How To Start Day Trading Futures, Options, and Indices

How to Start Day Trading Futures, Options, and Indices explains everything you need to know to maximize profits and minimize the risks in this challenging, potentially lucrative field. After covering the basics traders need to know from establishing an account to placing your first trade this comprehensive, no-nonsense guide provides detailed examples of the techniques and strategies needed to limit risk while locking in consistent, substantial trading profits. This book teaches beginning traders everything they need to know, from selection of hardware and software to opening an account and placing trades, and helps them gain access to this exciting, fast-paced, and potentially profitable trading opportunity. This simple, practical, and useful guide, filled with concrete examples and detailed instructions, provides a step-by-step approach suitable for traders of all experience levels.

Introduction:

Most traders are familiar with stocks and, these days, many have had some experience day trading them. Fewer are familiar with day trading futures and options. Yet, in some ways, futures and options are superior day trading vehicles. High levels of leverage and low margin requirements give the trader the ability to extract significant profits from small swings, employing only a minimum of capital. And, used correctly, options can help the day trader minimize the risk of serious adverse movement in the markets he or she is trading.

There are certain issues that arise when trading futures and options, however, that are not present when trading stocks. Already mentioned are the issues of leverage and margin. In addition, both futures and options are subject to expiration; stocks, on the other hand, only “expire” when the company goes bankrupt. Finally, unlike either stocks or futures, options decay: They are wasting assets.

Futures and options are considered highly “leveraged” instruments. Leverage refers to the ability to control large amounts of a commodity, or many shares of an option’s underlying stock, with a small amount of up-front capital. For example, trading a contract that controls 100 ounces of gold worth $30,000 might only require a $1620 margin deposit. If the price of an ounce of gold moves only a few dollars up or down, hundreds of dollars can be gained or lost. A large gain, or loss, from a small move is an aspect of leverage. In futures, leverage can be incredible. Options also offer large amounts of leverage. A call option purchased for $5 may control a share of stock worth $50. Should the stock rise to $70, the option may climb to $20. Although the stock has risen only 40 percent, the option holder has earned a return of 400 percent, an example of the tremendous profit potential inherent in options.

Leverage and ”margin” are interrelated. In futures trading, brokers require a good faith deposit (margin) to cover any losses that might ensue. Buying and selling a futures contract is merely making a commitment. Futures are traded completely on margin. In contrast, in equities trading, margin is a loan that is specifically used to increase holdings. While in futures small amounts of margin can control huge amounts of assets (commodities), at the present time leverage is limited to 100 percent in the world of stocks. In other words, in a typical margin account,$10,000 worth of equities can be controlled with $5000. With futures, the ratio is more like ten to one, rather than two to one. A ten-to-one ratio might sound excessive, but just remember that the average homeowner uses this kind of leverage when buying a house: A $300,000 home may be purchased with only a $30,000 deposit and the commitment to make relatively small monthly payments. Although margin almost invariably implies leverage, leverage does not imply margin.

Another difference between equities, futures, and options, is that the latter two have premium, a component of the price of a futures or options contract. In the case of futures, premium is related to interest rates and “carrying charges.” In options, it also takes the form of “time” or speculative value. Premium exists because futures and options are derivatives, or financial instruments that trade on top of some other security. Futures generally trade on top of underlying commodities; for example, gold futures trade on top of gold bullion. Equity options trade on top of individual stocks.

Unless a company goes bankrupt, its stock does not expire; however, futures and options do. Expiration refers to the fact that a futures contract or option has a limited lifetime during which it can be traded. At some point before the expiration date, the futures or options contract must be “exercised,” or the long or short position must be “rolled over” or offset.

In the case of options, premium decays rapidly with time; hence the term time value. In this sense, an option is a wasting asset. When purchasing an option, the trader must consider not only movement in the underlying security, but also the erosion of the option’s value from the passage of time. Since the value of an option may be nothing more than its time premium, options can eventually become worthless. It is estimated that 70 percent of all options are worth nothing at expiration. This clearly differs from stocks, where time itself does not destroy value. Stocks are not wasting assets. Futures fall in between options and stocks as far as time is concerned. A futures contract may experience a small decline in premium (hence in total value) over time, but its value is never merely its time premium. Consequently, a futures contract never becomes worthless, even at expiration. The issues of premium and time decay affect the day trader much less than the position trader, and, for the most part, can safely be ignored when trading on an intraday time frame.

Contents:

• Futures and Options As Day Trading Instruments
• Hardware and Software
• Getting Connected
• Mechanics of Day Trading
• Fundamentals of Day Trading
• Profit-Grabbing Strategies
• Day Trading in Action
• Trading Index Options and Futures
• Advanced Trading Techniques

How To Start Day Trading Futures, Options, and Indices By Jeffrey Owen Katz, Donna L. McCormick pdf