WDIS: Two Yutes - Beginner Options Trading

Options on Futures, Yields, and Calendar Spreads (Oh my.)

| Mar 15, 2021
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    WDIS: Two Yutes - Beginner Options Trading

    Options on Futures, Yields, and Calendar Spreads (Oh my.)

    Mar 15, 2021

    After reviewing their existing position (something Tom says they should be doing daily), E dives into his first option on futures trade with /MNQ, the Nasdaq microfutures product.

    Tom explains that an option on futures contract is functionally the same as a regular old options contract, with the exception that there are often different “multipliers.” In this case, the /MNQ product has a multiplier of 2 which means that with a $50 strike width between the long and short contract, you’d actually have a risk of $100 (2 x $50), minus the credit collected. In normal options would be simply risking that $50 (minus the credit collected).

    Kay proclaims she’s bullish on bonds before Tom explains that with yield products you have to be careful--if you’re bullish on bonds, you’re bearish on yield (interest rates). They’re an inverse relationship. The popular futures yield product /ZN adds even more confusion because if you’re bullish on interest rates, you’d go bearish on this product, or sell it. Kay learns that the Smalls product /S10Y simplifies things by aligning the direction with yield--if you’re bullish on interest rates, buy a /S10Y contract--which Kay does.

    Finally, Tom teaches the yutes how to put on a calendar spread--a neutral strategy in which you sell an option in the back month (a closer cycle), and buy an option at the SAME STRIKE PRICE in the front month (the further away cycle). Tom tells the kids it’s a high POP, slow-moving trade.

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