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Sep 29, 2015

Trading Options on Futures Contracts: All You Need To Know

By:Jenna DiMaria

In tastytrade’s first “Where Do I Start?” series related to trading futures, Expert Futures Trader, Pete Mulmat, teaches Options Trader, Katie McGarrigle, how to trade futures from the ground up. The show airs on the tastytrade network every weekday from 12:20-12:40 CST and is sponsored by the CME Group.

To kick things off, Pete and Katie start by defining this new trading vehicle: What exactly IS a Futures contract? By first explaining that a futures contract is a standardized agreement between two parties to buy or sell a product at a set price on an agreed upon date, they also list the benefits of trading futures, how futures are a leveraged product that control a notional value (dollar amount) of a set quantity of the underlying, and how futures move up and down.

Last week, the dynamic futures duo covered a number of fundamental topics including:

  • The definition of options on futures and why traders might trade them
  • How to annotate futures contracts with varying durations
  • Understanding the term “marked to market” and how it influences a trader’s daily account balance

Options on futures are contracts that give the buyer the right (but not the obligation) to buy or sell a contract at a price that is agreeable to both of them. Unlike options on stock, options on futures expire into a long or short futures contract if their call or put expires in the money (ITM).

A trader might decide to trade options on futures contracts because there is limited risk and they can use strategies that are directional, neutral, or simply volatility contraction plays!

Similar to options, futures traders can execute strategies several days (or even years) away from expiration. However, unlike options, futures contract maturity is also denoted with an alphabet code, which is shown below:

 

“Marked to Market” is a term that refers to the settlement that occurs daily when the market closes. The brokerage firm uses the closing price of the futures contract being traded and then adds to or subtracts from a futures trader’s “performance bond” depending on whether they gained or lost money on that day.

Viewers can tune in daily to watch Pete and Katie on tastytrade.com and also on YouTube for episode highlights! Tune in as they tackle each major asset class week by week and learn futures fundamentals and strategies sure to fit a futures trader's portfolio!

More about Pete Mulmat:

Prior to joining tastytrade, Mulmat was the director of education at CME Group, the world's leading and most diverse derivatives marketplace. In this role, he was responsible for educating retail traders about CME Group products and helping create curriculum to support trader development.

More about Katie McGarrigle:

Katie McGarrigle is co-host of the beginner options trading series, “Where Do I Start: Trading Futures With Katie.” Before that, she spent two years on the tastytrade network trading options on “WDIS: Back to Cool” with Tony Battista.

Viewers can tune in daily to watch Pete and Katie on tastytrade.com for full episodes and episode highlights!


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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