Intro to Futures Part 2 | Barbara Armstrong | 12-17-19 | Getting Started with Futures


good morning and welcome to getting
started with futures delighted to be here today today we’re going to talk
about futures on the russell we have a position on in our paper money account
we’re going to look at how one might choose to manage that we’re going to
place a new trade and in the context of doing that today we are going to discuss
several things so stick around lots of great information to cover in this
getting started with futures class this morning all righty
as you can see from the blue bird on my screen all of the coaches are now part
of the Twitter community and consider this my personal invite from me to you
for you for you to join me there at be Armstrong underscore TD a posting lots
of great information on not only futures but all kinds of other things that
impact the market as well so I hope you’ll join me there let’s get through
our important information so we can cover our objective and agenda for today
and get right down to business know that futures and futures options trading is
speculative and not suitable for all investors know that also futures
accounts are not protected by the Securities investor Protection
corporation and that futures trading privileges are subject to review and
approval and that not all clients will qualify so just because you can trace
place trades in your paper money account doesn’t mean the same privileges are
automatically there in your live account also know that trades involving minimal
potential benefit can be more significantly impacted by transaction
costs in order to demonstrate the functionality of the platform we need to
use actual symbols and we do however that is not to be construed as a
recommendation on the part of TD Ameritrade or myself we cannot begin to
determine the suitability of any security or strategy for an individual
trader any investment decision that you make in your self-directed account is
your responsibility my friends know the paper money application is for edge
occasional purposes only and successful virtual trading during one time period
doesn’t guarantee the same kind of results in your actual funds at a later
time period why because the market continues to change day to day right and
lastly know that all investing involves risk including the risk of loss good
morning to Dave and to Jonathan tuning in from Orlando if you are new to this
class we have a really vibrant community here at TD Ameritrade and I encourage
you to type in your name and let us greet you and let us know where you’re
tuning in from so for all who are on the webcast live today if you have any
questions as we go along please don’t hesitate to ask those who are watching
the archives later will I’m sure be grateful for your questions so what are
we going to cover today well we’re going to look at a trade that we placed I
believe last week on the Russell and we’re going to then place another
example trade on that same futures contract and in the context of doing
these two things we’re going to look at future symbols and how to read them
we’re going to have a conversation around what happens at expiration
as we approach expiration we’re going to discover we’re going to discuss some of
the basics around margin and a term called mark to market and what that
means and then look at wrap all this up in a conversation around risk and reward
so an hello to Dave from Hamilton New Jersey so again thanks for being here so
let’s get out to the thinkorswim platform because that’s a pretty packed
agenda for half an hour so I’ve brought up the rustle and as we can see the
rustle has been continuing to climb now when I looked at this just a few minutes
ago it was a red candle on the day today so what it’s saying is the rustle
actually we’re down to 50 today and – it’s actually 2.4 and what number does
that represent well it represents two point four points
and when we look at this is a three-year Oh this is a three-year weekly chart if
we come in and we look at a six-month chart we can see that we’ve had a nice
run up and actually if we come up to the big chart just you may want to just walk
with me okay so when we look at the big chart here we can see that if I come out
a bit time-wise and we look at say a nine-month
timeframe during the whole last month we’ve really seen the Russell moving in
a range right between about this 1460 and then up here around the 1600 mark so
we’ve been in this range between about 14 75 and 1600 and then we broke to the
upside and when you see this type of range and you do break out a technician
might expect that if this range 1475 to 1600 so if this range is about 125 that
when this breaks out that we might see an a similar move to the upside so when
we look at this 1600 it seems to have gotten to about the 1650 mark and it’s
hovering and we have a bullish trade on the russell and given that it’s hovering
what might we do well we might say well let’s just wait and see if it’s a
temporary pullback or we could close that trade out and then tee up another
trade to say if we have some gains we’d like to realize these gains just in case
it decides to come back and retest you know what are what might happen well it
might come back and retest it might just pull
for a couple of days and then continue to the upside or by the end of the day
today it could be going to the upside or it could be going sideways so in face of
all these potential things happening you know how do we choose to react and then
the other question you might say well what’s with this dotted line well if we
come back time frame wise and we look at a two-year chart we can see that with
this particular line this dotted line here which is kind of where it’s budding
it’s oops where it’s kind of budding its head up over how a year ago July so this
isn’t July of this year July of last year it had some support here so this is
a pretty old support level and some might say it’s been such a long time
since it’s been here that may not actually serve as resistance but when
technicians are looking at timeframes they’ll go back and look at this as a
potential resistance level so let’s come up back here and I’m
coming back here mainly because when we come to the trade tab in the monitor tab
it’s a little easier for you to see on this screen so we’re going to come all
the way down I have my monitor tab organized by groups and so here’s our
futures and we have two trades teed up here so one you can see has a zero and
that’s because we haven’t actually entered that trade and we can have a
quick conversation around that but here’s our trade on the russell so when
did we place this trade so if you were looking at your monitor tab and you were
saying when did i place that trade you can come out here and you can see that
we place this trade a week ago on December 10th and we bought an at 16:30
350 and is this 1600 $33.50 actually my friends it is not it is
sixteen hundred and thirty three points what’s a point worth good question so
let’s come up to the analyze tab and we’re going to come down to fundamentals
and this is a quick way for us to see this and so we can see here that let me
just bring up my drawing tool it makes it a little easier our point or our
multiplier is fifty so if I wanted to find out the value of this contract I
take sixteen hundred and fifty three eighty and multiply it by fifty so this
is what a point is worth now something else that might be important to us is
margin and why is margin important because when we look at the value of
this contract and I’ve got a handy-dandy calculator here so let me just do this
quickly 1653 I’m going to make it fifty times fifty dollars a point then the
nominal value of this or notional value of one contract on the russell is about
eighty two thousand six hundred and seventy five dollars and so some of you
may be looking at saying wow to trade one contract that blows my position
sizing parameters out of the water if you don’t want one position to represent
more than say five to ten percent of your account but if the requirement is
not eighty six thousand but rather this margin requirement of thirty three
hundred it makes it far more feasible to be able to trade and this initial margin
requirement is like a good-faith deposit if you would so so what is required in
order for you to trade the russell other than having permission to trade futures
is that you have this initial margin requirement so and and so if you want to
see for any contract what these are worth so if we came to the S&P 500
you know it’s trading at 31 97 25 and what is the multiplier again we would
come down here and say okay it’s 50 so now we’re taking a much bigger number
3,000 if I round to 3,200 just to make my calculating quicker that’s almost a
hundred and sixty thousand dollars so that would be the dollar value this is a
point value and of course the margin requirement on this is more than double
what it is on the Russell 6000 930 not surprising considering that the value of
the contract is almost double as well okay so coming back so coming back to
our monitor tab and this contract on the Russell we currently have a profit of
eight hundred and sixty-five dollars on this trade that we placed last week and
we’re starting to pull back so it’s you know we’ve given back seventy dollars of
this unrealized gain so if we decided that and and plus this contract it’s a
December contract that expires in three days so one way or the other this would
have to be closed out so if we look at this and say okay we would like to
create a closing order and just close out of this we just put in our order we
bought it because we were bullish so now we’re going to sell it to lock in our
gain and you’ll see here this says rty z19 what does that mean so we’re going
to send that and we’ve now closed out this contract and we’ve taken our
unrealized gain in this example trade and that we can now put it into the
realized gain bucket but what if we’re looking at the chart and and and we say
but this could well continue to the upside
we’re only 50 of a projected you know 100-plus point move what might we do if
this turns around either by the end of the day or maybe in the next two or
three days and continues to go up well we could look at yesterday which was an
you know a new 52 week high for this and say well if that high was 16 64 20 what
about if we put in an order to say hey if this gets to 1665 20 get me in so
1665 1665 20 so we’re just adding a point so if it goes above yesterday’s
high then we would like to enter another bullish trade so how would we tee that
up well we come up here and we can now see that the active contract is rty h20
so what does that mean well the RT y means that’s the Russell the H means
that the expiration is in March and the 20 means that it’s in the year 2020 so
if we come back and we look at you know the other contracts so if we say show us
all the contracts you can see that the one we just exited
RTZ 19 which expired in three days that stands for the Russell rty or the
Russell emini you know Russell 2000 index futures contracts the Z means
December expiration and 19 means the Year 2019 you can see if we go down to
the bottom this RT Y Z 20 is the December expiration of next year and
it’s out 367 days now most people or traders will trade the
of contract why is that well if we look at this what is our bid-ask spread it is
one tenth of a point so on what’s a tenth of a point is five dollars right
so if I look at that and I say okay on this oops
just let me change my drawing tool here I’ve got a five dollar bid ask spread if
I go out to this contract 16:35 versus sixteen seventeen fifty I
mean you could drive a truck through that that’s enormous
17:15 and and so you can see why no one’s trading this because the
difference between the bit off spread is so wide you know if one point is fifty
dollars remember one point equals fifty dollars so people want that they’re very
aware of the bid-ask spread and we can see here that this one that’s ready to
expire has been pretty tight also but this is why people will trade our active
contract and that one is always highlighted so this is the one that we
just exited the position on now we’d be looking to go out to march of twenty so
here we are we would just right-click and this one we’re going to say we want
to buy a single and we’re going to buy this at the market and then we’re going
to click on our little sprocket we’re going to make it conditional because we
only want to buy if it goes at or above sixteen sixty five twenty so let me
click on that 16 and 65 20 confirm and send oh and we’re gonna make
this good til cancelled because this could happen by the end of the day today
it could happen by the end of the day tomorrow it could take a week before we
get in and we might be you know in the midst of all our holiday festivities and
really not paying this close of attention to the market as we normally
would so we’re going to come down here to futures and hit Send now when we look
at maintenance and mark-to-market if we come back to our analyze tab and we look
at this initial margin requirement some people will look at options contracts
and think okay this is a futures contract it’s similar isn’t it and just
because the word contract is involved it doesn’t mean it’s similar I just want to
be sure that everyone understands that because with this initial margin
requirement you would take 10% of that 3,300 and so if we say okay
three hundred and thirty that is going to be our maintenance number and so if
it goes below that number so if I take my 3300 and I subtract my three thirty
or just multiply by 0.9 times 0.9 20 so that goes below 29 70 what happens is at
the end of every regular trading day so when the even with futures the market
will take a break for a few minutes so at the end of every sorry this is points
nope that’s dollars pardon me so at the end of every trading day they
will look at your account and say okay what is the value of this contract now
and if it’s more than 10 percent less they will do a sweep into your account
to bring it back up to not twenty nine seventy to bring it up to the initial
margin requirement and if at the end of the day like today had we been in and
still had that gain of of eight hundred and fifty dollars they would say okay
Suzy Q has more money in here than she needs to maintain this margin
requirement so we’re going to sweep money out back to her regular account
and then if the next day it went down and you know you needed to bring it back
up there’s a there’s a settlement at the end of every day they call it marking to
market so you can’t say oh we’re we’re kind of underwater on this but I’m
confident it will come up by the expiration as some traders might do with
an options contract with this it’s settled at the end of every day and when
you come back and we look let me just move this you know if you do not close
this out yourself TD Ameritrade will close it out for you
now the Russell is a cash settled index but what if we were looking at oil and
let’s say you were in an accident or someone in your family was in an
accident and you took your eye off the ball and you didn’t exit in time do you
really want to be on the hook to buy 5,000 barrels of oil I think not most
retail traders if they’re trading something such as oil you know they they
don’t necessarily want to take possession of it they are trading
speculatively which means they’re looking to make some money on the
movement of oil futures they aren’t necessarily interested in buying so
you’ll see here if the client isn’t out two days two business days
for the first notice state or one business day after the last trade date
the broker will close them out so that you don’t end up having to take
possession of the commodity so that’s something that TD Ameritrade
automatically will do okay so let’s go back to our PowerPoint and just make
sure we’ve covered the things that we said we were going to cover so we looked
at how to manage our trade on Russell and for the example today where we had
that gain and we saw that the Russell had come up and might be starting to
turn we decided to take our example profit we teed up another example trade
and this one was a conditional order to get back in if it continues to go up we
looked at how to interpret the symbols so we’ve done that we’ve talked about
expiration and what happens on expiration you know either the trader
will close out their position or the broker will close it out for them now
the broker isn’t going to be looking at you know have you made the profit you
want or are you getting out at the best time during the day they’re just going
to close you out so you have to keep that in mind you might prefer to be the
master of your own destiny on that but in the event that it slips and you don’t
do it that you know the brokerage will do that for you we’ve talked about
margin and mark to market just a pretty basic overview and risk and reward well
let’s just take a minute on that and then we’ll wrap so if we come back out
to our friend the Russell and let’s go back to our tea why and you know let’s look at this top line
so let’s kind of hone in a little bit here and if you’ll follow me we’ll come
back out to the big chart for just a minute so if we look at this and I know
that we have a lot on our chart here let’s see if I can draw that down there
we go so if we look at the previous high and
we say well you know what if this went back up to 1750 and right now it’s
sitting at 16 53 so that’s about a hundred point move at about 50 it’s 50
bucks a point right so that would be on one contract potentially if it went up
here a $5,000 game now that’s a pretty happy occasion isn’t it because how much
margin did we have to put down to be able to make that gain well our margin
requirement remembered was 3300 so when we look at that game that’s a pretty
extraordinary gain isn’t it and this is one of the things that’s so appealing
about futures is people see this kind of potential gain and their eyes light up
you got to make sure you look at the other side because what if this came
back down so and it came back down to say the 1600 level which is here well
now we’re giving back 50 points right so that would be a $2,500 loss if it came
back to that level and that’s if it came back to the 1600 level not a happy day
and then what if it came all the way back down here and let’s just make the
math easy at 1500 so that’s another hundred points that could be another
5,000 you could be down 7,500 if you didn’t exit that position now
that’s like not only sad days I mean that’s like tears happening here I’m no
artist but it this cuts both ways so you have to understand that you’ve got
tremendous leverage and that can be both your best friend and your worst enemy so
please be aware of that these are not set it and forget it
type trades in you know by most people’s definition and why because of this so I
just want to be sure that everybody is aware of that okay so coming back up
we’re gonna wrap so I have a question from Vinod saying could you talk about
the VIX and show some examples and you know yeah Dave Fox is saying yes you’d
be doing the happy dance so the VIX is beyond the context of this
class to discuss then odd I’ve just got to be honest with you about that and we
are out of time we are out of time on that today but I will post something
where if you’re interested in the VEX I will post a link to a class that you can
access where volatility is discussed okay so I can do that for you and then
Dave thank you so much for reminding me to mention fees so although if you’re
buying a stock there is now not a transaction fee if you’re doing that
online for our trade on the Russell when we place that trade there are
transaction fees both when we get in and when we get out on all futures contracts
so there still is a transaction fee it’s pretty modest but if you do a lot of
trading of futures those can add up okay so there’s our risk and reward so I
think we’ve checked all the boxes that we intended to check today so I hope
that you guys have found this in four if you have I encourage you to smash
that like button so that other people will know that you found this helpful if
you haven’t already subscribed to our channel I’d encourage you to do that and
last but not least if you aren’t part of my Twitter community you are missing out
my friends I’ll post something on Twitter for you today Vinod I hope I
pronounced that right and I’m also going to post a subscribe button so if you
want to just if you’re watching the archives you can click on that subscribe
button also I will post a link to you know getting started with futures part 1
which was last week and for those that are pretty keen I’ll post a link on
trading with micros also so hope you found all of this helpful last thing I
almost forgot to mention that we have changes a-coming in this class is going
to be part of the changes it’s going to be exciting come January 1 this class
will be accessed only from the archives there are two other futures classes
being taught one on Mondays at the market opened by John McNichol and one
on Thursdays by the fabulous Mike Follette so you’ll want to make sure you
tap into those so make sure you check the schedule at the beginning of the
year because changes are coming ok so guys that’s a wrap for today keep in
mind all investing involves risk including the risk of loss have a
wonderful holiday take care be safe best have success with your trading and I’ll
look forward to seeing all of you soon take care bye for now

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