help. i'm a complete novice and want to understand how would buying a call and a put work.

Discussion in 'Options' started by rtw, Feb 18, 2018.

  1. rtw


    good day to everyone,

    i'm interested in buying options for futures contracts and i could use some clarification to see if i understand how everything would work.

    i'm thinking of buying 1 march 2018 e6h18 call at a strike price of 1.24500 and also 1 put at 1.31000. i don't know how long it could take me to get a real options account where i could place trades like these, but let's say i would buy those options this monday, february 19th, with limit orders, at least on paper. my plan would be to hold those contracts to expiration, so the day those options expire i would get to buy and sell 1 contract at those prices, ¿right? ¿what about the expiration of the futures contract itself? ¿would there be time enough for me to buy and sell those contracts on the open market after the options have expired but before the futures contracts expire themselves?

    in the case of the trade i have just described, my estimations for the required margin are that i would need to pay the price of the call and the put (this is where i'm having the most problem, i can't discern the price for those two options from the only source i have found so far, link below) while also needing to have around 2,400 usd in my account for the e6h18 contract, ¿right? ¿is there anything i'm missing? the fluctuating market value of those 2 bought options wouldn't affect the balance in my account, ¿would it? ¿which are the brokers where i could place this kind of options trades on futures contracts through?

    in the case of rbk18, i see this is a far less liquid market, still i would like to know how to discern the prices and approximate total costs of buying calls and puts for this instrument.

    very well, thanks a lot, regards.
  2. Robert Morse

    Robert Morse Sponsor

    Sorry, but you are not ready for real trading.

    You don't seem to have a handle on why you buy that spread, where you make and lose money and what happens at expiration. I'd be doing you harm by making corrections and giving you information, You need to do more reading and understand the process better. The CME is a good place to start.

    piezoe, cvds16 and Lou Friedman like this.
  3. Might it be a good idea that, instead of trying options on futures, that you start off by trying options on normal stocks or ETFs. Perhaps do the:

    BUY 1 CALL
    BUY 1 PUT

    Spread on SPY. And just one. Then watch what happens?

    Aside from the amount of the margin, all your questions would be applicable (and contain roughly the same answer) when applied to a SPY ETF (vs, say, ES). So it might be worthwhile to focus on the SPY ETF.

    It's also worth asking:
    Are you doing options on futures because you want the leverage and margin? If so, it might be worthwhile to try with SPY Options instead of futures, as it will be a less risky venture.

    Note: If you are concerned about being assigned a futures contract you could consider index options where the settlement is pure cash, however that may require greater capital. I would suggest if you do not have the capital to safely trade (and mess up the trade) of an SPX, or ES, that you should refrain from doing so, and stick with the SPY ETF (which is a lot less deadly when a mistake is made).

    But, to get back to you original post:
    You indicate you want to BUY a call and BUY a put, so at the day of close you would not need to do the buying you suggest. Nor would you do it on both contracts. You would either throw away both or sell one and throw away the other.

    A BUY CALL and BUY PUT is a bet that the underlying moves either UP or DOWN enough to make up for the cost of the premium. If it stays flat or only moves a little, you loose the premium you paid. If it goes UP or DOWN significantly, you get the difference in contract price minus the premium paid.

    Your subsequent question about buying and selling the futures after assignment. Your broker may not auto-assign to you on a CALL or PUT (when you are the buyer) and require you to manually request assignment (or more likely simply sell out the option). If for whatever reason you end up with the contracts you can then sell them. BUT the time taken for the assignment to occur until you sell them can be a while (not sure with futures, but with normal stocks you would get assigned on Saturday 2AM and have to wait until Monday 9AM or so to sell). The market can obviously move a lot in that time. It would be wiser to sell than get assigned.

    As for the timing of the expiration of the futures options contract vs futures contract, that is a more complicated question as there are various days futures expire (and or auto-roll I think) vs various days that contracts expire/assign (depending on European or American).

    The combination of the above two paragraphs suggests that your question is too open ended to accurately answer and it is recommended you focus on a specific type of contract and expiration date and then perhaps return with that concrete example. And in doing so you may see there are more combinations of options and futures to be worried about (this is why I like SPY ETFs instead of ES/SPX).

    As for how the holding of the contracts (and possible subsequent futures) would affect your margin, that would depend a bit on the exact broker you are dealing with. I suspect there are multiple ways this is handled and different brokers do things differently. Plus there may be the issue of what kind of margin account you have? I'm no margin expert I'm afraid, but there are some gurus here who would be able to help given a concrete example and a specific brokerage firm.

    As always, good luck, and hopefully you do extensive research and carefully managed trades over the next several years before you do anything risky. That may be the best advice out there, and is usually what separates a HappyTrader from a SadTrader :)
    rtw likes this.
  4. rtw


    mr. Morse, HappyTrader,


    i see my initial post is too vague and needs clarification.

    i have gone through cme's education course and it was not that helpful. it does make clear that options on futures held at expiration result in the respective futures contracts positions but it doesn't go into enough detail about what happens when both instruments expire on the same date or very close to each other. the example they use to illustrate the cost of buying a call on the es contract hasn't been helpful to understand the prices i see on barchart for e6 and rb options either.




    i'm thinking about a long position for the eur versus the usd because the usd is in one of its worst multiyear downtrends ever. on the other hand, the economy of the eu is having its least horrible performance ever, that plus other political, economic and mental health factors mean there's an interesting probability that the eur will still move at least a little higher and/or the usd will drop slightly further.

    as far as i understand, buying a call for a e6 contract at the money and buying a put for the same instrument some distance in the money means that at expiration the highest price i would pay to buy the instrument would be my call strike price and the lowest price i would get to sell would be my put strike price. i understand the strategy HappyTrader mentions as if both options were bought at the money, which would be more of a strangle and i don't think it would be appropriate for the e6 in the next 30 - 60 days.

    i'm interested in futures contracts to establish an options position over because of the high leverage and margin. i asked about brokers because, for example, eoption gives access to options but not futures and tradestation has options available exclusively for stocks, so i don't know if there are brokers that make futures and options on futures available.

    the alternatives that HappyTrader mentions with the spy and other etfs are interesting, but options positions on futures seem more attractive to me because of the high leverage, low capital requirements and the ability to cap potential losses as a very small fraction of the potential profits. i will indeed be taking a look at options on etfs, at least for my first options trades.

    i also have the opportunity to install the zaner360 platform where i will be available to conduct some paper trades and get a very realistic experience of the prices and commissions to pay.

    thanks again.
  5. prc117f


    Please visit (Free education by the Options Industry Council) They offer tons of podcasts,videos,materials related to Options trading. Even free or very cheap live classes you can take from your computer and the teachers are real veterans of the CBOE who know their shit.

    Margine combined with High Leverage/Low capital requirements and no experience is a recipe for disaster. Paper trading is not realistic because it does not truly simulate the market microstructure. You cannot cap losses to a small amount when you are using leverage and a small amount of trading capital.

    Don't try to rush things thinking you are going to get rich quick, most likely you will get poor quick and the professionals on the other side of your trades will eat you for lunch.

    Forget futures etc.. just worry about first learning the basic options market on SPY.
  6. I believe it is possible with futures that you could loose more money than you have invested.

    It is also theoretically to try to cap your losses (with the correct combination of options). However, if one uses 'stop sell' orders or similar, they may not get triggered in time if the market moves quickly.

    Additionally one leg of a combo could get assigned (in American options or if you are asleep at the wheel on a European Option) which could result in a margin call & liquidation. And the liquidation could occur at a less favourable price resulting in a negative balance.

    I don't do futures or anything with high leverage. I like to think of strategies that require high leverage as:

    A system that will completely and totally ruin you if you make the smallest unintentional mistake or if anything unexpectedly bad happens in the market.

    And, I like to sleep well at night :)

    That being said, if you wish to do Futures and Options on Futures you could consider going with a good universal brokerage (Interactive Brokers does this I believe). Or one of the recommended futures brokers (rather than stock brokerage firms). I would look at the list of EliteTrader sponsors that say they do futures and see what they offer :)

    Also, I would highly encourage you to spend many months (years?) doing *very* small transactions. You have to not only learn how options & futures work, not only how combos on these work, not only how stop orders/etc work on these, but also how the actual brokerage platform itself works.

    On a separate note: Anyone have statistics on the correlation between individuals who use highly leveraged strategies (due to minimal capital funding) and their success rate?
  7. rtw



    i have continued doing more research on the subject of financial options and with the information i have now i have come to think that options on futures contracts are horrible instruments.

    if my calculations are correct, just the price of one atm call with a strike price of 1.2400 on e6h18 today was 1650 usd. that means that this trade has to move around 1.1% in one's favor just to break even. and an option at 1650 usd is an obscenely expensive instrument when the total cost of the e6h18 contract is around 2500 usd.

    the cost of a put with a strike price of 1.3100 is 8275 usd today. so if one was to combine both the atm call and an itm put the trade would be a guaranteed and sizable loser with the total cost of the options representing almost 4 times the cost of the ordinary e6h18 contract. the profit if one bought an e6h18 at 1.2400 and sold it at 1.3100 would be around 9500 usd, which would be transformed into a negative trade if one was to buy an atm call and an itm put as i was thinking of. totally crazy.

    on the other hand, options for individual stocks and etf's look way better, prices are far more reasonable and those kinds of options could indeed be used as effective vehicles to hedge or speculate on the movements in their underlying assets. i will be doing some research on etf's that would mimic a long eur, short usd trade to see how liquid their options markets are and how reasonable their prices are. with what i have learned so far about options, i will also be looking to see if there any etf's that could be comparable to futures contracts like the fdax, nk, cl, rb, ng, ec and jy.

    very well, thanks, regards.
  8. ironchef


    If you are correct, in that case you should take the opposite position, then it is like printing money.:D
  9. rtw


    i agree. if the prices i arrived at for puts and calls on the e6 are correct the people selling those instruments are doing fantastic.

    however, at the moment i don't think selling premium would be suitable for me as it requires discipline managing losing positions (which has always been my biggest weakness in trading) and with market volatility at the levels it is currently at these are not the best times for novices to start selling options.