FOT200910

October 2009 • Volume 3, No. 10

TESTING A “double-butterfly”system p. 20

GOLDEN opportunity p. 31

BULL PUT SPREAD pays off p. 32

FUTURES BASICS:Front and back months p. 22

TRADING FUTURES with implied volatility p. 10

BEYOND THE CREDIT SPREAD:Diagonal put spreads p. 14

2 October 2009 • FUTURES & OPTIONS TRADER

Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Market Movers . . . . . . . . . . . . . . . . . . . . . . . .8Futures market roundup.

Trading Strategies

Implied volatility: An overlooked tool

for stock and futures traders . . . . . . . . . .10Implied volatility is usually associated with

options trading, but futures and stock traders

can use this information too.

By Keith Schap

Diagonal put spreads:

Beyond the basic credit spread . . . . . . .14How to profit from volatility surges and time

decay with a put spread that encompasses

different expiration months.

By John Summa

Managed Money . . . . . . . . . . . . . . . . . . . . .18Top 10 option strategy traders ranked by August

2009 return.

Options Trading System Lab

Double butterflies on the S&P 500 . . . . .20Trading two butterfly spreads with a short-term

outlook has been surprisingly effective since

2004.

By Steve Lentz and Jim Graham

Futures Basics

Front and back months . . . . . . . . . . . . . . .22Learn the difference between the different

contract months in your market.

By FOT Staff

New Products and Services . . . . . . . . . . . . .23

CONTENTS

continued on p. 4

Derivatives, simplifiedNadex. Make the trade you want, when you want. Simple.

t Nadex – the North American Derivatives Exchange– we know how quickly things can change. We know youhave a view on the Credit Crunch and the future of oil

prices, so we know you need straightforward, instant access to trade the markets.

That’s why we’ve made derivatives trading fast and simple.

At Nadex you can trade on stock indices, commodities, forex and financial events with limited risk, in a transparent, regulated marketplace. These are just some of the markets we offer:

• Wall Street 30, US 500, FTSE 100, Germany 30, Korea 200

• EUR/USD, GBP/USD, USD/CAD, USD/CHF, and USD/JPY

• Crude Oil, Natural Gas, Gold, Silver, Copper, Corn, and Soybeans

• Payroll figures, interest-rate decisions, and more

No trading fees for your first four weeks!

Simply follow your view and go long or short on hundreds of financial markets, with our easy-to-use products:

• Spreads

• Binary Options

What’S a Spread COntraCt?

Our Spreads provide you with easy exposure to the markets. They are straightforward, short-term limited risk contracts, which are settled against the prices of underlying markets (generally Futures).

What’S a Binary OptiOn?

A Binary Option asks you a question. For example: will the Wall Street 30 finish up today? Will GBP/USD climb three points by 2 p.m.?

Do you agree or not? Our Binary Options settle at 100 if the event occurs, or at 0 if the event doesn’t occur.

Small contract sizes

At Nadex we’ve made it easy to trade what you want.

• Contract sizes are smaller than contracts in the underlying market

• A wide choice of expiry times

• Broad range of strike prices and Spread ranges

Limited risk

With Nadex products, we keep things simple. You know your maximum possible profit and loss from the start, which limits your exposure to extreme price changes.

Each of our Spread contracts has a Floor and Ceiling associated with it, representing the maximum and minimum settlement levels. Your profit/loss is restricted by these levels, no matter how far past either level the underlying market may have moved.

And our Binary Options can only be settled at 0 or 100, so you know your maximum risk on a trade in advance.

easy access, simple trading

Open a Nadex account in just five minutes and gain free access to our unique Direct Access trading platform:

• Free – no charges to set up an account or use our platform• direct access – trade directly into the exchange on all our markets • Fast – real-time streaming updates • Flexible – browser-based trading platform • powerful – open multiple order tickets

NADEx

Nadex is a designated contract market subject to regulatory oversight by the Commodity Futures Trading Commission. Nadex, Inc. is part of the global IG Group – a world leader in financial derivatives trading. IG Group is a UK FTSE 250 member with several operating companies around the world, offering trading products to more than 70,000 active retail and professional clients.

A

Simulate your trading on our free demo platform, with absolutely no risk, and no obligation. Visit www.nadex.com to submit your details and begin your test drive. Simple.

090706_273x206_FOT.indd 1 29/06/2009 13:28:54

http://www.nadex.com

www.nadex.com

Futures Snapshot . . . . . . . . . . . . . . . . . . . . . .24Momentum, volatility, and volume

statistics for futures.

Options Radar . . . . . . . . . . . . . . . . . . . . . . . . .25Notable volatility and volume

in the options market.

Futures & Options Watch:

COT extremes . . . . . . . . . . . . . . . . . . . . . . . . .26A look at the relationship between commercials

and large speculators in 45 U.S. futures markets.

Options Watch:

Stocks and ETFs with

high options volume . . . . . . . . . . . . . . . . . . .26

Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . .27References and definitions.

Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

Futures & Options Calendar . . . . . . . . . . . .30

Futures Trade Journal . . . . . . . . . . . . . . .31Jumping on the gold bandwagon.

Options Trade Journal . . . . . . . . . . . . . . .32Riding a bull put spread into the winner’s circle.

Have a question about something you’ve seen

in Futures & Options Trader?

Submit your editorial queries or comments to [email protected].

Looking for an advertiser?

Click on the company name below for a direct link to the ad

in this month’s issue of Futures & Options Trader.

eSignal

Nadex.com

RS of Houston

The World MoneyShow

CONTENTS


mailto:[email protected]

Introducing eSignal, version 10.5!

With eSignal, you’ll know — not just what to trade — but when and how to trade it. And, when you’re ready to trade, select from a list of top brokers that connect directly to eSignal.

Version 10.5 significantly expands the content available in eSignal…

6Reasons Why OptionsTraders Prefer eSignal

eSignal is used by tens of thousands of traders who depend on its award-winning data, charting and analytics.

eSignal offers reliable, real-time market data along with tools that allow options traders toset up emotionless, systematic trading.

800.245.9431 www.eSignal.com/offer/at

eSignal is a division of Interactive Data Corporation (NYSE: IDC).*All fees will be refunded to you, minus any taxes and applicable add-on service/exchange fees, if you cancel within the first 30 days of service. Call for details. x14098

Voted Best 15 Years in a Row!Stocks & Commodities Readers' Choice

Best Real-Time/Delayed Data

Now, you can get comprehensive options analytics and track global markets with access to extensive intraday and daily historical data.

Award-winning, reliable, real-time options,stocks, futures and Forex data, now with 50+new data fields New with 10.5!

Get your risk-free, 30-day trial today!*

eSignal gives options traders what you need to succeedin any market — reliable, real-time, global data, plusoptions-focused features. Tens of thousands of traders justlike you use and trust eSignal. Discover the best value indecision support tools with a risk-free, 30-day trial.

“…eSignal makes it possible for me to create my own tools and enablesme to reach beyond the default-packaged software and define studiesand views…into markets that can be complicated.” — A. Montenegro

“…in terms of timeliness, reliabilityand analytic capabilities, eSignalrates with the best.” — D. Mehta

1

3 Advanced charting with EFS, a unique formula engine for creating strategies or modifying 100s of pre-existing free formulas

Intraday historicaldata now expandedNew with 10.5!5 eSignal’s Trade Integration

for executing your trades withyour choice of options broker6

An equity options analytics tool, OptionsPlus, for choosing, tracking and modifying your positions for optimum profit2

Option Chains with a clear at-a-glance view of your strike’s near-,in- and out-of-the-money status4

http://www.esignal.com/offer/at


CONTRIBUTORS

Editor-in-chief: Mark [email protected]

Managing editor: Molly [email protected]

Senior editor: David Bukey [email protected]

Contributing writers: Keith Schap,Chris Peters

[email protected]

Editorial assistant andwebmaster: Kesha Green

[email protected]

Art director: Laura [email protected]

President: Phil [email protected]

Publisher,Ad sales East Coast and Midwest:

Bob [email protected]

Ad sales West Coast and Southwest only:

Allison [email protected]

Classified ad sales: Mark [email protected]

Volume 3, Issue 10. Futures & Options Trader is pub-lished monthly by TechInfo, Inc., 161 N. Clark St.,Suite 4915, Chicago, IL 60601. Copyright © 2009TechInfo, Inc. All rights reserved. Information in thispublication may not be stored or reproduced in anyform without written permission from the publisher.

The information in Futures & Options Trader magazineis intended for educational purposes only. It is notmeant to recommend, promote, or in any way implythe effectiveness of any trading system, strategy, orapproach. Traders are advised to do their ownresearch and testing to determine the validity of a trad-ing idea. Trading and investing carry a high level ofrisk. Past performance does not guarantee futureresults.

For all subscriber services:www.futuresandoptionstrader.com

A publication of Active Trader®

CONTRIBUTORS

� Keith Schap is a freelance writer specializing in risk man-

agement and trading strategies. He is the author of numerous

articles and several books on these subjects, including The

Complete Guide to Spread Trading (McGraw-Hill, 2005). He was a

senior editor at Futures magazine and senior technical market-

ing writer at the CBOT.

� John Summa is an economist, author, and professional options trader.

In 1997 he founded OptionsNerd.com, where he teaches traders how to

become successful option sellers. He also publishes an option trading adviso-

ry. He is the author of Trading Against The Crowd: Profiting From Fear and Greed

in Stock, Futures and Option Markets (John Wiley & Sons, 2004) and the co-

author of Options on Futures: New Trading Strategies (John Wiley & Sons, 2001).

He currently operates a portfolio of managed account programs which

employ his philosophy of selling options on equity futures options.

� Jim Graham ([email protected]) is the product

manager for OptionVue Systems and a registered investment

advisor for OptionVue Research.

� Steve Lentz ([email protected]) is a well-estab-

lished options educator and trader and has spoken all over the

U.S., Asia, and Australia on behalf of the CBOE’s Options

Institute, the Options Industry Council, and the Australian

Stock Exchange. As a mentor for DiscoverOptions.com, he

teaches select students how to use complex options strategies

and develop a consistent trading plan. Lentz is constantly developing new

strategies on the use of options as part of a comprehensive profitable trading

approach. He regularly speaks at special events, trade shows, and trading

group organizations.

http://www.futuresandoptionstrader.com













Metro Toronto Convention Centre

MoneyShowGithler Center1258 North Palm Ave. Sarasota, FL 34236 USA

How Do I Manage My Portfolio in Today’s Market?Top Experts Show Me How at The World MoneyShow

Learn How to Invest Smarter, Trade WiserGain a Great Investment & Trading Education in Just 3 Days

• Attend & profit from specific recommendations & strategies• Hear from leading global experts on investing in stocks, bonds, etfs,canadian trusts, active trading, forex, technical analysis – and much,much more!

• Choose from among 100+ sessions: keynote presentations, interactiveworkshops, live trading demonstrations, and spirited panel discussions

• Acquire non-commercial market perspectives

Discover Cutting-Edge Tools in the Mega-Marketplace • Browse, review, and comparison shop in the exhibit hall • Interact face to face with top financial products-and-services companies• Network with fellow market enthusiasts, exchange ideas, share experiences

72 hours and your portfolio will thank you!

Attend FREE & take home hundreds of dollars’ worth ofcomplimentary investment and trading resources!

Or call 800/970-4355Mention priority code 015365

a Production of

TORONTO | October 20-22, 2009

Formerly known as

Meet Face to Face & Learn from These Confirmed Speakers

and over 30 more!

SteveForbes

LarryBerman

GavinGraham

TimCestnick

PatriciaLovett-Reid

GordonPape

HankCunningham

JimJubak

GaryShilling

IanMcAvity

EllenRoseman

BenjGallander

AlexanderElder

DanielGramza

EricRoseman

www.WorldMoneyShowToronto.ca

For complete show/attendancedetails and to register free online:

Media PartnerPlatinum Sponsor Gold Sponsors

Futures_Options_Trader-TOMS09_Layout 1 8/19/09 10:14 AM Page 1

http://www.WorldMoneyShowToronto.ca


MARKET MOVERS

Grains

For the most part, the re-cent downtrend ingrains slowed inSeptember, but the sec-tor failed to make any

decisive move to the upside.Wheat was the weakest market,

with the December contract (WZ09)falling to new lows (below 440) inlate September and early October. December corn (CZ09) stabilized

after falling to 300 in early September, bouncingback above 340 by the end of the month.

November soybeans (SX09) followed a jaggedpath in recent months, leaping higher in late Julyonly to fall back near contract lows bySeptember.

November rice (RRX09), which had buckedthe bearish grain trend during part of the sum-mer, seesawed lower in August and September,but as of Oct. 1 was still well above its late-Junelow.

At the beginning of October, commodity futures were hovering near themiddle of the range they established between the July lows and the Juneand August highs. After rallying off the March lows — along with mostother global financial markets — commodity futures (represented here bythe Rogers International Commodity Index TRAKRS), peaked in earlyJune, pulled back, challenged the June high in August, and then saggedagain through the end of September.

Energies and grains were notable drags on the market as summerwound down, while precious metals were one of the strong spots.

On the financial side, stock-index futures kept their rally alive — albeitless confidently — while interest-rate futures also edged higher. A U.S.dollar nosedive sent the benchmark dollar index futures into the toiletwhile buoying many foreign currency futures.

For momentum, volatility, and volume data for the top U.S. futures con-tracts, see the Futures Snapshot.

Mixed bag for commodities

Metals

Gold reclaimed $1,000 in September after staging a strongrally in late August. December gold (GCZ09) climbed 9percent from an Aug. 17 close of 935.80 to a Sept. 16 closeof 1020.20 before pulling back.

And once again, gold’s upthrust overshadowed an even more powerfulmove in silver. The December contract (SIZ09) rocketed more than 25 per-cent during the same period.

Copper, which launched a summer rally earlier than its higher-profilecounterparts, extended the rounded consolidation it began in mid-August.The December contract (HGZ09) was trading around 2.770 on Oct. 1 —pretty much where it had been in early August.

Energy

As October ar-rived, energy fu-tures were stilltrading in chop-py, slightly bear-ish fashion in thewake of their late-July rallies. Decembercrude oil (CLZ09), after pushing above $75in August, gradually stuttered lower to$65.55 on Sept. 24.

While gasoline and heating oil basicallyfollowed crude’s lead, natural gas buckedthe sector’s trend (or rather, lack thereof) byrallying off its lows in early September. TheDecember contract (NGZ09), which hadfailed to rebound in the spring with the restof the sector, closed at 4.486 on Sept. 7, butsubsequently jumped more than 26 percentto close at 5.666 on Sept. 25.

Source for all: TradeStation

Softs

The soft com-modities havebeen split recent-ly, with cocoa and especiallysugar mounting bullish sum-mer-fall campaigns while cof-fee and orange juice flailedwildly in July, August, andSeptember.

Both January sugar (SBF10)and December cocoa (CCZ09)were in the process of chal-lenging their recent highsafter correcting at the end ofSeptember.

On Oct. 1 December coffee(KCZ09) found itself smackdab in the middle of its Julylow close around 118 and itsAugust high close of 141,while November orange juice(OJX09) was in a similar con-dition, having pulled backfrom above 110 in August tothe low 90s at the beginningof the month.

Meats

After staging their first realrebound from the swine-fluinduced collapse, Dec-ember lean hogs (LHZ09)turned lower again — butnot dramatically — in mid-September, falling backbelow 50 after havingtopped 52.

February pork bellies(PBG10), which had turnedhigher after hogs (and moresharply), also corrected.

Interestingly, live cattle(LCZ09), which had suf-fered the least from themeat malaise earlier in theyear, trended decidedlylower in August andSeptember. The Decembercontract (LCZ09), whichhad closed above 95 on July20, fell nearly 7 percent tothe Sept. 22 low of 84.45before bouncing slightly.

Wood and fiber

November lumber (LBX09)extended its summer downtrendinto fall, pushing lower in lateSeptember after having stabilizedto a degree over the precedingmonth. The close around 170 at theend of September was nearly 25percent below the mid-June highclose above 225.

December cotton (CTZ09) con-tinued its wide-ranging consolida-tion through September, pullingback from resistance around 65 to close the month around 63.

Treasuries

Treasury futuresrallied in recentweeks despite the stock market’soverall gains. In late Septemberthe December 10-year T-note

contract (TYZ09) broke out of a short-term consolidation andpushed above 119 by Oct. 1 — just as stocks were beginning toshow some instability.

Stockindices

December E-MiniS&P 500 (ESZ09) began to leveloff in late September after a sum-mer rally that took it from a closeof 869.75 to 1067.25 on Sept. 22.Several days of up-and-down trading followed before the con-tract opened October with a sharp sell-off.

Currencies

After a virtuallyuninterrupted decline since lateApril, the December U.S. dollarindex futures (DXZ09) caught theirbreath a bit in late September, but notbefore the most recent downthrust

took the contract from a high close of 79.10 on Sept. 1 to 76.29 onSept. 23 — around 15 percent below the market’s spring high.

For more coverage of the foreign exchange market, go toCurrency Trader magazine.

FUTURES & OPTIONS TRADER • October 2009 9

www.currencytradermag.com

OPTIONS STRATEGY LABTRADING STRATEGIES


Implied volatility:An overlooked tool for stock and futures traders

Note: A version of this article originallyappeared in the April 2006 issue of Active Trader magazine.

Almost all futures-relateddocuments carry the warn-ing, “Past performance is noguarantee of future results,”

or words to that effect. Most tradersand analysts turn their backs on thatwarning by repeatedly using measuresof past performance, such as historicalvolatility, to predict future results.

The past is a notoriously unreliableindicator of the future, especially inmarkets. Relying on historical volatili-ty is comparable to driving a car whilelooking only in the rearview mirror.The same can be said for many othermarket statistics.

Implied volatility, in contrast, is aforward-looking market estimate ofwhat the volatility of a market will beat option expiration. Because of this,implied volatility has predictive con-tent. It is not absolute, to be sure; after all, markets change.But with a little work, implied volatility can be useful.

Make the volatility numbers meaningfulSuppose the E-Mini Dow futures (YM) are trading at 10,900,and the implied volatility for an at-the-money (ATM) callon these futures is 11 percent. This implied volatility valuemeans the market is saying there is a 68-percent probabilitythe futures price one year from now will fall somewhere ina range plus or minus 11 percent from the current price.Given the 10,900 futures price, 11 percent is 1,199, so oneyear forward there is a 68-percent probability the futuresprice will fall somewhere between 12,099 and 9,701.

For traders, this is not particularly useful information.Traders typically deal with shorter trade horizons.Fortunately, a little arithmetic can make the informationmore relevant to specific trade planning.

Say you want to know where the mini Dow futures pricesmight be seven or 21 days forward given a 10,900 futuresprice and 11 percent ATM call option implied volatility.

1. Locate the number of seven or 21-day periods in a year by dividing 365 by seven or 21:

365/7 = 52.14 365/21 = 17.38

2. Find the square root of the number of periods:

52.14 = 7.22 17.38 = 4.17

3. Convert the volatility to decimal form (11 percent becomes 0.11) and divide by the square root:

0.11/7.22 = 0.0152 0.11/4.17 = 0.0264

Implied volatility isn’t just for option players — it can provide useful market estimates

and forward-looking support and resistance levels for all traders.

This chart shows the December 2004-March 2006 individual contract price datafor the mini Dow futures (YM).

FIGURE 1 — E-MINI DOW FUTURES PRICES

BY KEITH SCHAP


4. Multiply the current futures price by the factor resulting from the third step:

10,900 * 0.0152 = 165.68 10,900 * 0.0264 = 287.76

5. Round the results from the fourth step to the nearest whole number (the mini Dow futures prices do not have fractions) and add them to and subtract themfrom the current price:

10,900 + 166 = 11,066 10,900 + 288 = 11,18810,900 - 166 = 10,734 10,900 - 288 = 10,612

The prices resulting from the final step in the left columnindicate a 68-percent probability the futures price sevendays forward will fall somewhere between 11,066 and10,734. They offer the same level of confidence the futuresprice 21 days forward will fall somewhere between 11,188and 10,612.

In a normal distribution, this 68-percent probability willencompass plus or minus one standard deviation of all val-ues (prices). Plus or minus two standard deviations producesapproximately 95 percent confidence. To find this widerrange, simply double the factors resulting from the fourthstep to 332 for seven days and 576 for 21 days. This indicatesthere is a 95 percent probability the futures price seven daysforward will fall somewhere between 11,232 and 10,568. Theprice 21 days forward is this likely to fall somewherebetween 11,476 and 10,324.

Testing the predictionsUsing implied volatility to make pre-dictions such as these is one thing,knowing whether they prove out inpractice is another. To test these pre-dictions, let’s consider two markets —the E-Mini Dow and 10-year T-notefutures (TY) — from Sept. 1, 2004, toJan. 3, 2006.

Figures 1 and 2 show the prices for asequence of contracts in each market.For example, the Sept. 1 to Nov. 30,2004, segment in Figure 1 tracksDecember mini Dow futures (YMZ4),the Dec. 1, 2004, to Feb. 28, 2005 seg-ment tracks March futures (YMH5),and so on. Figure 2 provides similardata for 10-year T-note futures.

Figures 3 and 4 make the futuresprices from Figures 1 and 2 continu-ous. (This results from collapsing sixcolumns into one on a spreadsheet tomake the volatility calculations sim-pler to manage.) Also, the one stan-dard deviation boundaries shown on

Figures 3 and 4 are based on 28-day periods. For example,on Sept. 1, 2004, the December mini Dow futures price was10,166, and the implied volatility was 14.91 percent. Thesevalues produce the following calculations:

365/28 = 13.0413.04 = 3.61

0.1491/3.61 = 0.041310,166 * 0.0413 = 419.88, round to 42010,166 + 420 = 10,58610,166 - 420 = 9,746

These upper and lower boundaries predict a 68-percentprobability the price 28 days forward will fall between10,586 and 9,746. Sept. 1, 2004, was a Wednesday and 28days forward was Wednesday, Sept. 29. On that day, theDecember mini Dow price was 10,123, which was withinthe predicted range.

Finally, Figures 3 and 4 show the results of carrying outthis forward placement of the implied volatility predictionsfor the entire 16-month period covered in the figures. Thereare only a few places where the current price traded over orunder the one standard deviation boundaries. Based onthese charts, these implied volatility predictions seem tohave some value.

Using implied volatility predictionsThese predictions can be useful in a variety of ways. They canhelp traders evaluate the claims of analysts concerning what

continued on p. 12

This chart shows the December 2004-March 2006 contract prices for the 10-year T-note futures (TY).

FIGURE 2 — 10-YEAR TREASURY NOTE FUTURES PRICES


levels a certain market or stock is likely to achieve in a spec-ified time period.

A corollary of this is the possibility of using impliedvolatility predictions to set goals for trades. They seem toimprove on other methods of estimating support and resist-ance levels.

Two current situationsSuppose on Sept. 29 of this year you hadtuned into one of the financial newschannels and one of the “experts” saidthe Dow would top 12,500 by late 2009.That seems preposterous, but this per-son seems very sure of his forecast andworks for one of the most prestigioustrading firms. Still, you want to checkout this claim. To do so, you note the cur-rent price of 9,670 for the December E-Mini Dow futures and a 20-percentimplied volatility.

Using a target date 90 days forward,this price and implied volatility lead to a68-percent probability the price 90 daysfrom Sept. 29 will fall somewherebetween 10,630 and 8,710. Based on this,a 12,500 Dow futures price seems a rela-tively low-probability event. If you takethe prediction out to two standard devi-ations by doubling the result of thefourth step of the process, you get at a

95-percent probability that the price 90 days forward willfall somewhere between 11,590 and 7,750. This puts a 12,500Dow way out on the tail of a normal distribution array andgives it roughly a 2.5-percent probability of occurrence.Forget that expert view.

This kind of evaluation can apply to any market, ofcourse. Suppose on the same day (Sept.29) an oil analyst claims crude oil —which had sold off nearly $10 over thepreceding several days — would go backabove $70 per barrel in October — quitelikely above $75. Armed with a $67.01per barrel November futures price and a25-percent ATM call option impliedvolatility, you can discover a price rangefor 30 days forward of $71.81 to $62.21.While a $75 price is far from a sure thing,because these predictions make no direc-tional claim, the oil man’s number seemsreasonable given the current data.

Forward-looking support andresistance estimatesThese implied volatility predictions canalso provide a better way of estimatingwhere a market will find support orresistance.

Traders have long used “pivot point”prices as a “quick-and-dirty” way of esti-mating support and resistance levels. To

TRADING STRATEGIES

The implied volatility bands are penetrated infrequently. For the most part, theyprovide dynamic support and resistance levels.

FIGURE 4 — IMPLIED VOLATILITY 28-DAY RANGE, 10-YEAR T-NOTE FUTURES

The lines one standard deviation above and below price are forecasts based onimplied volatility.

FIGURE 3 — IMPLIED VOLATILITY 28-DAY RANGE, CBOT MINI DOW FUTURES


find the pivot point price, you sum the high, low, and clos-ing prices and divide by three. Table 1 lays out a typical setof data for mini Dow futures, specifies the formulas for firstand second levels of pivot point support and resistance, andshows the prices for each level. Armed with these values,traders assume the market will rebound if it hits either sup-port level during the next day or fall back if it hits eitherresistance level.

This approach looks back one day to predict a next-dayresult, and the more thoughtful veterans of the tradingfloor suggest it performs even this limited task poorly. In2006 Chicago Board of Trade senior economist Leo Murphysaid in all his years on the trading floor, he had never hearda credible claim concerning why these numbers should beconsidered valid.

Another common approach is to calculate a standarddeviation. However, it is hard to know how far back to look.For example, by using the prices from the last seven tradingdays prior to the day used to calculate the pivot point price,you can discover one standard deviation prices close to thesecond support and resistance levels of Table 1. This raises aquestion whether seven prices are enough for a valid meas-ure. This could easily be a bogus number given the smallamount of data.

The greater problem with both of these measures is theirbackward focus. It’s the rearview mirror all over, and theforward thrust is only one day — hardly useful if your typ-ical trade horizon is a week or longer.

In contrast, the implied volatility prediction is forward look-ing, and it gives you a way of looking at any time horizon youlike.

Consider Figure 4 in this regard. In most cases, when thefutures price trades close to the upper boundary, it soonturns back down. Similarly, when the price trades close tothe lower boundary, it most often turns back up. During theperiod studied in Figures 3 and 4, the futures prices tradedthrough the upper and lower boundaries only a few times.Further, they seemed never to trade very far through theboundaries and to head the other way in a relatively shorttime.

Given this observation, it seems reasonable to use theseboundaries as a way of defining support and resistance. Ifthis is a valid way to define support and resistance, it is rea-sonable to use these implied volatility boundaries as onemeans of deciding when to buy or sell a market. After all, ifyou are long 10-year T-note futures and the current price isclose to the 28-day upper boundary (or the boundarydefined by whatever time interval you are using), this tradewould seem to have little more to offer in the way of profitpotential — at least in the near term.

A probability is not a promiseThe advantage of implied volatility predictions are their for-

ward focus and the richness of the market data from whichthey are derived. An option implied volatility estimate, afterall, comes from much more than just a price or a sequence ofprices.

Nevertheless, it is important to remember the use of suchterms as “implied volatility estimate” and “68 percent prob-ability” in discussing these predictions. These predictionsconvey good information and are based on a sound empiri-cal foundation. But they make no promises — they are notsure things.

The absence of promises, however, should not deter any-one from putting implied volatility predictions to work.They can be valuable tools for planning and managingtrades in all the markets.�

For information on the author see p. 6.

Related reading:

“Tracking VIX swings,” Active Trader, January 2006.The VIX has been a widely discussed stock market barom-eter, but how reliably does it identify market turning points?This study turned up a few surprises in analyzing how theS&P 500 tracking stock (SPY) responded to VIX highs andlows.

“Putting volatility to work,” Active Trader, April 2001.Get a handle on the essential concepts and learn how toimprove your trading with practical volatility analysis andtrading techniques.

“VIX-based system,” Active Trader, January 2006. This system tries to find oversold situations in the S&P byidentifying VIX spikes.

Pivot-point calculations are commonly referenced techni-cal tools, but there’s no underlying reason why they wouldidentify viable support and resistance levels, and no solidevidence they provide any real trading value.

TABLE 1 — A PIVOT POINT APPROACH TO SUPPORT AND RESISTANCE

High 11,034

Low 10,993

Close 11,001

Sum 33,028

Pivot point 11,009

Formula Level

2nd resistance Pivot + (High-Low) 11,050

1st resistance Pivot + (Pivot-Low) 11,025

1st support Pivot – (High-Pivot) 10,984

2nd support Pivot – (High-Low) 10,968

OPTIONS STRATEGY LABTRADING STRATEGIES


BY JOHN SUMMA

Diagonal put spreads:Beyond the basic credit spread

Note: A version of this article originally appeared in the March 2005issue of Active Trader magazine.

A“vertical” credit spread consists of a short out-of-the-money (OTM) call or put option and along call or put that is farther out of the money.“Vertical” refers to the fact that the spread uses

options with the same expiration month. Option spreadsusing different expiration months are sometimes called“horizontal.”

Because you are selling the more expensive option(which is closer to the money) and buying the cheaper one(the more distant option), you are taking in more premiumthan you are spending –– i.e., a “credit” is created in yourtrading account, which is also your maximum potentialprofit on the trade.

During bull markets, option sellers often like to sell ver-tical put credit spreads, a strategy that has worked wellwhen the stock market has either traded higher or side-ways. Although this strategy has good profit potential (andlimited risk), it cannot make more than the credit receivedat the outset of the trade.

However, there is a way to alter a put credit spread thatcreates the potential to make more than the initial credit,and also to profit from rising volatility. Instead of selling avertical spread, you can construct a “diagonal” put spreadby using options with different expiration months.Diagonal credit spreads, especially in low-volatility envi-

ronments such as the one the market was in during much of2004 (which carries the possibility of a sudden volatilityincrease), offer a special edge not available with a conven-tional vertical credit spread.

In the examples that follow, options on S&P 500 futuresare used. They are the most attractive vehicles for stockindex option writers because, among other things, theyoffer more premium bang for the margin buck. Most pro-fessional traders use S&P 500 futures options rather thanOEX or SPX stock index options for selling strategies.

The vertical put credit spreadA standard vertical put credit spread is a popular strategyto profit from time value decay, or theta. The strategy isknown as a bull put spread because it profits from a bullishmove in the underlying instrument. It can also profit if theunderlying remains range-bound or even declines moder-ately.

A bullish move will reduce the position’s value (creatinga profit for the seller) as the underlying market moves far-ther from the options’ strike prices, thus causing the spreadbetween the premiums of the short and long puts to shrink.

On the other hand, in a range-bound or moderatelydeclining underlying market, the spread shrinks because oftheta, which accelerates as expiration approaches. The clos-er the expiration date, the less time premium the optionshave, which reduces the spread and produces a profit(assuming the market has not dropped too far).

Expanding the conventional “vertical” credit spread to incorporate different expiration months

results in a position with enhanced profit potential.

Because you are selling a more expensive option and buyinga cheaper one, the vertical put spread creates a net credit.

TABLE 1 — VERTICAL PUT CREDIT SPREAD

Vertical Strike Premiumput spread price

Long put Dec. 1135 -.80

Short put Dec. 1155 +1.95

Option premium credit = +1.15 ($287.50)

Because the position’s net theta is positive, it means thespread profits from time decay as expiration approaches.

TABLE 2 — PROFITING FROM TIME DECAY

Vertical Strike Thetaput spread price

Long put Dec. 1135 -23.7


Position theta = +44.70


Typically, most S&P 500 futures-option spreaders willwrite options with two to six weeks remaining until expira-tion and strike prices at least one standard deviation fromthe underlying price. These parameters generally providefor the necessities of position management while offeringenough premium relative to transaction costs. However,should the underlying move too far, there is potential forlarge losses if position adjustments are not made.

Table 1 shows an example of a vertical put spread. Withthe December 2004 S&P 500 futures (SPZ04) at 1189.40, thespread consisted of a long December 1135 put and a shortDecember 1155 put for a credit of 1.15, or $287.50. (Eachpoint of S&P 500 option premium is worth $250.) The shortleg of the spread is justless than 35 points out ofthe money, which is justshy of two standard devi-ations. (The hypotheticalposition expired prof-itably on Friday, Dec. 16,2004, 10 trading daysafter they were selected.)At the prevailing volatili-ty levels and distancefrom the money (approx-imately two standarddeviations), this trade hasan expected probabilityof profit of 97 percent.

Table 2 shows the thetavalues for each option inthe spread and under-scores how this strategymakes money. The longDecember 1135 put loses$23.70 in time decay perday but the shortDecember 1155 put gains

$68.40 in time decay per day, which means the spread isprofiting at a rate of $44.70 per day. Because time valuedecays at an accelerating rate, the potential gains increasewith each passing day, all other factors remaining the same.

Because the options can only decline to zero, regardlessof the time decay rate, the maximum profit potential of thestandard vertical put spread is always the initial net credit.Assuming both options remain out of the money, the profitbefore commissions and fees would be $287.50. This is theshortcoming of this strategy –– you can only achieve thisprofit if these options expire worthless, regardless of thevolatility level or underlying price movement.

continued on p. 16

The vertical put credit spread is transformed into a diagonal spread by replacing the December 1135 long putwith a January 1070 long put. Although this reduces thespread’s net credit to .65, it gives the position the ability to generate additional profits.

TABLE 3 — DIAGONAL PUT CREDIT SPREAD

Diagonal Strike Premiumput spread price

Long put Jan. 1070 -1.25


Option premium credit = +.65 ($162.50)

TABLE 4 — DIAGONAL SPREAD THETA

Diagonal Strike Thetaput spread price

Long put Jan. 1070 -17.30


Position theta = +51.10

Because it is more distant from expiration, the longJanuary 1070 put has a much lower theta than the longDecember 1135 put from the vertical spread. As a result,the diagonal spread’s theta has increased to $51.10.

Profit/loss at December

expiration

FIGURE 1 — PROFITABILITY AND PROBABILITY

Source: OptionVue5 Option Analysis Software (www.optionvue.com)

The diagonal put spread has an expected profit of $388, $100 or so more than the original vertical put spread. Also, as you move lower along the price axis, the positions vega increases.

http://www.optionvue.com


If the S&P corrects,say, 1 to 3 percent, as ithas periodically through-out the past few yearssince its bullish move offthe 2002 lows, any mod-est volatility spikes(volatility rises whenequity futures decline)can quickly add value toput options. A diagonalput spread has the abilityto turn these events intopotential profits, while avertical put spreadremains limited to thepremium collected whenthe spread was placed.

Diagonal put creditspreadTable 3 shows how a ver-tical put credit spread istransformed into a diag-onal spread: TheDecember 1135 long puthas been replaced with aJanuary 1070 long put.This has reduced thespread’s net credit to .65($162.50).

However, this smallercredit does not necessari-ly mean less potentialprofit. The diagonalspread is a “time” spread(also known as a calen-dar spread), whichmeans the options expirein different months.Therefore, a time-decaydifferential existsbetween the two options.

Table 4 shows thetheta of the diagonalspread and its compo-nent options. Because ithas more time until expi-

TRADING STRATEGIES

By keeping the original December 1135 long put and adding the long January 1070 put (creating a three-legged vertical-diagonal combination trade), the trade’s margin requirementdrops to $3,800, about $500 below the original put spread’s margin.

FIGURE 3 — ADDING A LEG


If the S&P is at 1160 at expiration (which represents an approximately 3-percent drop fromwhere the index was when the diagonal spread was established), the maximum profit increases to $900 from the original vertical spread’s $287.50 profit. The increased profitoccurs because the January 1070 put can capitalize on both the additional volatility and downside price movement.

FIGURE 2 — RESPONDING TO VOLATILITY


Profit/loss at December

expiration



ration, the long January 1070 put has amuch lower theta than the previouslong December 1135 put, which had atheta of -23.7. As a result, the positiontheta has increased to $51.10 from$44.70, or an additional $17.40 per dayin time decay — this, despite the factthe initial credit received from writingthis spread decreased to $162.50.

Looking at the profit/loss dynamicsof this diagonal put spread in Figure 1,the probability of profit is 98 percent,with an expected profit of $388, $100 orso more than the original vertical putspread.

However, the real advantage ofgoing diagonal comes in the form of an

enhanced ability to profit from avolatility increase, as shown in Figure2. (Both Figures 1 and 2 show at-expi-ration data, which is located below thesolid profit/loss function. The dottedlines represent interim profit/lossperiods.) Figure 1 shows the positionhas turned vega-positive at the expira-tion of the December put, with a posi-tion vega of 57.2 at the current pricelevel.

As we move lower along the priceaxis, the position’s vega increases.What does this mean in terms of volatil-ity changes? Figure 2 simulates a rise inthe entire volatility structure by 3 per-centage points, which would occur

with about a 30-point drop in the S&P500 futures. If the S&P was at 1160 atexpiration (which is an approximately30-point drop from the point this tradewas established), the maximum profitincreases to $900 from the original ver-tical spreads $287.50.

The increased profit results from theJanuary 1070 put capitalizing on theadditional volatility and gaining fromdownside price movement. Because itexpires in January rather than Dec-ember, this option has additional timevalue at the expiration of theDecember short put. If the December1155 short put option expires worth-

continued on p. 18

www.currencytradermag.ir


less, you can pocket thegain on the long Januaryput.

If you recall, thisspread was establishedfor .65 or $162.50. At theexpiration of theDecember 1155 put (withthe December futures set-tling at 1160), the spreadwill widen to $1,062.50 ––a $900 profit (before com-missions and fees).Although we are assum-ing the January futurescontract trades at thesame premium asDecember futures (thereis typically a stable ratioin equity index futuresduring short-term time

frames, such as the one describedhere), the expected profit with a risein volatility now increases to $626, upfrom the $380 in Figure 1, and upfrom the $287.50 in the verticalspread.

Disadvantages, risks, andanother legMargin requirements are higher(about twice the level of initial marginrequirements) for the diagonal putspread, so the higher expected profitessentially requires equal additionalrisk to obtain.

However, if you keep the originalDecember 1135 long put bought at .80and add the long January 1070 put(creating a three-legged vertical-diag-onal combination trade), the marginrequirement drops to $3,800, about$500 below the vertical put spread’soriginal margin requirement. Figure 3reveals that the expected probabilityof profit remains the same at 98 per-cent, with an expected profit of $258with no volatility change, and $540 inthe event of a three-percent volatility

TRADING STRATEGIES

The expected profit for the revised spread in the event of a three-percent volatility increase is$540.

FIGURE 4 — THREE-LEGGED SPREAD WITH VOLATILITY INCREASE


Profit/loss atDecember expiration

Source: Barclay Hedge (www.barclayhedge.com) Based on estimates of the composite of all

accounts or the fully funded subset method. Does not reflect the performance of any single account.

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

Top 10 option strategy traders ranked by August 2009 return.

(Managing at least $1 million as of Aug. 31, 2009.)

August 2009 YTD $ underRank Trading advisor return return mgmt.

1. CKP Finance Associates (Masters) 15.96% 174.59% 2.0

2. NEOS Advisors (Special Opportunities) 7.88% 8.36% 47.4

3. Washington (Singleton Fund) 7.58% 35.95% 55.7

4. ACE Investment Strat (ASIPC INST) 5.39% 26.08% 1.3

5. LJM Partners (Aggr. Premium Writing) 4.75% 21.20% 26.0

6. ACE Investment Strategists (ASIPC) 4.53% 27.26% 3.6

7. Kingsview Mgmt (Retail) 4.25% 16.00% 3.0

8. ACE Investment Strategists (DPC) 4.19% 64.42% 16.3

9. Oak Investment Group (Ag Options) 4.18% 47.35% 4.4

10. Nantucket Hedge Fund - CTA 3.40% -4.97% 4.4

MANAGED MONEY


http://www.barclayhedge.com

increase (Figure 4). Thus, by leaving in place the origi-

nal December 1135 long put and goingdiagonal with the January 1070 put,the expected $540 profit (with a mod-est correction to 1160) can be obtainedon margin that does not exceed $4,500for this trade. This represents a 12-per-cent profit-to-margin ratio. If theunchanged-volatility expected profit isused, the rate of return on margin is5.7 percent.

For the original vertical creditspread, the return on margin of $4,700(which is the maximum requirementdown to 1160 on the S&P 500) is 6.1percent. While the unchanged-volatil-ity profit on margin is slightly lowerfor the diagonal spread, there is anadditional profit potential of 6 percentfrom a rise in volatility, which morethan compensates for the commissioncosts of the purchase of the additionallong December 1135 put.

Getting more out ofvolatility and time decayThe traditional vertical credit spreadhas limited risk but limited profitpotential as well. However, by con-structing a diagonal put spread, addi-tional profit can be extracted fromtime decay and volatility increases.(But not without an equal increase inrisk.)

But, if you leave the original verticalput spread structure in place and adda January long put to create anotherversion of a diagonal spread (a three-legged vertical-diagonal combinationstrategy), there is a potential jumpfrom 6.1-percent to 12-percent in prof-it on margin. This result stems from ahypothetical increase in volatility aris-ing from a modest correction in theS&P 500.�

For information on the author see p. 6.

Related reading:

“Option spreads: The reinsurance approach”Active Trader, July 2004. An analysis of option credit spreadsfrom the perspective of playing the odds the way insurers and casinos do.

“Timing events with the calendar spread”Active Trader, October 2003. The calendar spread offers a way to capitalize on aspects of time, market direction and volatility.

“Controlling risk with spreads” Active Trader, March 2003. Trading the bull call-option spread.

“Extra credit (spreads)” Active Trader, February 2002. Another look at trading creditspreads.

“Spreading your charting options” Active Trader, July 2000. How to know what strategies areappropriate for different market conditions.

Bob DormanAd sales East Coast and [email protected]

(312) 775-5421

Allison CheeAd sales West Coast and Southwest

[email protected](415) 272-0999

Mark SegerAccount Executive

[email protected](312) 377-9435

Three good tools for targeting customers . . .

— CONTACT —





OPTIONS STRATEGY LABOPTIONS TRADING SYSTEM LAB

Market: Options on the S&P 500index (SPX). This strategy couldalso be applied to other equityindices, ETFs, and stocks with liq-uid options contracts.

System concept: This OptionsLab places two butterfly spreadssimultaneously and treats them asone trade. On the second Friday ofeach month, two out-of-the-money(OTM) butterflies are placed onthe S&P 500 index (SPX) — eachcentered one-half standard devia-tion away from the current price.The higher butterfly uses calloptions and the lower butterflyuses put options.

Long butterfly spreads selloptions at one strike price andthen buy half as many contracts atequidistant strike prices bothabove and below that strike. Theposition’s long options cost more than the short ones, so itrequires a net debit. To manage risk, each trade is held untilit gains 10 percent or the underlying hits either butterfly’sfar long strike.

Figure 1 shows the potential gains and losses of a doublelong butterfly entered on Aug. 14, 2009 and held throughSept. 1, 2009. The total position contained five long 1000calls, 10 short 1030 calls, five long 1060 calls, five long 940puts, 10 short 970 puts, and five long 1000 puts — all expir-ing in September. The position resembles two tents, becauseat expiration, there are two points of maximum profit (970and 1030) and four breakeven points.

However, this system doesn’t wait until expiration toexit. Notice Figure 1’s dashed line, which represents prof-itability 18 days in the future. This line is gently roundedand peaks at 30 percent around the S&P’s closing price(1004.10) when the spread was entered. At that point, thetrade is profitable when SPX trades between the breakevenpoints of 954.68 and 1037.57.

This system tries to take advantage of the faster timedecay of the short options, which is why it exits well beforethe options expire. In fact, the average trade was held

between 11 to 14 days in this test.In theory, the underlying could move around enough

after the trade is placed so that neither exit rule is hit andthen move back to the entry price, facing large losses as alloptions expire worthless. However, this scenario never hap-pened in the five-year test period.

Trade rules:

Place a double butterfly spread on the second Friday ofthe month:

1. Sell 10 calls one-half standard deviation above the current price.

2. Buy five at-the-money (ATM) calls.3. Buy five calls that same distance further OTM.4. Sell 10 puts one-half standard deviation below

the current price.5. Buy five ATM puts.6. Buy five puts that same distance further OTM.7. All options are in the second expiration month

available in the S&P 500 index.


FIGURE 1 — DOUBLE LONG BUTTERFLY SPREAD

This double long butterfly risks $4,870 and has a maximum potential profit of morethan 200 percent at expiration. But the strategy aims for 10-percent profits eachmonth.

OPTIONS TRADING SYSTEM LAB

Double butterflieson the S&P 500

Source: OptionVue

Close both butterflies if:1. The entire position gains

10 percent, or2. The market touches either

distant OTM strike.

Starting capital: $20,000.

Execution: Option trades wereexecuted at the average of the bidand ask prices at the daily close, ifavailable; otherwise, theoreticalprices were used. Daily closingprices were used. Testing used SPXoptions with 10-point strikes only.Standard deviations were calculat-ed using the implied volatility (IV)of the ATM call. Commissions were$5 per trade plus $1 per option.

Test data: The system was tested on cash-settled S&P 500index (SPX) options at the CBOE.

Test period: Jan. 9, 2004 to Sept. 1, 2009.

Test results: Figure 2 tracks the double butterfly strate-gy’s performance, which gained $30,720 (154 percent) overfive and a half years. Overall, the strategy traded 69 timessince January 2004 and 81 percent were profitable. The

strategy’s average loss ($1,714.23) was considerably biggerthan its average gain ($946.52), but its high winning per-centage was largely responsible for its success.

— Steve Lentz and Jim Graham of OptionVue


LEGEND: Initial capital — Starting account value. Net gain — Gain at end of test period.Percentage return — Gain or loss on a percentage basis.Annualized return — Gain or loss on a annualized percentage basis.No. of trades — Number of trades generated by the system.Winning/losing trades — Number of winners and losers generated by the system.Win/loss — The percentage of trades that were profitable.Avg. trade — The average profit for all trades.Largest winning trade — Biggest individual profit generated by the system.Largest losing trade — Biggest individual loss generated by the system.Avg. profit (winners) — The average profit for winning trades.Avg. loss (losers) — The average loss for losing trades.Avg. hold time (winners) — The average holding period for winning trades (in days).Avg. hold time (losers) — The average holding period for losing trades (in days).Max consec. win/loss — The maximum number of consecutive winning and losingtrades.

Option System Analysis strategies are tested using OptionVue’sBackTrader module (unless otherwise noted).

If you have a trading idea or strategy that you’d like to see tested,please send the trading and money-management rules [email protected].

The vast majority of this strategy’s trades (81 percent) made money, helping theapproach gain 154 percent since January 2004.

Source: OptionVue

FIGURE 2 — BUTTERFLIES SPREAD THEIR WINGS

STRATEGY SUMMARY

Initial capital: $20,000.00Net gain: $30,720.00Percentage return: 154%Annualized return: 27.2%No. of trades: 69Winning/losing trades: 56/13Win/loss: 81%Avg. trade: $445.22Largest winning trade: $3,260.00Largest losing trade: -$3,540.00Avg. profit (winners): $946.52Avg. profit (losers): $1,714.23Avg. hold time (winners): 11Avg. hold time (losers): 14Max. consec. win/loss: 15/2



FUTURES BASICS

BY FOT STAFF

Front and back months

In the futures market, “frontmonth” describes the contractmonth that is nearest to expira-tion and “back month(s)” refer to

the subsequent contract months avail-able for trading in a particular market.

Contract-month cycles differ frommarket to market. Many popularfinancial futures, including stock-index and Treasury futures, use aMarch, June, September, andDecember quarterly cycle. Crude oilfutures, however, have contracts forevery month of the year. Soybeanfutures have January, March, May,July, August, September, andNovember contracts.

For example, during the month ofDecember, January is the front-monthcontract for soybeans, with Marchbeing the first back month. When the

January contract stops trading on thebusiness day prior to the 15th of themonth (Jan. 14 in the case of theJanuary 2010 soybean contract), theMarch contract officially becomes thenew front month.

In practice, however, the nearestback month (usually simply referredto as “the” back month) effectivelybecomes the front month before theexpiring front month actually stopstrading, in that the majority of volumetransfers to the first back month in thecycle before the expiring contract’s lasttrading day. In stock-index futures, forexample, the majority of trading shiftsto the upcoming contract month whenthere is about a week left in the currentcontract’s life. The timing of this tran-sition is market specific.

In most futures markets, althoughseveral contract months are listed fortrading at any given time, the majorityof trading typically occurs in the frontmonth, which represents the “price ofrecord” on any given day — the offi-cial price for that market. For example,although many contract months ofcrude oil futures were trading on Sept.10, the October 2009 contract (whichstopped trading on Sept. 22) was thefront-month contract and provided theprice the financial news reported asthe crude oil closing price for the day.The October contract closed at 71.94,while the first back month, November,closed at 72.27. The October futurestraded around 310,000 contracts thatday, while the November futures trad-ed around 145,000 contracts.

Although the majority of volumeusually occurs in the front-month con-

tract (followed by the first backmonth), this is not always the case. Inthe Eurodollar futures, for example,volume is actually higher in some ofthe back months than the front monthbecause of the unique nature of themarket.

Sometimes, the front month is calledthe “nearby” month or the “current”month.��

In the futures market, contract months have a specific hierarchy.

Futures glossary:Cars

“Car” is shorthand for contract, usedto refer to the number of contracts ina trade — e.g., “I bought 10 cars ofDecember crude oil.” The term orig-inated because the amount of grainrepresented by one futures contract(grains were the underlying marketfor the first exchange-traded futuresin the U.S.) filled one railroad car.The term spread to apply to anyfutures contract, although it tradi-tionally has been used mostly byfloor traders.

www.rsofhouston.com


� TradeStation now offers its clients integratedCommitments of Traders (COT) data at no additional cost.The Commodity Futures Trading Commission (CFTC) pro-vides this weekly information about the purchases andsales of futures contracts. COT data gives a detailed break-down of the number of futures contracts held long, short, orspread by commercial traders (producers and consumers ofcommodities), non-commercial traders (large speculatorssuch as hedge funds), and other speculative (smaller)traders, and may be used for fundamental analysis of thefutures markets. COT data can be used to show whichgroups of traders have a position bias in a market direction,which groups may be driving the market trend, and whichgroups are increasing or decreasing position size. For moreinformation, visit the support center at TradeStation.comand click on the QuickTips page, where you can downloadCOT materials and watch a narrated video demonstrationof how COT data can be incorporated in TradeStation chart-ing and analysis.

�Mirus Futures has partnered with eSignal to offerfully integrated futures trading using Mirus’ Zen-Fire trad-ing engine. Mirus clients can now access and trade theiraccounts from within eSignal and eliminate exchange-datafees for U.S. electronic futures markets. Clients will have theability to trade on Zen-Fire data while using eSignal’sadvanced analytics and charting, all in one application. Thenewest version of eSignal includes windows that connect toyour Mirus Futures account. Orders placed through the“trade manager” window are routed through the Zen-Firetrading engine. For more information, visit:www.eSignal.com/map/mirus and http://mirusfutures.com.

� CME Group has launched a new financially settledEuropean gasoil (ICE) futures contract. This contract allowsCME Group customers to gain margin and capital efficien-cies by hedging their risk to both European gasoil and Brentcrude oil futures along with the benchmark WTI and heat-ing oil futures contracts, all on a single exchange. The com-modity code for this contract is 7F, and it is listed for 36 con-secutive months with the first contract month of September2009. CME Group also launched three new financially set-tled five decimals natural gas liquids swap futures con-tracts. These contracts offer CME Group customers the abil-ity to price at an eighth of a cent (five decimal places). Thecontracts and commodity codes for the new swap futuresare Mont Belvieu LDH propane five decimals (OPIS) (B0);Mont Belvieu ethane five decimals (OPIS) (C0); and MontBelvieu normal butane five decimals (OPIS) (D0). The firstlisted month is the September 2009 contract. The propanecontract is listed for up to 48 consecutive months and theother contracts are listed for 36 consecutive months. Formore information visit www.cmegroup.com/clearport.

� TradeTheNews.com has introduced a new market

update feature covering North American, European, andAsian markets. You can sign up for the free market updateby selecting the “Click here for free Market Updates” link atwww.tradethenews.com. The market updates provide read-ers with insight into the day-to-day performance in globalmarkets at key junctures during trading hours. Those whosubscribe to the free market updates will also receive theweekly wrap-up every Friday. The report brings togetherthe past week’s market activity, providing in-depth analysisof the events of the week.

� TAG debuted two new options products at the FIA OICEquity Options Conference. The Market Data Explorer toolcan look up any options equity symbol, on any day, at anytime, in any market center in the U.S., Europe, or Canada, inany currency in the TAG IQ Engine and view it on a graph.The Order Routing Comparison Tool simultaneously com-pares your firm’s routing destinations with those of otheroptions brokers online and saves reports for trend tracking.For more information, visit www.tagaudit.com.

�MTPredictor, the UK firm specializing in risk controlsoftware for financial traders, has released its new stand-alone analysis software v6.5. The new version enables cus-tomers to find trade set-ups and control the risk on bothlive, intraday charts and daily/weekly charts in the samesoftware package, and serves the needs of both short-termswing traders and long-term position traders. Real-time,intraday traders now have the choice of powering v6.5 witha streaming, live data feed from new MTPredictor industrypartner DTNiQFeed or the long-established partnereSignal. In addition, they can now use the full set ofMTPredictor risk tools previously available only in v6.0 tofind risk-controlled trades in real-time. The new real-timescanner cuts search time down by alerting traders automat-ically to low initial money risk set-ups. The five main auto-matic MTPredictor set-ups are identified with a visual andaudible alert. For more information, visit www.mtpredictor.com.

� BCS Financial Group, a direct market access equityand derivatives broker, has partnered with CQG to provideits 400 customers and internal trading desks in Russiaaccess to CQG’s trading platforms. Customers clearingthrough BCS will have access to CQG’s leading decision-making tools, accurate consolidated market data, andadvanced electronic trading via the CQG Trader and CQGIntegrated Client platforms. BCS traders will be able toroute orders to many exchanges. For more information visitwww.cqg.com.

Note: The New Products and Services section is a forum for industry businesses to announce new products and upgrades. Listings are adaptedfrom press releases and are not endorsements or recommendations from the Active Trader Magazine Group. E-mail press releases to [email protected]. Publication is not guaranteed.

NEW PRODUCTS AND SERVICES

http://www.eSignal.com/map/mirus

http://mirusfutures.com

http://www.cmegroup.com/clearport

http://www.tradethenews.com

http://www.tagaudit.com

http://www.mtpredictor.com

http://www.cqg.com



LegendVolume: 30-day average daily volume, in thou-sands (unless otherwise indicated).OI: Open interest, in thousands (unless other-wise indicated). 10-day move: The percentage price move fromthe close 10 days ago to today’s close.20-day move: The percentage price move fromthe close 20 days ago to today’s close.60-day move: The percentage price move fromthe close 60 days ago to today’s close.The “rank” fields for each time window (10-

day moves, 20-day moves, etc.) show the per-centile rank of the most recent move to a certainnumber of the previous moves of the same sizeand in the same direction. For example, therank for 10-day move shows how the mostrecent 10-day move compares to the past twen-ty 10-day moves; for the 20-day move, the rankfield shows how the most recent 20-day movecompares to the past sixty 20-day moves; forthe 60-day move, the rank field shows how themost recent 60-day move compares to the pastone-hundred-twenty 60-day moves. A readingof 100 percent means the current reading is

larger than all the past readings, while a read-ing of 0 percent means the current reading issmaller than the previous readings. These fig-ures provide perspective for determining howrelatively large or small the most recent pricemove is compared to past price moves.Volatility ratio/rank: The ratio is the short-termvolatility (10-day standard deviation of prices)divided by the long-term volatility (100-day stan-dard deviation of prices). The rank is the per-centile rank of the volatility ratio over the past60 days.

This information is for educational purposes only. Futures & Options Trader provides this data in good faith, but it cannot guarantee its accuracy or timeliness. Futures & OptionsTrader assumes no responsibility for the use of this information. Futures & Options Trader does not recommend buying or selling any market, nor does it solicit orders to buyor sell any market. There is a high level of risk in trading, especially for traders who use leverage. The reader assumes all responsibility for his or her actions in the market.

FUTURES SNAPSHOT (as of Sept. 25)

The following table summarizes the most actively traded U.S. futures contracts. The information does NOT constitute trade signals. It isintended only to provide a brief synopsis of each market’s liquidity, direction, and levels of momentum and volatility. See the legend for expla-nations of the different fields. Volume figures are for the most active contract month in a particular market and may not reflect total volumefor all contract months. Note: Average volume and open-interest data includes both pit and side-by-side electronic contracts (where applicable).

10-day move/ 20-day move/ 60-day move/ VolatilityMarket Symbol Exchange Volume OI rank rank rank ratio/rankE-Mini S&P 500 ES CME 1.88 M 2.30 M 0.36% / 6% 1.14% / 4% 16.54% / 79% .17 / 5%10-yr. T-note TY CME 761.5 1.02 M 0.00% / 0% -0.58% / 54% 0.90% / 26% .21 / 63%5-yr. T-note FV CME 399.3 724.7 -0.03% / 0% -0.68% / 45% 0.10% / 4% .22 / 38%Crude oil CL CME 281.2 202.3 -4.72% / 50% -8.93% / 74% -1.06% / 13% .52 / 100%E-Mini Nasdaq 100 NQ CME 278.1 291.5 0.80% / 17% 3.54% / 33% 17.42% / 73% .14 / 14%Eurodollar* ED CME 252.5 660.8 -0.10% / 100% 0.22% / 27% 0.34% / 59% .21 / 7%30-yr. T-bond US CME 231.5 669.2 0.10% / 38% 0.15% / 8% 1.67% / 28% .25 / 58%Eurocurrency EC CME 206.7 133.0 0.49% / 11% 2.03% / 58% 4.56% / 41% .20 / 45%2-yr. T-note TU CME 198.1 695.0 -0.01% / 0% -0.09% / 65% 0.01% / 11% .23 / 35%E-Mini Russell 2000 TF CME 137.7 332.8 1.15% / 7% 3.16% / 19% 20.13% / 75% .20 / 12%E-Mini Dow YM CME 129.6 59.2 0.92% / 21% 0.87% / 6% 16.72% / 83% .14 / 2%Natural gas NG CME 127.2 118.2 34.63% / 60% 31.39% / 90% 10.69% / 89% .54 / 42%Gold 100 oz. GC CME 103.0 293.7 -1.47% / 100% 4.68% / 63% 5.34% / 59% .30 / 37%British pound BP CME 101.8 81.9 -4.49% / 100% -2.14% / 84% -2.94% / 100% .49 / 100%Japanese yen JY CME 91.2 95.3 0.73% / 5% 4.01% / 77% 6.53% / 92% .28 / 20%Corn C CME 90.3 368.1 4.51% / 45% 3.41% / 56% -3.36% / 8% .20 / 38%Australian dollar AD CME 79.2 97.9 0.37% / 11% 2.59% / 43% 8.83% / 34% .16 / 50%Canadian dollar CD CME 65.5 84.1 -1.42% / 100% -0.73% / 32% 6.29% / 41% .31 / 82%Sugar SB ICE 57.1 294.0 5.03% / 25% -1.49% / 0% 31.80% / 65% .11 / 2%Soybeans S CME 55.1 165.7 2.55% / 33% -16.89% / 91% -19.76% / 77% .17 / 7%Swiss franc SF CME 37.0 42.4 0.68% / 11% 2.73% / 66% 5.07% / 58% .19 / 18%RBOB gasoline RB CME 35.0 53.7 -7.92% / 33% -20.23% / 97% -9.51% / 47% .60 / 98%E-Mini S&P MidCap 400 ME CME 34.1 94.1 0.25% / 6% 2.37% / 10% 19.88% / 76% .19 / 7%S&P 500 index SP CME 33.3 332.4 0.37% / 7% 1.33% / 4% 16.55% / 78% .17 / 5%Heating oil HO CME 32.5 42.9 -3.10% / 29% -9.79% / 69% -1.44% / 8% .42 / 80%Wheat W CME 29.7 147.0 -3.77% / 62% -5.35% / 39% -15.01% / 62% .13 / 12%Silver 5,000 oz. SI CME 28.9 67.7 -3.83% / 50% 12.94% / 62% 16.72% / 77% .35 / 45%Copper HG CME 22.8 65.8 -3.72% / 67% -3.79% / 58% 18.87% / 14% .22 / 57%Mexican peso MP CME 20.2 66.2 -1.39% / 19% -3.41% / 74% -2.80% / 71% .50 / 83%Live cattle LC CME 13.3 59.0 -1.35% / 63% -1.74% / 76% 0.35% / 3% .33 / 52%Soybean oil BO CME 12.6 32.2 1.55% / 100% -5.99% / 30% -3.68% / 17% .18 / 5%Soybean meal SM CME 12.0 28.3 3.10% / 33% -23.69% / 98% -24.33% / 77% .18 / 20%Lean hogs LH CME 11.7 42.8 -4.81% / 100% 4.28% / 22% -15.70% / 72% .17 / 18%Crude oil e-miNY QM CME 11.4 4.5 -4.72% / 50% -9.24% / 75% 0.64% / 1% .53 / 100%Nikkei 225 index NK CME 10.7 34.7 -2.35% / 92% -3.50% / 76% 4.67% / 9% .17 / 20%Coffee KC ICE 8.9 57.1 0.91% / 8% 5.23% / 47% 7.27% / 59% .44 / 62%U.S. dollar index DX ICE 7.8 26.4 0.16% / 100% -1.75% / 58% -4.32% / 36% .18 / 57%Cocoa CC ICE 6.9 55.2 0.26% / 0% 9.29% / 67% 23.12% / 88% .16 / 2%New Zealand dollar NE CME 6.6 23.3 1.58% / 37% 3.84% / 53% 13.80% / 65% .22 / 82%Mini-sized gold YG CME 6.6 4.7 -1.39% / 100% 4.48% / 59% 5.44% / 64% .31 / 38%Fed Funds** FF CME 5.7 54.5 -0.01% / 20% 0.02% / 2% 0.19% / 69% .10 / 12%Natural gas e-miNY QG CME 4.9 8.6 67.16% / 100% 63.14% / 100% 37.25% / 100% 1.00 / 97%Nasdaq 100 ND CME 2.7 18.0 0.80% / 17% 3.54% / 33% 17.42% / 73% .14 / 13%E-Mini eurocurrency ZE CME 2.0 2.2 0.49% / 17% 2.64% / 76% 4.56% / 42% .20 / 45%Mini-sized silver YI CME 1.7 1.9 -3.84% / 50% 12.51% / 59% 16.88% / 79% .36 / 46%Dow Jones Ind. Avg. DJ CME 1.1 8.5 0.92% / 21% 0.87% / 6% 16.72% / 83% .14 / 2%Feeder cattle FC CME 0.8 3.9 -2.60% / 87% -2.25% / 49% -6.91% / 100% .35 / 60%*Average volume and open interest based on highest-volume contract (September 2010). **Average volume and open interest based on highest-volume contract (February 2010)


LEGEND:Options volume: 20-day average daily options volume (in thousands unless otherwise indicated).Open interest: 20-day average daily options open interest (in thousands unless otherwise indicated).IV/SV ratio: Overall average implied volatility of all options divided by statistical volatility of underlying instrument.10-day move: The underlying’s percentage price move from the close 10 days ago to today’s close.20-day move: The underlying’s percentage price move from the close 20 days ago to today’s close. The “rank” fields for each time window (10-day moves, 20-daymoves) show the percentile rank of the most recent move to a certain number of previous moves of the same size and in the same direction. For example, the “rank”for 10-day moves shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, the “rank” field shows how the mostrecent 20-day move compares to the past sixty 20-day moves.

OPTIONS RADAR (as of Sept. 28)

MOST-LIQUID OPTIONS*Indices Symbol Exchange Options Open 10-day move / 20-day move / IV / IV / SV ratio —

volume interest rank rank SV ratio 20 days agoS&P 500 index SPX CBOE 165.4 1.40 M 1.30% / 31% 3.31% / 28% 22.9% / 17.3% 21.8% / 17.1%S&P 500 volatility index VIX CBOE 117.2 2.06 M 4.27% / 38% 0.48% / 5% 90.6% / 81.6% 155.8% / 71.9%Russell 2000 index RUT CBOE 60.8 481.9 2.20% / 38% 5.75% / 39% 28.1% / 24% 26.3% / 22.7%E-Mini S&P 500 futures ES CME 27.7 135.4 1.49% / 41% 3.07% / 20% 22.9% / 19.6% 21.9% / 21%Nasdaq 100 index NDX CBOE 16.1 146.2 1.82% / 33% 4.95% / 43% 23.5% / 18.3% 23% / 19.3%

StocksGeneral Electric GE 200.0 3.01 M 9.19% / 44% 19.03% / 70% 47.2% / 49.8% 40% / 34.3%Bank of America BAC 130.9 2.96 M 1.35% / 13% -4.23% / 64% 51.7% / 40.2% 49.8% / 44.9%Apple Inc. AAPL 99.9 734.4 7.16% / 75% 9.47% / 49% 36.1% / 26% 30.8% / 22.7%Altria Group MO 88.3 322.1 -1.78% / 40% -3.02% / 40% 22.2% / 18.2% 20.4% / 17.5%Research in Motion RIMM 65.5 460.4 -18.39% / 100% -10.01% / 65% 49.6% / 35.1% 48.1% / 35.4%

FuturesEurodollar ED CME 102.6 5.23 M 0.05% / 30% -0.06% / 78% 123.4% / 139% 103.7% / 56.5%Corn C CME 40.1 560.0 6.61% / 83% 5.48% / 71% 34.8% / 47.3% 35% / 41.7%E-Mini S&P 500 futures ES CME 27.7 135.4 1.49% / 41% 3.07% / 20% 22.9% / 19.6% 21.9% / 21%Soybeans S CME 16.1 149.4 1.14% / 33% -19.04% / 98% 29.3% / 34.3% 36.2% / 34.6%10-year T-notes TY CME 13.3 230.7 0.75% / 86% 0.04% / 5% 7.6% / 5.9% 7.9% / 6.8%

VOLATILITY EXTREMES**Indices - High IV/SV ratio

S&P 100 index OEX CBOE 14.1 87.3 1.48% / 44% 2.92% / 26% 21.5% / 15.6% 20.7% / 16.1%Dow Jones index DJX CBOE 5.9 151.7 1.68% / 47% 2.57% / 24% 20.1% / 14.6% 19.8% / 16.1%S&P 100 index (European style) XEO CBOE 4.0 46.3 1.48% / 44% 2.92% / 26% 20.8% / 15.6% 19.9% / 16.6%S&P 500 index SPX CBOE 165.4 1.40 M 1.30% / 31% 3.31% / 28% 22.9% / 17.3% 21.8% / 17.1%S&P 500 futures SP CME 12.4 69.9 1.49% / 40% 3.85% / 37% 23.5% / 17.9% 19.8% / 17.2%

Indices - Low IV/SV ratioGold/silver index XAU PHLX 2.4 20.1 -4.72% / 67% 5.74% / 34% 47.3% / 48.1% 37.5% / 37.1%

Stocks - High IV/SV ratioCIT Group CIT 20.5 613.9 14.38% / 67% -0.60% / 0% 178.7% / 84.1% 188.3% / 186.7%Cell Therapeutics CTIC 1.5 86.4 -7.30% / 50% -18.59% / 89% 136.4% / 73.7% 147.6% / 73.6%Qualcomm QCOM 20.6 577.9 -0.56% / 0% -2.65% / 42% 32.6% / 22.9% 29.4% / 22.7%Research in Motion RIMM 65.5 460.4 -18.39% / 100% -10.01% / 65% 49.6% / 35.1% 48.1% / 35.4%Exxon Mobil XOM 22.9 837.1 -0.59% / 27% -0.76% / 16% 24.3% / 17.5% 25.4% / 20.7%

Stocks - Low IV/SV ratioDelta Petroleum DPTR 4.3 44.7 -52.24% / 100% -3.21% / 10% 135.4% / 201.2% 105.6% / 72.7%

Futures - High IV/SV ratio5-year T-notes FV CME 1.0 25.4 0.10% / 13% -0.65% / 43% 4.9% / 2.5% 5.1% / 4.2%Eurocurrency EC CME 2.7 21.2 -0.16% / 50% 2.12% / 61% 10.7% / 7.5% 9.9% / 8.1%S&P 500 futures SP CME 12.4 69.9 1.49% / 40% 3.85% / 37% 23.5% / 17.9% 19.8% / 17.2%10-year T-notes TY CME 13.3 230.7 0.75% / 86% 0.04% / 5% 7.6% / 5.9% 7.9% / 6.8%Live cattle LE CME 2.0 133.1 -1.09% / 13% -0.66% / 48% 15.4% / 12.8% 13.6% / 12.9%

Futures - Low IV/SV ratio**30-yr T-bonds US CBOT 2.8 51.5 1.57% / 100% 0.87% / 27% 12.9% / 24.3% 12.9% / 11.7%Corn C CME 40.1 560.0 6.61% / 83% 5.48% / 71% 34.8% / 47.3% 35% / 41.7%Soybean meal SM CME 2.3 47.9 1.84% / 33% -25.45% / 100% 29.8% / 39.8% 31.1% / 38.1%Wheat W CME 7.9 93.1 0.35% / 0% -2.44% / 19% 30.6% / 38.5% 32.9% / 39%Soybeans ZS CME 1.1 149.4 1.14% / 33% -19.04% / 98% 28.9% / 34.3% 36.8% / 34.6%

* Ranked by volume ** Ranked based on high or low IV/SV values.


Options Watch: Stocks and ETFs with high options volume (as of Sept. 29) Compiled by Tristan Yates

The following table summarizes the expiration months available for 20 stocks and ETFs with the largest options volume (measured in dollars). Italso shows each stock’s average bid-ask spread for at-the-money (ATM) October options. The information does NOT constitute trade signals. It isintended only to provide a brief synopsis of potential slippage in each option market.

spread as %Stock of underlying

Stock Ticker price Call Put priceS&P 500 tracking stock SPY X X X X X X X X 106.00 0.04 0.04 0.04%Apple Inc. AAPL X X X X X X 185.38 0.08 0.10 0.05%PowerShares QQQ Trust QQQQ X X X X X X X X 42.22 0.03 0.03 0.07%Google GOOG X X X X X X 498.53 0.33 0.38 0.07%Baidu Inc. BIDU X X X X X X 394.92 0.33 0.25 0.07%Bank of America BAC X X X X X X 17.16 0.02 0.01 0.07%iShares Russell 2000 index IWM X X X X X X X X X X 60.99 0.05 0.06 0.08%Research in Motion RIMM X X X X X X 67.64 0.08 0.08 0.12%Priceline.com PCLN X X X X X X 167.00 0.25 0.28 0.16%American International Group AIG X X X X X X 45.22 0.11 0.13 0.26%Citigroup C X X X X X X 4.70 0.01 0.01 0.27%Vanguard FTSE All-World Ex-US VEU X X X X X X 43.04 0.31 0.29 0.70%Thomson Reuters Corp. TRI X X X X 33.42 0.19 0.33 0.77%Doctor Reddy's Lab RDY X X X X 19.25 0.16 0.18 0.88%SLM Corp. SLM X X X X X X 8.91 0.09 0.08 0.91%Cabot CBT X X X X 23.73 0.23 0.21 0.92%HRPT Properties Trust HRP X X X X 7.86 0.16 0.15 1.99%Monarch Casino & Resort MCRI X X X X 10.90 0.21 0.23 2.01%RPC Inc. RES X X X X X 10.49 0.43 0.29 3.40%Proshares Dynamic Small Cap Growth PWT X X X X 12.02 NA NA NA

Legend:Call: Four-day average difference between bid and ask prices for the front-month ATM call.Put: Four-day average difference between bid and ask prices for the front-month ATM put.Bid-ask spread as % of underlying price: Average difference between bid and ask prices for front-month, ATM call, and put divided by the underlying's closing price.

Oct

.

Nov

.

Dec

.

Jan.

Feb.

Mar

ch

Apr

il

May

June

Sep

t.

Dec

.

Jan.

Dec

.

Jan.

2009 2010 2011

The Commitments of Traders (COT) report is published eachweek by the Commodity Futures Trading Commission(CFTC). The report divides the open positions in futures mar-kets into three categories: commercials, non-commercials,and non-reportable.

Commercial traders, or hedgers, tend to operate in thecash market (e.g., grain merchants and oil companies thateither produce or consume the underlying commodity).

Non-commercial traders are large speculators (“largespecs”) such as commodity trading advisors and hedgefunds — professional money managers who don’t deal in theunderlying cash markets but speculate in futures on a large-scale basis. Many of these traders are trend-followers. Thenon-reportable category represents small traders, or the gen-eral public.

Figure 1 shows the relationship between commercials and large speculators onSept. 22. Positive values mean net commercial positions (longs-shorts) are largerthan net speculator holdings, based on their five-year historical relationship.Negative values mean large speculators have bigger positions than the commer-cials.

In September, commercial positions continued to outnumber speculator posi-tions in natural gas futures (NG), a bullish relationship that has held for morethan two months. On the other side, speculators held more positions than com-mercials in platinum (PL), palladium (PA), and gold futures (GC), a bearish sign.This bearish situation in platinum has existed for at least two months, while therelationship in palladium and gold futures grew more bearish in September.�

— Compiled by Floyd Upperman

The largest positive readings represent markets in which commercialpositions (longs-shorts) exceeded speculator holdings in September.And the largest negative values represent the opposite relationship —speculator positions exceeded commercial positions.

FIGURE 1 — COT REPORT EXTREMES

For a list of contract names, see “Futures Snapshot.” Source: http://www.upperman.com

Natural gas and platinum near COT extremes

Legend: Figure 1 shows the difference between net commer-cial and net large spec positions (longs - shorts) for all 45 futuresmarkets, in descending order. It is calculated by subtracting thecurrent net large spec position from the net commercial positionand then comparing this value to its five-year range. The formula is:

a1 = (net commercial 5-year high - net commercial current)b1 = (net commercial 5-year high - net commercial 5-year low)

c1 = ((b1 - a1)/ b1 ) * 100

a2 = (net large spec 5-year high - net large spec current)b2 = (net large spec 5-year high - net large spec 5-year low)

c2 = ((b2 - a2)/ b2 ) * 100

x = (c1 - c2)

Option contracts traded

FUTURES & OPTIONS WATCH

Bid-ask

http://www.upperman.com


American style: An option that can be exercised at anytime until expiration.

Assign(ment): When an option seller (or “writer”) isobligated to assume a long position (if he or she sold a put)or short position (if he or she sold a call) in the underlyingstock or futures contract because an option buyer exercisedthe same option.

At the money (ATM): An option whose strike price isidentical (or very close) to the current underlying stock (orfutures) price.

Backspreads and ratio spreads are leveraged posi-tions that involve buying and selling options in differentproportions, usually in 1:2 or 2:3 ratios. Backspreads con-tain more long options than short ones, so the potentialprofits are unlimited and losses are capped. By contrast,ratio spreads have more short options than long ones andhave the opposite risk profile.

Note: These labels are not set in stone. Some tradersdescribe either position as option trades with long andshort legs in different proportions.

Bear call spread: A vertical credit spread that consistsof a short call and a higher-strike, further OTM long call inthe same expiration month. The spread’s largest potentialgain is the premium collected, and its maximum loss is lim-ited to the point difference between the strikes minus thatpremium.

Bear put spread: A bear debit spread that contains putswith the same expiration date but different strike prices.You buy the higher-strike put, which costs more, and sellthe cheaper, lower-strike put.

Bull call spread: A bull debit spread that contains callswith the same expiration date but different strike prices.You buy the lower-strike call, which has more value, andsell the less-expensive, higher-strike call.

Bull put spread (put credit spread): A bull creditspread that contains puts with the same expiration date, butdifferent strike prices. You sell an OTM put and buy a less-expensive, lower-strike put.

Calendar spread: A position with one short-term shortoption and one long same-strike option with more timeuntil expiration. If the spread uses ATM options, it is mar-ket-neutral and tries to profit from time decay. However,OTM options can be used to profit from both a directionalmove and time decay.

Call option: An option that gives the owner the right, butnot the obligation, to buy a stock (or futures contract) at afixed price.

The Commitments of Traders report: Publishedweekly by the Commodity Futures Trading Commission(CFTC), the Commitments of Traders (COT) report breaksdown the open interest in major futures markets. Clearingmembers, futures commission merchants, and foreign bro-

kers are required to report daily the futures and optionspositions of their customers that are above specific report-ing levels set by the CFTC.

For each futures contract, report data is divided into three“reporting” categories: commercial, non-commercial, andnon-reportable positions. The first two groups are thosewho hold positions above specific reporting levels.

The “commercials” are often referred to as the largehedgers. Commercial hedgers are typically those who actu-ally deal in the cash market (e.g., grain merchants and oilcompanies, who either produce or consume the underlyingcommodity) and can have access to supply and demandinformation other market players do not.

Non-commercial large traders include large speculators(“large specs”) such as commodity trading advisors (CTAs)and hedge funds. This group consists mostly of institution-al and quasi-institutional money managers who do not dealin the underlying cash markets, but speculate in futures ona large-scale basis for their clients.

The final COT category is called the non-reportable posi-tion category — otherwise known as small traders — i.e.,the general public.

Covered call: Shorting an out-of-the-money call optionagainst a long position in the underlying market. An exam-ple would be purchasing a stock for $50 and selling a calloption with a strike price of $55. The goal is for the marketto move sideways or slightly higher and for the call optionto expire worthless, in which case you keep the premium.

Credit spread: A position that collects more premiumfrom short options than you pay for long options. A creditspread using calls is bearish, while a credit spread usingputs is bullish.

Debit spread: An options spread that costs money toenter, because the long side is more expensive that the shortside. These spreads can be verticals, calendars, or diagonals.

KEY CONCEPTS The option “Greeks”

Delta: The ratio of the movement in the option price forevery point move in the underlying. An option with adelta of 0.5 would move a half-point for every 1-pointmove in the underlying stock; an option with a delta of1.00 would move 1 point for every 1-point move in theunderlying stock.

Gamma: The change in delta relative to a change in theunderlying market. Unlike delta, which is highest fordeep ITM options, gamma is highest for ATM optionsand lowest for deep ITM and OTM options.

Rho: The change in option price relative to the changein the interest rate.

Theta: The rate at which an option loses value each day(the rate of time decay). Theta is relatively larger forOTM than ITM options, and increases as the option getscloser to its expiration date.

Vega: How much an option’s price changes per a one-percent change in volatility.

continued on p. 26

KEY CONCEPTS


Delivery period (delivery dates): The specific timeperiod during which a delivery can occur for a futures con-tract. These dates vary from market to market and are deter-mined by the exchange. They typically fall during themonth designated by a specific contract — e.g. the deliveryperiod for March T-notes will be a specific period in March.

Diagonal spread: A position consisting of options withdifferent expiration dates and different strike prices — e.g.,a December 50 call and a January 60 call.

European style: An option that can only be exercised atexpiration, not before.

Exercise: To exchange an option for the underlyinginstrument.

Expiration: The last day on which an option can be exer-cised and exchanged for the underlying instrument (usual-ly the last trading day or one day after).

In the money (ITM): A call option with a strike pricebelow the price of the underlying instrument, or a putoption with a strike price above the underlying instru-ment’s price.

Intrinsic value: The difference between the strike priceof an in-the-money option and the underlying asset price. Acall option with a strike price of 22 has 2 points of intrinsicvalue if the underlying market is trading at 24.

Naked option: A position that involves selling an unpro-tected call or put that has a large or unlimited amount ofrisk. If you sell a call, for example, you are obligated to sellthe underlying instrument at the call’s strike price, whichmight be below the market’s value, triggering a loss. If yousell a put, for example, you are obligated to buy the under-lying instrument at the put’s strike price, which may be wellabove the market, also causing a loss.

Given its risk, selling naked options is only for advancedoptions traders, and newer traders aren’t usually allowedby their brokers to trade such strategies.

Naked (uncovered) puts: Selling put options to collectpremium that contains risk. If the market drops below theshort put’s strike price, the holder may exercise it, requiringyou to buy stock at the strike price (i.e., above the market).

Near the money: An option whose strike price is closeto the underlying market’s price.

Open interest: The number of options that have notbeen exercised in a specific contract that has not yet expired.

Out of the money (OTM): A call option with a strikeprice above the price of the underlying instrument, or a putoption with a strike price below the underlying instru-ment’s price.

Parity: An option trading at its intrinsic value.

Physical delivery: The process of exchanging a physicalcommodity (and making and taking payment) as a result ofthe execution of a futures contract. Although 98 percent ofall futures contracts are not delivered, there are market par-ticipants who do take delivery of physically settled con-tracts such as wheat, crude oil, and T-notes. Commoditiesgenerally are delivered to a designated warehouse; T-notedelivery is taken by a book-entry transfer of ownership,although no certificates change hands.

Premium: The price of an option.

Put option: An option that gives the owner the right, butnot the obligation, to sell a stock (or futures contract) at afixed price.

Put ratio backspread: A bearish ratio spread that con-tains more long puts than short ones. The short strikes arecloser to the money and the long strikes are further from themoney.

For example, if a stock trades at $50, you could sell one$45 put and buy two $40 puts in the same expiration month.If the stock drops, the short $45 put might move into themoney, but the long lower-strike puts will hedge some (orall) of those losses. If the stock drops well below $40, poten-tial gains are unlimited until it reaches zero.

Put spreads: Vertical spreads with puts sharing the sameexpiration date but different strike prices. A bull put spreadcontains short, higher-strike puts and long, lower-strikeputs. A bear put spread is structured differently: Its longputs have higher strikes than the short puts.

Simple moving average: A simple moving average(SMA) is the average price of a stock, future, or other mar-ket over a certain time period. A five-day SMA is the sum ofthe five most recent closing prices divided by five, whichmeans each day’s price is equally weighted in the calcula-tion.

Straddle: A non-directional option spread that typicallyconsists of an at-the-money call and at-the-money put withthe same expiration. For example, with the underlyinginstrument trading at 25, a standard long straddle wouldconsist of buying a 25 call and a 25 put. Long straddles aredesigned to profit from an increase in volatility; short strad-dles are intended to capitalize on declining volatility. Thestrangle is a related strategy.

Strangle: A non-directional option spread that consists ofan out-of-the-money call and out-of-the-money put withthe same expiration. For example, with the underlyinginstrument trading at 25, a long strangle could consist ofbuying a 27.5 call and a 22.5 put. Long strangles aredesigned to profit from an increase in volatility; short stran-gles are intended to capitalize on declining volatility. Thestraddle is a related strategy.

Strike (“exercise”) price: The price at which an under-lying instrument is exchanged upon exercise of an option.


Time decay: The tendency of time value to decrease at anaccelerated rate as an option approaches expiration.

Time spread: Any type of spread that contains shortnear-term options and long options that expire later. Bothoptions can share a strike price (calendar spread) or havedifferent strikes (diagonal spread).

Time value (premium): The amount of an option’svalue that is a function of the time remaining until expira-tion. As expiration approaches, time value decreases at anaccelerated rate, a phenomenon known as “time decay.”

Variance and standard deviation: Variance meas-ures how spread out a group of values are — in otherwords, how much they vary. Mathematically, variance is theaverage squared “deviation” (or difference) of each numberin the group from the group’s mean value, divided by thenumber of elements in the group. For example, for the num-bers 8, 9, and 10, the mean is 9 and the variance is:

{(8-9)2 + (9-9)2 + (10-9)2}/3 = (1 + 0 + 1)/3 = 0.667

Now look at the variance of a more widely distributed setof numbers: 2, 9, and 16:

{(2-9)2 + (9-9)2 + (16-9)2}/3 = (49 + 0 + 49)/3 = 32.67

The more varied the prices, the higher their variance —the more widely distributed they will be. The more varied amarket’s price changes from day to day (or week to week,etc.), the more volatile that market is.

A common application of variance in trading is standarddeviation, which is the square root of variance. The stan-dard deviation of 8, 9, and 10 is: .667 = .82; the standarddeviation of 2, 9, and 16 is: 32.67 = 5.72.

Vertical spread: A position consisting of options withthe same expiration date but different strike prices (e.g., aSeptember 40 call option and a September 50 call option).

Volatility: The level of price movement in a market.Historical (“statistical”) volatility measures the price fluctu-ations (usually calculated as the standard deviation of clos-ing prices) over a certain time period — e.g., the past 20days. Implied volatility is the current market estimate offuture volatility as reflected in the level of option premi-ums. The higher the implied volatility, the higher the optionpremium.

EVENTS

Event: Financial Markets World’sRisk Management for Non-QuantsDate: Oct. 7-8Location: Bayards, New York CityFor more information: Visit www.fmwonline.com

Event: FXstreet’s International Traders ConferenceDate: Oct. 14-16Location: Barcelona, SpainFor more information: www.traders-conference.com

Event: TradeStation Futures SymposiumDate: Oct. 15-17 Location: Costa Mesa, Calif.Date: Dec. 10-12 Location: Naples, Fla.For more information: Visitwww.tradestation.com/strategy

Event: SunGard’s City Day: What Happens Next?Date: Oct. 19 Location: Chicago Marriott Downtown For more information: Go to www.sungard.com/citydays

Event: Sydney Trading & Investing ExpoDate: Oct. 30-31

Location: Sydney Convention & Exhibition Centre For more information: Go to http://tradingandinvestingexpo.com.au

Event: Lawrence G. McMillan’sIntensive Options Seminar Date: Nov. 7Location: New York City, Marriott MarquisFor more information: Go to www.optionstrategist.com and click on “Seminars”

Event: The Fifth Middle East Forex Trading Expo andConference 2009Date: Nov. 17-18Location: Jumeirah Emirates Towers Hotel, DubaiFor more information: www.meforexexpo.com

Event: International Traders ExpoDate: Nov. 18-21Location: Mandalay Bay Resort & Casino, Las VegasFor more information: www.tradersexpo.com

Event: International Traders ExpoDate: Feb. 13-16Location: Marriott Marquis Hotel, New York, N.Y.For more information: www.tradersexpo.com

http://www.fmwonline.com

http://www.traders-conference.com

http://www.tradestation.com/strategy

http://www.sungard.com/citydays

http://tradingandinvestingexpo.com.au

http://www.optionstrategist.com

http://www.meforexexpo.com

http://www.tradersexpo.com

http://www.tradersexpo.com


MONTH

Legend

CPI: Consumer price index

ECI: Employment cost index

FDD (first delivery day):The first day on which deliv-ery of a commodity in fulfill-ment of a futures contractcan take place.

FND (first notice day): Alsoknown as first intent day, thisis the first day a clearing-house can give notice to abuyer of a futures contractthat it intends to deliver acommodity in fulfillment of afutures contract. The clear-inghouse also informs theseller.

FOMC: Federal OpenMarket Committee

GDP: Gross domestic product

ISM: Institute for supplymanagement

LTD (last trading day): Thefirst day a contract maytrade or be closed out beforethe delivery of the underlyingasset may occur.

PPI: Producer price index

Quadruple witching Friday:A day where equity options,equity futures, index options,and index futures all expire.

October

1 FND: October sugar futures (ICE)FDD: October crude oil, natural gas, gold, silver, copper aluminum, platinum, and palladium futures (NYMEX); October soybean product futures (CME); October sugar and cotton futures (ICE)U.S.: Natural gas storage report

2 FND: October heating oil, RBOB gasoline, and propane futures (NYMEX)LTD: October live cattle options (CME); November cocoa options (ICE)

3

4

5 FND: October live cattle futures (CME)U.S.: Crop progress report

6 FDD: October propane futures (NYMEX)

7 U.S.: Petroleum status report

8 FDD: October heating oil and RBOB gasoline futures (NYMEX); October live cattle futures (CME)U.S.: Natural gas storage report

9 LTD: November coffee and U.S. dollar index options (ICE)U.S.: Crop production report; World agricultural production

10

11

12

13 U.S.: Crop progress report

14 LTD: October soybean product futures (CME)

15 LTD: November crude oil options (NYMEX); November sugar options (ICE)U.S.: Petroleum status report and natural gas storage report

16 LTD: October single stock futures (OC); November orange juice and cotton options (ICE); October index and equity optionsU.S.: Cattle on feed

17

18


20 FND: November crude oil futures (NYMEX)LTD: November crude oil futures (NYMEX)

21 LTD: November platinum options (NYMEX)U.S.: Petroleum status report

22 U.S.: Natural gas storage report

23 LTD: November soybeans and rough rice options (CME)

24

25


27 LTD: November natural gas, heating oil, RBOB gasoline, gold, silver, copper, and aluminum options (NYMEX)

28 LTD: November natural gas, gold, silver, copper, aluminum, platinum, and palladium futures (NYMEX)U.S.: Petroleum status report

29 FND: November natural gas futures (NYMEX)U.S.: Natural gas storage report

30 FND: November gold, silver, copper, aluminum, platinum, and palladium futures (NYMEX); November soybeans and rough rice futures (CME)LTD: November heating oil, RBOB gasoline, and propane futures (NYMEX); October live cattle futures (CME); November lumber options (CME)U.S.: Agricultural prices

31

November

1 FDD: November crude oil and natural gas futures (NYMEX)

2 FND: November propane futures (NYMEX)FDD: November silver, copper, aluminum, platinum, and palladium futures (NYMEX); November soybeans and rough rice futures (CME)U.S.: Crop progress report

3 FND: November heating oil and RBOB gasoline futures (NYMEX)

4 U.S.: Petroleum status report

5 U.S.: Natural gas storage report

OCTOBER/NOVEMBER FUTURES & OPTIONS CALENDAR

The information on this page issubject to change. Futures &Options Trader is not responsiblefor the accuracy of calendar datesbeyond press time.

OCTOBER 2009

27 28 29 30 1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 27 28 29 30 31

NOVEMBER 2009

1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 28

29 30 1 2 3 4 5


Legend: IRR — initial reward/risk ratio (initial target amount/initial stop amount); LOP — largest open profit (maximum available profitduring lifetime of trade); LOL — largest open loss (maximum potential loss during life of trade).

TRADE

Date: Tuesday, Sept. 22, 2009.

Entry: Long December gold (GCZ09) at$1015.70.

Reason for trade/setup: This papertrade was based on a bias and a generalcharacteristic. The bias was the expecta-tion of a continued up move in thealready bullish gold market, whichrecently topped $1,000 again, and man-aged to hold above that psychologicalthreshold. This bias was based on theexpectation of a pullback in the overheat-ed U.S. equity market, which would havethe potential to drive gold even higherbecause of remaining nervousness of thestability of the economy and stocks (espe-cially in September and October).

The general characteristic was the slight correction onSept. 18-21, which fulfilled the expectation for a “test” of$1,000 (the market fell to $996.30 before rallying to closearound $1,005). When price jumped the next day, we inter-preted the move as a sign that, rather than retreating fromresistance and pulling back again from a high level, themarket was going to break out to new highs. We enteredwhen price retreated from the intraday high of $1,021.50.

Initial target: $1,031, just above the next round-numberprice above the Sept. 17 high.

Initial stop: $998.70.

RESULT

Exit: 998.70.

Profit/loss: -17.00 (1.67 percent).

Outcome: Perhaps this trade is a lesson about basingtrades on general principles rather than hard facts and test-ed patterns. After one day of inside trading with a downclose on Sept. 23, gold broke back below $1000 decisively onSept. 24, and followed through with more selling on Sept.25.

We were obviously too eager to get into the market, andgold is notoriously choppy. We paid the price for buyingstrength near all-time highs. The downside risk far out-weighed the upside potential. Given the market’s overheat-ed condition, it would have been more prudent to wait fora pullback at least to the mid-970s (the August high) to puton this trade. �

Note: Initial targets for trades are typically based on things such as thehistorical performance of a price pattern or trading system signal.However, individual trades are a function of immediate market behavior;initial price targets are flexible and are most often used as points at whicha portion of the trade is liquidated to reduce the position’s open risk. As aresult, the initial (pre-trade) reward-risk ratios are conjectural by nature.

Gold gambit comes up empty.

P/L

Date Contract Entry Initial stop Initial target IRR Exit Date Point % LOP LOL Length

9/22/09 GCZ09 1,015.70 998.70 1,031.00 .90 998.70 9/24/09 -17 -1.67% 5.30 -17 2 days

TRADE SUMMARY

FUTURES TRADE JOURNAL

Source: TradeStation

TRADE

Date: Tuesday, Sept. 15.

Market: Options on the S&P 500 tracking stock (SPY).

Entry: Sell two September 103 puts for $0.39 each.Buy two September 101 puts for $0.14 each.

Reasons for trade/setup: Afterpulling back from its late August high,the S&P 500 index rebounded 5.25 percentfrom Sept. 2 to Sept. 10 and closed abovea resistance level around 1030-35. Such astrong response to a pullback convincedus this rally, which began in March and reignited in July,has room to run.

To profit from an uptrend, we normally buy in-the-money (ITM) calls, which have high deltas and tend tomove roughly in-line with the underlying stock. However,September options will expire in four days, so entering abullish position that sells front-month options seems like agood idea.

One possibility is a bull put spread — a vertical creditspread that sells puts with out-of-the-money (OTM) strikeprices, which are below the market, and buys puts witheven lower strike prices in the same expiration month.Bull put spreads are appealing because you collect optionspremium, which you keep if the underlying closes abovethe short strike at expiration. More importantly, thespread’s maximum loss is limited to the distance betweenthe two strikes, so even if the market tanks, the spreadoffers some protection.

When the stock market opened on Sept. 15, we enteredSeptember bull put spreads in SPY by selling September103-strike puts for $0.39 each and purchasing September

101-strike puts for $0.14 each — a total credit of $0.25 perspread. Is collecting such a small amount pointless?Perhaps, but SPY traded at 105.31 when we entered thespread, so price must fall 2.2 percent in just four days beforethe position will lose money (see Figure 2). Given its timingand strike-price location, the spread has an 83-percentchance of success.

Figure 1 shows the bull put spread’s potential gains andlosses on three dates: trade entry (Sept. 15, dotted line),halfway until expiration (Sept. 17, dashed line), and expira-tion (Sept. 19, solid line). Note the position has leeway on


TRADE STATISTICS

Date: Sept. 15 Sept. 18Delta: 27.39 1.67Gamma: 13.08 -2.38Theta: 7.15 1.09Vega: -3.06 -0.28Probability of profit: 83% 100%Breakeven point: $102.75 $102.75

TRADE SUMMARY

Entry date: Sept. 15, 2009

Underlying security: S&P 500 tracking stock (SPY)

Position: Bull put spreadTwo short September 103 callsTwo long September 101 calls

Initial capital required: $400

Initial stop: Exit if SPY drops to short strike (103).

Initial target: Hold four days until options expire worthless.

Initial daily time decay: $7.15

Trade length: 4 days

P/L: $50 (12.5%)

LOP: $50

LOL: $0

LOP — largest open profit (maximum available profit during life of trade).

LOL — largest open loss (maximum potential loss during life of trade).

OPTIONS TRADE JOURNAL

SPY climbed 2.6 percent within two days of entering the bull put spread. The position remained in profitable territory during expiration week, and we earned 12.5 percent when options expired on Sept. 19.

FIGURE 1 — MARKET RALLIES AS EXPECTED

Source: OptionVue

This bull put spread on SPY

benefits from an expiration-week rally.

the downside as SPY must fall by almost one stan-dard deviation (pink bar) before it loses ground.The plan is to hold the spreads until options expireon Sept. 19, but exit if SPY drops to the short strike(103) before expiration.

Initial stop: Exit if SPY falls to 103 by Sept. 18.

Initial target: Hold four days until Septemberoptions expire.

RESULT

Outcome: Figure 2 shows SPY continued to rallyafter we entered the bull put spread, so it was neverin danger. The market climbed 2.6 percent to hit 108on Sept. 17 before easing lower as expiration weekwound down. When September options expired,we kept the entire premium of $50 (12.5 percent).

This bull put spread example isn’t ideal, becausethe credit received was fairly small. However, thisstrategy is attractive in rallying markets because itrisks less than buying the underlying outright.�


This September 103-101 bull put spread on SPY has an 83-percentchance of success. It collected $50 in premium, which we will keep aslong as SPY doesn’t drop below the 103 short strike within four days.

FIGURE 2 — RISK PROFILE — BULL PUT SPREAD

Source: eSignal

Click on these boxes

to link directly

to these advertisers’

web sites

THIS MONTH’S ADVERTISERSTHIS MONTH’S ADVERTISERS

www.rsofhouston.com

www.worldmoneyshowtoronto.ca

www.esignal.com/offer/at

www.nadex.com

FOT200910

Documents

Transcript of FOT200910