES contracts settled? Its all "cash" right? My question concerns selling calls or puts for the futures. For IB, do I need to close out the positions before expiry? Does IB allow me to go into the settlement process of the futures? Example: I short a December ES contract and sell a covered put. If the put goes ITM, does IB accept the settlement? Its all cash settled right? Or is it still 'transfer of contract' because the contract is the underlying? Example 2: What if I sell naked December put of ES, and it goes ITM. How does it work to accept a 'contract' at the expiration? Its just cash settled right? So I simply pay the difference owed from price at closing and strike?
Cash index options settle for cash, you can go to the CME website for settlement values and how they are calculated. There is no "delivery" on these options or the future, so you don't have to worry about IB.
Ok thanks. So if I sell a Dec ES short now @ $1731, and ES goes to $1800 by DEC, I simply owe $3450 and this amount debited from my equity of the portfolio? Thats it? Are you an IB customer though? They have their own rules. They explicitly stated couple times everywhere they don't accept delivery or assignment of the underlying of futures. Contracts must be closed instead and they will even close it for you a while before expiry. So I am not sure if ES, if it is simply just cash, whether they allow running the contracts or options to expiry?
Another silly question. Since the futures are so leveraged. If I don't have enough buying power to actually pay the full amount of the contracts real worth, is that ok? Or do I simply need enough buying power to pay off the losses in a losing position?
If you are that concerned, you should call them. They don't offer commodity delivery like sugar, cocoa, hogs etc. Cash settled indexes have no delivery. They stop trading, have a settlement procedure, then a settlement price. Then they disappear. Yes, your P&L is the difference between when you buy or sell the ES contract and the settlement if you don't close. The options don't deliver with the future. The options at expiration are either OTM or ITM. OTM they are worthless. ITM, the value will be the difference between the strike and the settlement price.
I just want to learn it before trying it. First step as they say is the internet! Do I need to have the full value of the contract in my account to settle? Say right now its $86K as ES is trading at $1731. Or is ES always settled on the difference hence allowing smaller account holders to take it to expiration? In other words, I short at $1700. At expiration its $1800. The difference is (1800-1700)x50 = $5000 loss. So do I simply hand over the $5k, allowing a small account of say $20K to play this game? Or do I need to make sure i have the full contract value either in cash or at least in terms of buying power? So that will be 1800*50 = $90K of buying power required at settlement?
No, you don't need cash available to purchase the settled price. You only need the margin required by the exchange. Yes, you should completely understand the contract and how it works before you trade. I'm not sure this is the best way to learn. You can assume the members here are providing you with accurate info.
As mentioned, you put up the margin only. IB will auto-liquidate your positions if your cash can't cover the losses.
Actually taking or making delivery is decidely not recommended for a novice. While ES is cash settled you should do what nearly every small trader does: When, or as, the volume flips, roll it over into the next contract if you want to hold your position or do a closing transaction if you don't. Keep it simple and stress free as you learn. You have enough to concern yourself with without dreaming about what will you do with all the wheat being delivered to you!!
so, what is the benefit trading with IB vs proper futures broker ? IB has contracts in its name therefore no different than bucket shop. But it is cheaper ? Is this correct or am I missing something ?