Transcript for:
Understanding Options and Futures Trading Strategies

Trading options can be a great way to actively invest and they can give you potentially higher returns, but it can be challenging and confusing sometimes. In this video, we will take you from wherever you are in your investing journey and teach you everything we know and maybe everything you need to know to trade options effectively. My name is Tom Sausnoff. I was the founder and CEO of Thinkorswim and the founder and CEO of Tasty Trade. I've been trading since 1981. It's almost 44 years and I made hundreds of thousands of trades. I've taken a lot of the insights from my experiences and simplified them for you in this video. I've also brought in Pete Mulmat, an expert in the futures marketplace and fellow tasty trader Jamal Chandler so they can give you their experience. So get ready to learn the skills needed to become an active trader or an active investor. Jamal will get us started with the foundations of options. Why trade options? This is a question that we get asked so many times. What's the interesting part about trading options? What makes them unique? Well, there's many, many things. We're going to discuss and cover a bunch of them. Capital efficiency is probably one of the bigger things about trading options. You see, when you trade options, you need leverage to give you the necessary occurrences that give you a chance to win in these markets. Leverage is important because for every one option, it's a 100 shares of stock. Stocks have really gotten expensive. I mean, have you looked at the prices on some stocks these days? Nvidia is over $400. Microsoft is over $330. Stocks have gotten really expensive over time. And so, as a result of being able to use options and use the leverage they provide, you're able to stand a chance and be able to trade in the market. You got to choose your level of leverage when it comes to trading options. So you have defined options, uh defined strategies, you have undefined strategies, and learning how to use them will allow you to be capital efficient in the markets. Also, with capital efficiency, normalizing price differentials are allowed to be done when you're trading with options. It allows you to trade a $40 stock and a $400 stock in a very similar way. So these are the ways that capital efficiency can allow you to stand a chance in markets. Why else do we trade options? Well, the strategy and product diversification is another important reason. You see, the strategies, they actually allow you to trade any given market. Sideways, up, down, doesn't really matter. That's what strategies can do when you're talking about trading options. Strategies also allow you to optimize mechanics. Now, this is something that when people are first learning to trade, they try to figure out how can I find a way to use this strategy to trade this way or trade this name. This is actually what strategies allow you to do and we'll talk more about this later. Strategy and product indifference. Now, those can be used to reduce P&L volatility in your portfolio. Something that a lot of newcomers struggle with is the amount of swings that they'll see in their portfolio when it comes to trading and they're trying to figure out how can they minimize it. Now, if you use strategies, that's one way to really help you get better at it. But also uh being product indifferent, being willing to being willing to trade gold when the implied volatility is high or being willing to trade uh grains when implied volatility is high, however you want to look at it, trading a lot of different things that don't necessarily have a lot of correlation helps reduce your P&L volatility. And that's one of the things that options allow you to do. Additionally, uh when you manage early with options, you're able to eliminate most tail risk. A lot of times what we often talk about doing is trading at 45 days and then closing or rolling at 21 days. And by doing this, you're allowed to manage your tail risk and keep yourself still in the game. Why else do we trade options? Well, probabilities is definitely one of the bigger reasons why we're looking at trading options. So, the house always wins when people are talking about uh casinos and other unregulated markets. The difference is with liquid financial markets, that's not the case. We often see that you have a much more of a chance and on a day-to-day basis, nobody knows anything when it comes to trading. And this is one of the things that uh using that leverage with options will help you do. The other thing about stocks is well, they're 50/50. I mean, when you buy a stock, you really have a chance of it either going up or down, and that's really pretty much your your main uh probability that's on your side, which is not a whole lot. Options are actually userdefined. You can define your risk when it comes to options and you're define your probabilities. That's one of the big things. So for that reason, we we try not to rely on luck. That's that's not the way we're trying to do it. We're trying to rely on the mechanics on the edge that we have and the strategies that's going to get us to where we want to be with options. So probabilities at the end of the day end up being the great equalizer regardless of stock size, stock price. Because of options, you're able to use probabilities in your favor and define them in any way you want to be able to give your chance yourself self a chance to win. Why else do we trade options? Again, we said you're able to have defined risk trades and undefined risk trades. Now, whether you go undefined or or defined really depends on your capital availability. If you don't have a whole lot of capital, most times you're going to have very defined risk trades. But if you do have the capital to do both, don't be afraid of undefined risk trades because those end up having a higher probability of success. And so again, having that expected probability of success, what you're looking for is different ways to define it for yourself and put yourself in a position to win. The other thing about the different strategies, whether defined or undefined, what really also determines it is the market. So depending on how implied volatility is, whether it's high or low, that will be determined by defined or undefined risk trades, the price of the stock or even the liquidity within the uh stock that you're trading. For example, if it's a very illlquid stock, then more than likely you're not going to be able to get two legs of a trade, which usually is a defined risk trade. More than likely. Uh so that's something to keep in mind. So there's also advantages for rolling and adjusting your trades when they're defined in undefined risk trades. And that's something we'll discuss later on in this presentation. Why else trade options? Industry innovation is one of the big reasons why front-end technology has changed so much throughout the last 30 years. You're able to do things now that you couldn't even do once upon a time. you're able to see a lot more things and have the ability to look at a lot of different type of tools. Tasty trades platform is one of the most interesting ways that you can do that. That's one of the reasons why you'll see it being the ability gives you the ability to have a fighting chance in the market. Trading costs have gone way down over the years. Once upon a time, you had to call a broker and place a trade and it was very expensive to do. Now, nowhere near that amount. it's next to nothing to be able to get a trade on and express your opinion. Uh HFT liquidity, that's one of the things that has gotten a real bad rep. High frequency is often discussed in sort of negative connotation, but the truth is is that high frequency trading has taken a lot the other side of a lot of trades and it gives you the flexibility to put on trades in ways that one would never imagined once upon a time. So this is another important reason. And then finally, product innovation. Just about every day there's new products being created, new ETFs, etc. that allow people to express their opinion in a lot of different trades, in a lot of different ways. These and sum total are the reasons why we trade options. Now, let's explore the math and finance of why we trade options. Quite often when you're talking about options trading, sooner or later you will hear about a probability distribution. Let's simplify a probability distribution. Let's just say you have a 100 people in a room and you start putting everybody in buckets by height. 5 foot to 5'5, 5'5 to 6', 6' to 6'5, and then 65 and above. So, as you're starting to place people in these buckets, you will eventually get to what's considered a probability distribution curve such that the next person that walks in the room, there's a good chance you'll be able to determine what bucket they might fall in. And this is one of the things that we do often when we're looking at options montages, when we're looking at option strikes. This allows you to get an idea of your potential probability of profit by looking at it from the standpoint of a distribution curve. Where's the meat of it? Where's the outer liars? Option pricing skew is very important when it comes to option mathematics. Now this is a concept that I think a lot of new be beginners typically don't understand but it's very simple to be honest with you if you think it from the standpoint that most people are stock buyers. They are looking to purchase stock in the market and as a result at some point when the fear kicks in they're looking at ways to hedge it and most of the time you're going to look to get short delta. There's two ways to get short delta. Two simple ways to get short delta. Getting long puts and selling upside calls. So these are the ways that people are usually hedging their long stock. And as a result, this creates inherent skew in the market. And often in this situation, we're talking about equities. You'll often hear about skew being to the downside. That's because most people are buying downside and selling upside short delta trades just to hedge off their long stock. And as a result, those option prices end up being perceived in the market as higher for the downside and then sort of cheaper for the upside. But that's on a volatility basis. If we look at the chart, you'll see that uh the 16 delta distances from at the money for puts and calls often differ. So, if we look at 15 days to expiration, you'll often see a 3.9% difference on average of a put for from at the money versus a 2.9 2.4% difference for the call from at the money. When you go out to 30 days, this exacerbates a little bit more 6.5% to the downside for a put that is 16 delta versus a call of 3.9% to the upside. Then yet and still we see at 45 days to expiration just a bit more difference when you're talking about 8% to the downside and then 4.9% to the upside for the same delta call. So essentially this means that puts are more expensive than calls and the strikes are further from at the money than those calls. Correlation basics. Now this is something we touched upon earlier and this is something to expand upon now. uh if you most of the times when you're looking in markets and you're trying to trade, you're just looking at the implied volatility and you're not really thinking about much else, but I venture that you you should at least examine the differences in the correlation of the products that you're trading. If you're trading spy and you're trading cues, more than likely those are highly correlated because they typically will move together regardless of the reason of what's going on in the market. High correlation, high positive correlation is the are things that are typically moving much well together. However, on the reverse, we'll often hear about high negative correlation, things that don't necessarily move together. Good example of this is SPY and GLD or gold. Most often, gold does not care what SPY is doing, and they're moving in opposite directions most of the time. So having highly correlated names in your portfolio, it can work out for you if everything's moving in the direction and it's moving in the direction of your delta and trade, but it can also work against you if you have too much of it. And so this is one of the reasons why you have to pay attention to correlation because it can disrupt your P&L volatility often. So having highly correlated names, maybe a few here and there, but also having a couple of highly uncorrelated names is also essentially good for your portfolio. Measures of outlier risk is something I think people are most often concerned about, particularly when you're having undefined risk trades. So, we all know that short options can carry significant risk and potential outlier risk when we're trading. One of the ways we can look at this is value at risk and an even better way is conditional value at risk, which is on the Tasty Trade platform. Now, value at risk sort of gives you this estimate for worstcase scenario in a move. Say you have a downside put that you're short, which is uh you know if you get assigned on it eventually you could be long stock and maybe most people are comfortable with that given the strike that they chose. But some might not. Some might just want to be short the put and hope that expires out of the money. But oh no, all of a sudden you could have an adverse move and you're worried about your risk. Well, conditional value at risk is a more smoothed out way to get an example of how much you might lose given an adverse move against your short options. So this is something you can look at going forward and you'll see it on the taste trade platform. Next, let's discuss the nature of volatility trading. Trading volatility uh is something that I think a lot of beginners to options don't really get a grasp on. Many times uh you'll hear about people who are trading from the long side and they buy a call. They get the stock moved to the upside that they think is sufficient for them to make money and all of a sudden they're trying to figure out why am I losing. This is because volatility has likely changed on you. So implied volatility is often derived from the option price and it gives you an idea of what investors are willing to pay for an option at any given point in time. When option prices increase, it means there's just a little bit more fear in the market. And when they decrease, well then of course there's a little bit less fear going on in the market. So essentially you could say that implied volatility is a perceived risk in equity markets at any given time. And it gives you an idea of how fearful investors are when it comes to trading. So one of the best things to keep in mind is that implied volatility is usually correlated to price. When you see an equity name that moves down really big in a very short period of time, typically it will also accompany implied volatility going higher and sometimes vice versa. But it's also important to understand that if it does have a violent move to the upside, you can see implied volatility increase there too. So implied volatility in some ways can be said to seen increasing when we have large moves in either direction. Something to keep in mind. Expected move is one thing that traders are always interested in, especially option traders. Option traders typically want to know what type of move can I expect from this given asset given the conditions that's going on in the market. Now, because implied volatility is is often uh from how investors are anticipating future markets and future moves, expected price is one of those things we're always paying attention to. Expected move is one of those things that option traders are always paying attention to. And if you take the shadow price and divide it by where it's currently trading, you get an idea of what type of move in either direction this either stock or commodity might move. Now, specifically implied volatility is usually estimating standard deviation of that expected price move. It's one of the things that you always want to know. If you're trading to the downside, you want to get an idea of what move might happen, particularly if it goes through your strike. something you need to pay attention to, something you want to know. Most importantly, implied volatility is often overstated about 80% of the time for the S&P 500. So, this is one of the reasons why you hear about a lot of traders wanting to sell options because of this overstated nature. One of the best things about trading volatility is that to some degree, it typically has a standard operating procedure. You see, most of the time we'll hear about volatility being in a lull state. Eventually, we'll hear about an expansion state and see the volatility moves higher. Now, just like stocks, it's hard to top tick. You don't know when it's going to stop, but you do know at some point in time that implied volatility can't remain elevated for very long and eventually we will see about contraction. Now, you think about different regimes in the market. 2008 uh we saw volatility in a low state at the beginning of the year. We saw it begin to creep higher in the summer. Um and of course many different things factors created uh volatility expansion in 2008. Of course, uh what was going on with the entire banking system was really one of the things that pushed implied volatility higher and it stayed somewhat elevated for months eventually uh pulling back and contracting but it didn't contract really until the following year just about in 2009. 2020 is another example during the co time period. Now we saw a very very fast expansion in contraction and implied volatility. uh this is one of the things that really was unheard of and never seen to see such a fast movement within a few months time period. So uh what we typically see is is this unsustainable ability for implied volatility to remain high forever. This is one of the reasons we often try to take advantage of this by selling volatility because eventually we want to participate in the contraction phase. Now, that means you have to sell through the expansion and you don't know when the expansion is going to end. But this is one of the reasons why you're often trying to trade small, right? For SPY, it's often been in the lull state about 70% of the time. We'll see the expansion state about 10% of the time, and then we'll see the contraction state about 20% of the time, just to give you some numbers behind it. Now, we're able to construct a trade. Choosing an asset and an underlying is the first thing you're going to go about doing. But it's important to remember that liquidity is king. Liquidity trumps everything else that you're trying to do. You have to be able to get in. You have to be able to get out of the trade. So typically what you want is an underlying with a varied liquid options market. One that has high open interest, one that has a lot of volume across a lot of strikes, one that has tight bid ass spreads. Again, being able to get in and get out is essential. And then you want to be able to find a a trade that uh has contracts with a lot of different strikes and expiration dates. Now, the higher uh the volatility, that's going to sometimes result in wider bid ass spreads because well, a lot of times market makers aren't willing in a higher volatility environment to make decent markets and that's why you'll end up seeing that. So often try to focus on very liquid markets, those that have a lot of volume, those that have a lot of open interest across strikes. It's important. Next, you want to choose a duration. U this is something that I think a lot of people struggle with when they're looking for a trade. Sometimes they don't have an idea on a timeline uh where they want to for an action or whatever trade that they might be doing. They might look out at leaps. They might look out 3 months, 6 months, and it can be a daunting task trying to figure out exactly where you want to land on this. But, uh, I think it's important to at least comprehend what options often do, and that's decay. Options are often decaying vehicles. So, as a result, if you are selling options, what you want to pay attention to is the decay curve and how much your theta is over time. We've done a lot of research that shows that the decay curve is most optimal in the 45 to 21 day window where we'll often see the largest amount of decay. Um, but when you're when you're choosing that duration, you first have to choose um something that uses your buying power effectively, something that's going to allow you to cons consistently get a lot of occurrences and something that's, you know, suitable for the current market or what's going on at the time. Is the market slow? Is there a lot of volatility? What's happening? So, understanding all of that and putting that into context is important. But to keep things simple, we're often paying attention to a 45day window with regard to decaying. And we're typically either closing or rolling at 21 days. We have found uh a lot of our research has told us this is the most optimal when it comes to trading options. You do want to keep your position in a less volatile area, something that's within that sweet spot. And that's one of the reasons why we often do that. Next, after you choose duration, of course, you have to choose strategy. Now, this is where things start to get a little bit complicated. Um, the most important thing when choosing your your strategy is size. You see, size often times they say size kills. And for good reason. If you put on a trade and it's too big, then most of the time uh you're you're paying attention to it so much that it's probably dominating your portfolio and dominating your risk management abilities, and you're not really paying attention to many other things. The other thing about having too big of a size, if you are nervous about this trade day in and day out, you automatically know that it's probably too big for you. So, size is important. Try to stay as small as possible compared to your portfolio. Uh, in addition to position size, you want to be capital efficient. You want to be mindful of risk, particularly when you're talking about those undefined risk trades, but don't run away from it because again, those typically have the highest pop for you. And you want to choose the appropriate strategies given the implied volatility in the market. In high implied V markets, those are the times where you're probably looking for those undefined risk trades because there are high and pop. Um you're probably looking to sell in high implied volatility markets. When it's uh low implied volatility markets, a lot of times you might be looking to buy, might be looking to do the defined risk trades, straddling the stock price. Those are the times you're paying attention to that. Those are the times where you're paying attention to those strategies and those that's how you basically choose in between strategies given what's going on in the environment or in the market. It typically will let you know. You do often think about choosing a directional assumption. Many times folks want to look at a way to trade something because they have a belief that it's going to move in any given direction. It's understandable but you should understand that uh it's okay to be aware that nobody knows anything. Now that being the case, if you assume the current prices reflect some degree of available information in the market, well that's essentially a semi strong efficient market hypothesis. That essentially means that you're aware that nothing is happening. You have no control over it. But that being the case, you could still have your own directional assumption. One of the things we often try to do is have an assumption on volatility because as we said, it's a little more predictable. you know, about 70% of the time it's going to be in the low state. About 10% of the time it's going to be the expansion state and about 20% of the time it's going to be the contraction state. So that's if there's any one area we're often trying to sort of take a a directional assumption in, it's directional and volatility. We know that volatility is eventually going to rise and eventually it's going to fall somewhat slowly. Finally, you want to choose a delta. You choose your strategy based off of what uh your capital availability is, but you choose your delta for different reasons and giving yourself a chance to win. Delta, of course, is the perceived risk in terms of options, in terms of shares. What direction is it going to go? What's your current delta and how is that going to benefit you or hurt you? Something you need to be aware of. What we've done here is 16 years of research looking at different strangles based off of the deltas that they have. It's interesting to note all the different statistics and how they change amongst them. 16 delta strangle pop is 81%. The average P&L on that is $44. Your P&L standard deviation somewhere around $614. And your CVAR, of course, when we're talking about that smooth way of looking at your your value at risk and what an outsiz move could do to your position, that's $1,535. Now, if you go from having a 16 delta strangle and you move into the 20 delta where both options are 20 delta, you'll see a little bit of change, your pop all of a sudden is 76%. Right? So, we went down from being at the 16 delta strangle. Your average P&L of course goes up because you're selling a little bit more meteor options there. And your P&L standard deviation, well, that's about $659. But the C bar of course goes up because now you're a little bit closer to where the stock is trading, a little bit closer to at the money. And so an adverse move of course, well, you have a meteor option and so then it can get you a little bit more trouble. That C bar ends up being $1,673 delta strangle. So once again, we moved in just a little bit more. You'll see a pop of about 68%. Average P&L about $54. P&L standard deviation of course that increases to about $747 and naturally because we have a little bit more meteor options. Sear now is up to $1931 deltas. So having short deltas your premium on that is going to generally range about 10 to 40 delta oftent times right so it's important to understand how your risk changes as those fluctuate um from time to time. I'm Jamal Chandler and uh I have a show called Engineering Trade that comes on Monday through Friday 1:45 p.m. Central time to 2:15 p.m. Central time on tasty.com and also on the Tasty Live YouTube. Talk about macro trends, talk about trade ideas based on volatility and how your Greeks can help you manage your portfolio. Hello everybody. Welcome. I'm Tom Sasnoff. So the piece I'm going to do on the option side to complement what Jamal's done is I'm going to talk and I'm going to start off with the concept of managing trades because the one of the neat things about derivatives trading. One of the neat things about being a self-directed investor is that you get to do what you want to do. The counterparty's role in the whole marketplace and marketplace efficiency is facilitating what you want to do. Their edge is they have a tiny little edge in price facilitating what you want to do. Your edge as the as the self-directed trader um your edge is that you get to do whatever it is that you want to do. So you get to control your opportunities. You get to control order entry. You get to control all your own decision-making. Nobody forces anything on you. That's your advantage. The counterparties advantage is they get a small advantage on price. You get the advantage of getting to do whatever it is you want to do. And an efficient marketplace, I like I like your side, which is the same as my side, a little bit better. So, one of the things is initiating a trade. That's fine. We're going to get talk a lot about that today. But the other thing is when you have initiated the trade, you get to control all your next moves. Because in an efficient marketplace, one of the coolest things about it, and this is the world of options, is that you get to decide what you want to do after you've actually made the trade. You've executed, you have it on. You know, in the world of flatout futures, there's very little strategy. There's a little bit of what we call pairs trading. We'll get into it later, but there's a little bit of, you know, directional trading obviously and there's there's highly correlated positions where you can bet on the basis and you can bet on different things happening um directionally. But essentially, in the world of futures trading, the market's very black and white. In the world of stock trading, the market's very even more black and white. You can buy it and hope they go up, or you can sell something and hope it goes down. But that is pure black and white. And in the world of digital assets that would like Bitcoin and things like that, um that's a very black and white business too. You buy it, hope it goes up. You sell it, you hope it goes down. There's nothing else to it. But the world of option trading is very different. It's very strategic. We like to call it a it's an area of gray. It's it's it's gray colored, which means you can actually be right and lose money or you can be wrong and make money. And it's strategic in the sense that it's very mathematical. It's very probabilistic. All the outcomes are theoretically spot-on when they happen. When the trades are initially executed, all the theoreticals are spot-on. And then over time, how you manage those trades or how you adjust those trades or how you close those trades, whatever it may be, is really going to depend is really going to make or break how well you do as a, you know, do-it-yourself investor, as a self-directed investor, as somebody who's managing their own money. In a world of higher interest rates like we have now, in a world of very high risk-free returns, one of the great things about being a do-it-yourself investor, a self-directed investor is that you have an opportunity to set your objectives and they can be at a significant multiple of whatever risk-free rates are. Whether you achieve that or not, that's up to you. I mean, that's up to your skill set, that's up to how much risk you take, that's up to how many occurrences you have. But at least the opportunity is there to achieve some return over a passive return, some return over risk-free return. So I'm going to start out with um a segment that I call managing trades. And the reason managing trades is so important is because one one of the things that I've learned in the last uh we started Tasty uh almost 13 years ago. It's hard to believe, but it's been almost 13 years. And I just to give you a little tiny bit of background on me because some of you you know obviously know us and others have have no idea who we are. Um I started this business actually a little over 40 years ago and I started as a floor trader u market maker on the floor of the SIBO. I went from the floor of the SIBO I was down there making markets in the S&P 100 for almost 19 years. And in 1999 2000 I left and went to build Thinkerswim which we we were the founders and I was the CEO and we built a company called Thinkerswim. Um we were publicly traded company in 10 years after that in 2009 we were bought out by TD Maritrade. In 2011 uh or 2010 actually late 2010 I left to start Tasty. We built Tasty Trade in 201 end of 2010. 2011 we launched Tasty. Tasty Trade is now the brokerage. Tasty Live is the network. And um so we've been going, you know, pretty close to 13 years non-stop every single day creating content. We are Tasty Live today is the largest digital network for finance in the world. We're also the largest think tank for options. We create more content than anybody and it's all free. It's amazing. Um, and it's really interesting stuff. We've learned a lot. Well, one of the most important takeaways that I've had in the first 13 years is about risk mitigation with specifically outlier risk mitigation. So, we all know that consistency and discipline and all that kind of stuff is critical, but how do you mitigate your outlier risk? Because the thing that most people worry about when it comes to being a self-direct investor and one of the reasons that a lot of people will um dump their portfolio on somebody else or have somebody else or pay somebody else to manage their money is because they're worried about outlier risk. But the reality of outlier risk is is nobody can control outlier risk. There's only two things you can do. One thing is you can keep your trade size relatively small. I know that seems like common sense, but you'd be surprised how difficult it is to keep trade size small. But if you keep your trade size small, you essentially eliminate most of your outlier risk. One of the sayings we like to use is when genius fails, the only time genius really fails is when your trade size gets too big. Because everybody kind of has an idea of what they're doing. Everybody kind of understands how the game's played. So when does genius fail? Well, when you trade too big. So keep your trade size small. But the other thing is and this is the kind of thing that most astounding to us and something that we we figured out through a little bit through trial and error and a lot through research was that there are huge benefits to managing your positions before expiration. So let's say for example we you know our research shows that 45 days 45 DTE which is 45 days to expiration is the optimal time for putting on a trade. Well, let's say, you know, years ago, we used to think, all right, we're going to let that thing go as far close as we can to expiration because premium decay will accelerate as we get closer to expiration, and your theta will pick up and you'll make a lot more money if you hold it all the way to expiration. What we never realized was that based on dollars at risk, you're actually taking more risk holding something all the way to expiration because you're not eliminating your outlier risk. And so in the end after doing you know thousands of hours of research and studies with respect to where in the decay curve is it best to manage a position we finally figured out oh my god it's much better to manage positions before expiration. The benefits include you can create a lot more occurrences if you redeploy the capital. And the most important thing about more occurrences is in a world of law of large numbers, more occurrences, better performance and closer to your expectations. You have significantly less outlier risk when you manage a trade early because early in the decay curve essentially eliminates outlier risk in the second half of the decay curve which is when almost all outlier risk takes place and then you have and this was very surprising to us you're you have a higher average daily P&L when you manage early. So again the three most important takeaways about managing a trade early. Now, imagine a trade early would be like a 45day trade, you manage it 21 days. A 30-day trade, you manage it 15 days. A 10-day trade, you manage it 5 days. A one-day trade, you manage three hours. That's what managing early is. But again, it creates more occurrences. It reduces your outlier risk and it gives you a higher average daily P&L. So, with respect to that, what about a management strategy? like what is what are some of the examples of that? As you can see here, we're posting all the slides that we've used and in the upper right hand corner of all these slides, you will see a page number and those page numbers will take you back to a page in Julius Spina's book um the unlucky investors guide to option trading which will give you all the detail and all the backup math for everything that we're discussing today. That's why this is such a cool event. So when choosing a strategy, consistency is essential. Then and and again I know that seems like it's like okay that seems obvious but sometimes we have to be a little bit masters of the obvious. Managing contracts according to days to expiration. It simplifies everything. It actually gives us some context around the concept of managing early. So what you can see here is that contracts managed early are less likely to are less likely to um uh are less likely to profit and collect less per trade but also have less volatile P&Ls, less tail risk and collect um more theta daily. So, as we as we post on this trade here, um on this slide here, you can see that um where we highlight 21 well, we actually didn't highlight this slide, but at 21 DTE would be kind of the center of this page. And as you'll see right here, we highlighted it. And you can see how the averages and everything is a lot cleaner at 21DT and how it makes so much more sense than holding all the way. When you look at, for example, your pop, which is going to be consistent, but if you look at your average daily P&L, that's where your big difference is. So your average daily P&L is going to be higher. Your pop's going to be at the top. And your pop will stay consistent. That's your probability of profit. But where would you find the lowest C bar, which is your basically your outlier risk, worst 5% of the times. Your lowest standard P&L standard deviation, that means how much is is your account going to swing, your P&L going to swing every day. your highest average daily P&L, your essentially highest average P&L and your highest pop and that's right at the center at 21 DTE. So you can also if you choose to and you don't have very complex positions on you only have like kind of let's just say one position or or yeah one strategy or one position in a certain underlying you can manage at 50% of max profit. So, if you put a position on, let's say that position just happens to work your way quite quickly and you don't want to wait till half the time. If you put it on at 30 days, you don't want to wait till 15 days, you put it on at 5 days, you don't want to wait till 2 and 1/2 days, you can manage at 50% of max profit because you're going to find very similar results at 50% of max profit than you do at managing at 21dt. Now, for those of you that are listening to this for the first time or kind of wondering what the hell is he talking about, these this will become second nature to you. The more trades that you put on and the more times that you do something and the more consistency, the more discipline, the more occurrences that you have, you're going to find that this becomes essentially second nature. In some cases, you'll use something like 50%, other cases you use 21 DTE. But one of the most important things here is whichever you choose, you want some consistency to it and you always want to default to earlier rather than later. And that's the question we probably get most in emails is should I wait a little bit longer. Is there anything wrong with wrong with waiting? And the answer is of course not. But if you want to default to something, you want to default to a little bit earlier rather than a little bit later. And as you can see on this slide, we highlighted again that middle column, which is the 50%. So at Tasty, we manage at 50% of the initial credit or at 21dt, whichever is easier. And if it if you have a nice profit and you want to take that profit before that, default to doing everything earlier because defaulting to earlier is always better. So we have also applied these same guidelines if you are doing undefined or defined risk trades doesn't matter to us. Now, obviously, if you're doing undefined risk trades where where um you have outlier risk, which you don't have in the case of defined risk trades, but if you're doing undefined risk trades, these are the kind of things that would probably have a bigger impact and that would apply more often. If you're doing defined risk trades, okay, you have a little bit more wiggle room. And what I mean by that is the numbers um become um there's less extreme. So, if you want to wait a couple of extra days on a defined risk trade, sure, go ahead. If you want to manage a couple days earlier on a defined risk trade, sure, go ahead. If you want to manage that defined risk trade at 25% instead of 50, sure, go ahead. If you want to wait till 75%, sure, go ahead. There's more wiggle room on defined risk trades because the early management of those, you're essentially because you have defined risk, you're essentially eliminating outlier risk anyway, which is one of the reasons for doing, you know, for for managing a trade early. But what should be pointed out is you still want to keep your size in check because the number of contracts and the size of the position, whether it be capital or contracts, is really critical to the success that you're going to have, whether it's defined or undefined risk. You want to keep that trade size small. Um, and let's talk about basic portfolio management because this is what tricks a lot of people up. basic portfolio management, although it sounds easy at first, it's it's something that that most individual or self-directed investors, it's not something they've had a lot of experience with. Now, after you've made a few thousand trades, a few thousand option trades, few hundred option trades, tens of thousands of options trades, basic portfolio management becomes second nature. But getting yourself to the point where you're disciplined enough where you create enough occurrences where you don't have to overthink every trade and overthink every adjustment or every roll or every close. That's the hard part. That's what's so important about doing something. You know, the the experience of doing something 10 times and or a hundred times or a thousand times. when you get to a certain number, um, it it changes your results short-term and long-term forever. Something that never goes backwards. So, for starters, let's talk about, you know, position allocation based on the VIX. Now, everything we do at Tasty Live, we will focus our our context around what we're doing based on implied volatility rank. We call that IVR, implied volatility rank. However, when it comes to allocation and position sizing for to simplify things, we decided to use the VIX because the VIX is a little more universal and it's if you are allocating positions in a portfolio, you're not going to allocate because every underlying has different IVRs, it's easier to find something that's more commoditized against an entire portfolio, which is the VIX. So we did is we posted on this slide the most conservative case. Now we have a conservative case. We have a moderate case which is 25 to 35% higher than this. And we have an aggressive case which is 50 to 75% higher than this slide. So this is the most conservative slide. The moderate case would be let's call it 25 to 50% higher. And the most aggressive slide would be 50 to 75% higher. That's why these numbers, you know, where we currently are on the VIX, 25% allocation of a portfolio would seem low, but if you went to the to a moderate case, you'd end up with, you know, somewhere between 37 and let's call it 42. And if you went to an aggressive case, you'd end up, you know, between 50 and 60%, which may seem again more in line, but it also depends on your portfolio size, your net liquidating value. There's all this other stuff. For the purposes of today's discussion, we talk about kind of an average account size of, let's say, around $50,000. But, you know, we know some people have multi-million dollar accounts and some people have accounts as small as three or $5,000. So, it's hard to just, you know, we can't make a blanket or we can't generalize. So, for the purposes of today's discussion, when we talk about accounts, we talk kind of in that $50,000 account size. So we are going to when we allocate trades um most of the time we are in the 25 to let's call it 50 to 60% of net lick. We're somewhere in the moderate case. We also allocate about and this is just a matter of preference. So so I can only talk for myself. We allocate, meaning me, I allocate about 75% of my trades to undefined risk and about 25% to defined risk. And what we're also very careful to do is not to allocate more than a certain percent of a portfolio to a specific underlying. Again, diversification is your friend. Diversification of underlying, diversification of strategy, diversification of of duration, diversification of volatility, all of those are important. And I'm going to explain later how important they are, but just so you see from an allocation side, um, a max allocation of I do usually a max allocation of 75% to undefined risk and 25% to defined risk, but I'm pretty much in that 7525 range all the time. And for my total portfolio, I tend to be in the 25% on the low side. Manage a large account, but 25% on the low side and 50 to 60% on the high side. For smaller accounts, you'll be between 50 and let's call it 80%, for for large accounts, you more, you know, for midsize accounts in that 40 to 60 range and for smaller count and for larger accounts in that maybe 25 to 50 or 60% range. So the benefits of diversification. Now in a traditional sense, in the classic sense, diversification was always just different names, different underlyings, different sectors, different countries, whatever it is. That was classic diversification. But we all know now that based on correlation, stocks are stocks. And in an up move, they can go lots of different directions. In a down move, they all are highly correlated to one. So there is no real true diversification in equities. just the downside. So we have to do is we have to get a little more creative than that and we have to find underlyings that are actually not correlated. So we can we can diversify through underlyings. No question about it. There's no there's no correlation between for example stocks and bonds. There's no correlation between stocks and currencies. There's no correlation between stocks and precious metals. You know there so there's there's no there's very little correlation between um uh crude oil, natural gas and stocks. So there's lots of different ways to diversify by underlying. We can also diversify by strategy. And that's really interesting because none of us really understood that before. But there's a big difference between a strangle and a calendar spread. There's a big difference between, you know, an iron condor and a ratio spread. In fact, you reduce your portfolio volatility. You reduce your outlier risk and you increase your returns dramatically if you are able to diversify your portfolio. That means futures, that means options, that means different strategies, different underlyings, different implied volatilities. Some are going to be higher than others. Some are going to be some are going to be they're going to seem like they're super low, but the IVR is going to be high. Some are going to seem like the implied volatility is super high, but the IVR is going to be low. So, you don't do them. You're going to diversify by durations. Some might be weekly, some might be monthly, some might be, you know, two months out. And you're going to diversify sometimes by management style in the sense that sometimes you're going to go to 50% of max profit and sometimes you are going to go to um just straight at 21 days. I find with lots of different positions on because I like to carry lots of positions with lots of positions. the consistency to get the best consistency out of my portfolio. I manage at 21dt because it lets me get out of everything at the exact same time. I don't have to worry about kind of exactly where is 50%. So the 21dt to me is really critical. So let's take a look at when we when we look at our Greeks, one of the questions that we get the most is, okay, well I get all this. I understand, Tom, why you're saying, you know, let's let's let's diversify the portfolio, let's manage early, but what confuses me is I'm not sure what too big really is. Um, so one of the things that we talk about a lot is looking at what is a reasonable amount of theta of premium decay to create because we want our portfolios, you know, you can play the market two ways when you when you trade derivatives. You can try to beat the market or you can let the market try to beat you. Our preference is to let the market try to beat us. Which means we are always carrying positive decay. Meaning we are letting the decay work for us and our theta numbers are always positive. But how much theta should we have? Like how much decay do we want? And it's always measured against our net lick. So how much theta decay are we looking for? and what's a reasonable number. Now, obviously, when implied volatility is really high and implied volatility ranks are high, you're going to let that data number go up a little bit because there's more opportunity in high implied volatility. But what about like right what about markets like they are going into December? What about markets um in the second half of this of 2023 when implied volatility was actually pretty low? Like what's a reasonable amount of theta to our net lick? Well, on the low side, you want it to be around 1/10enth of 1%. On the high side, you don't want it to get much more than 2/10 to 4/10en of a percent. Sometimes on a really small account, you can get to maybe a half a percent, 510 of a percent, but for the most part, you're going to be somewhere wrapped around the onetenth of 1% to 3/10en of 1%. Smaller accounts will be closer to 2 to 310 of 1%, maybe four. larger accounts will be in the wrapped around the onetenth of 1% maybe two ten of 1% sometimes sometimes even five basis points instead of 10 basis points which is onetenth of 1%. So just if you're if you're trying to think about you know hey where is that number well it's onetenth of 1%. So, so you know, I if if you're talking if you're talking about, you know, a $100 account, you're talking about 10 cents in theta decay. I mean, obviously, there's no such thing as a $100 account, but if you were talking about $100 count, that's what it would be. You can use the you can multiply it out from there. Um, but that's what we're talking about. So, just to put some context around that, that seems like a small number, but it's not. I promise you it's not. So, let's move in to the next step up, which is advanced portfolio mechanics. Okay, advanced portfolio mechanics and strategy. Now, we're going to take it up a notch. And at Tasty, one of the things we've done over the years is we've never dumbed anything down. We've always challenged, you know, one of the neat things about entrepreneurship, one of the neat things about business, one of my favorite things about trading, it's not just all the things you can pull out of trading, but it's all the challenges that evolve from trading. So one of the things it that we start with is you know understanding that you know understanding how portfolios work. Um there are lots of things that can happen in the option world. There can be a directional move in the underlying. You know your deltas can change really quick. Now with 45 days to go deltas move slow. With 21 days to go deltas start to move a little faster. With two days to go deltas are all over the place. they can go from 0 to 100 in a matter of seconds. So that's one of the reasons that you manage early. But understanding directional moves in the underlying that's one of the factors that you have to take into account. The other is changes in implied volatility changes in time to expiration because it's going to matter to you once you understand this stuff. You're going to see the longer you go out medium term, the easier it is to manage the positions and the less risk that you have. And then what strategies based on the price of the underlying based on the volatility of the underlying you know based on the rest of your portfolio where do you want to be prob probabilistically where do you want to be? So to do this, we started to put together kind of, let's call them some mechanics for determining kind of position size that would protect you against marketwide volatility expansion and also to make sure that you developed the process of keeping your positions very reasonable. So how do we do this? Well, we limit capital allocation. just a generalization for that. Now, again, this depends on account size, but talking about kind of like a $50,000 account, and you can you can guesstimate it higher or lower. So, obviously a million-dollar account's going to have significantly lower numbers than I'm about to tell you, and a smaller account's going to have slightly higher numbers. But on an average account size, if you're talking about a defined risk position, you're going to be somewhere around half of a percent to 2% of your net lick. It's always net lick, not buying power. It's net lick. So, net lick is the value of your account. Okay? It's the it's the mid price. It's the theoretical value of your account. net lick, you're going to be somewhere about 1/ half of 1% to 2/10en of a percent, I'm sorry, to 2% of your net lick. So 1/ half a percent to 2% of net lick for defined risk. For undefined risk, it's going to be 3 to 7%. Now, is it okay if it's 10%? Of course, it gets there. Is it okay if it's 2%? Of course, it gets there because different stocks have and different indexes have different prices. It's way different to trade a $20 stock versus a $200 stock. So, the answer is of course, but these are generalizations. So, for undefined risk positions, 310 I'm sorry, 3% to 7%. Now, the last thing here is you never want to have more than 15 to 20% of your net lick in a specific underlying. That's kind of your max. So if company XYZ or index XYZ has um you have a bunch of positions on in there, you don't want that to exceed 15 to 20% of your net lick. 3 to 7% for undefined risk, half to 2% for defined risk, and never more than 15 to 20% um for an for a single underlying. And again, just remember on the upper right hand corner of this slide, page 134, it all ties back to all the math behind this. And the math behind this is really fascinating, but it all ties back to the math behind this in Julius Spina's book. So, the next one we get to, and these are these are, you know, Tasty is a think tank. Tasty Live is a researchbased think tank, and nobody has ever created this kind of option research for today's kind of highfrequency based markets. And again, do the mechanics give you edge? Well, in a mechanical sense, yes. In a theoretical sense, no. But what they give you is consistency. And they optimize the mechanics behind all the numbers because it's hard to go research, you know, a statist. It's it's it's almost like a cheat sheet card, you know, if you're playing blackjack. Well, it's the same kind of focus here. That's what think tanks should do in the world of self-directed investing. Give you um essentially a cheat sheet with respect to optimization of you know how to address all these different circumstances that come up every single day because as we say markets move. So what about the theta ratio? What about your theta ratio to your portfolio? We talked about this just a couple seconds ago, but um what we want to do is you want to collect enough premium to justify the risk that you're taking. You want to collect enough premium to justify the tail risk that you're taking. And you also want that premium to reflect the current levels of implied volatility. But in the end, you also want to know that a reasonable expectation for the premium that you have sold and that you are collecting on a daily basis is about 25% of your exttrinsic. So when you sell something for a dollar and that's equivalent to let's say $100, a one lot at a dollar is $100 worth of premium. A reasonable expectation for what you're going to keep of that $100 is about $25. That's with managing early. That's with doing that's with doing making other adjustments. That's with combining losers with winners. And that's an objective. Okay? That's not a guarantee. That's an objective. So, we also what we do at Tasty and the way that we um uh the way that we present our research at Tasty Live is that we beta weight essentially all our discussions. And on the Tasty Trade software, they beta weightage all your positions to the S&P 500 ETF, the SPY. So, what we do um in our research is we use the S&P 500 as the underlying basis for our research and everything in portfolios have been normalized and commoditized by beta weighting everything to the S&P 500. This is something we introduced to the marketplace almost 24 years ago and it's now become an industry standard. I mean we introduced implied volatility rank. We introduced beta waiting to spy. I mean this is all stuff that has changed the industry and they're all products of our research and of our technology that we've built over the last two decades. So, um, uh, as you can see here on the slide, we talk a little bit about, we also use the term neutral, delta neutral, and essentially that what that means is we're not taking a directional shot. We're taking a, we're betting on premium decaying. So, if you ever hear the term delta neutral, it's means it's a non-directional play and the bet is on volatility contracting. The other thing we do and we're conscious about is we will balance our capital according to POP. POP is probability of profit. POP is the probability of making one penny at expiration. So you know on on Tasty Trade the software they had offer kind of two versions of pop. One is the probability of making one penny at expiration. That is a pure theoretical model. That's based off of black shaws. It's how all options are priced. The other is P50, which is the probability of making 50% of max profit at some point prior to expiration. Your P50 is always going to be higher than your pop, but it gives you two different ways to look at your probability of profit. For me, one of the most important things is my overall pop. Like, what is my overall probability profit on my total portfolio of all the different trades I make? If I do one at 80% and one at 70% and one at 60 or one at 54% and one at 92%. What is my overall probability of profit? And I think one of the things that we want individual investors to focus on is to always give themselves a opportunity to have a probability of profit on the total portfolio of somewhere around 70%. So we like to say 66 to 72% is kind of the target and 70% is the objective. Well 70% probability profits a theoretical objective. Why wouldn't everybody do that? And the answer is because in order to have a 70% probability profit, you're going to risk more than you can make. It's a straight symmetrical math model. So if you want a 70% probability of profit, okay, you are going to take more risk than you can make. Now in my world, I like that because a 5050 probability of profit. Okay, 50 50% probably profit, 50% chance you make, 50% chance you lose. That's a 50-50 shot. I don't want a 50-50 shot. I want a 7030 shot. Okay. But doing that, I know I'm going to take more risk. I have limited profitability in some cases and unlimited risk. That's the trade-off, but it's theoretically perfect. One thing we we we like to remind people of and we like to caution people of is that concept of how much of my portfolio am I really going to commit? So if I have $100, is it reasonable to commit $30, $40, 50, 60, 70, 80, 90, 100? And the answer is it goes back to VIX levels. It goes back to implied volatility rank um context. But in general, if you have a large account, you don't want to go over that 60% number. If you have a smaller account, you know, you want to be you might be get able to get up to 75 or 80%. And if you have an average size account, that's 60% 70%, you know, that number is about your max. Very large accounts, 50%'s kind of around your max. The reason for that is because occasionally the market does things where you know the crash of 1987, the meltdown in 2008, the pandemic in 2021, you always want to be able to come back and play the next day. And at that 60% allocation on average, you can always come back and play the next day. Um, if you are committing capital to oneoff or binary events, you want to be careful because there's very little management of those events and there's very minimal edge. So, if you're playing an event-based trade like a economic report, an election, a earnings report, um some other kind of number, something else that's coming out like a Brexit for example, if you are doing that, just understand it's there's minimal overstatement, minimal edge, and very little you can do with respect to adjusting those positions. So, you want to be careful and not let those positions get too big. I think in most cases if you're doing kind of a one-day binary event, you don't want to get much more than 15 to 20% of your available buying power or 15 to 20% of your net lick. Traders often use one DTE or weekly as kind of an as a guide for an expected move in those cases. Like I wouldn't use a 45day expected move for an overnight earnings play. um but or I wouldn't use that for a one-day, you know, economic event. But if you're looking at a stock that doesn't have any um numbers that are expected to come out or an underlined with any expectations of a binary event, then you're going to look to that 30-day. We mostly look to the 30-day IVR or 45day IVR, whatever it is. Again, more details here on page, you know, 164. So for zero and one DT trades, you know, these are minimal edge trades, highly volatile trades, just want to be careful. Couple things to just remember. Try not to hold things past midday. Try not definitely try not to hold things until the last two hours. That's where you have the most amount of risk. If you're using a a big index, you would that's cash settled, you might want to use defined risk. It'll be much more capital efficient. One of the keys to success is having enough being smart about capital efficiency and of course most importantly keep your position size small. So we're going to wrap up this segment with exploring um exploring your probabilities. And what's so interesting about this is like there's there's no tells in trading but there are things that we look at to get an idea of you know with respect for the first thing is like pricing skew. So options have ever since 1987 options have um there's there's there's pricing skew which is this what we call this level of asymmetry in the distribution of prices. In other words, if you're trading an index um uh like an equity index, you're going to find that puts are way more expensive than calls because the perception of the velocity of risk is to the downside. If you're tra if you're trading a highly volatile stock with like that that has a lot of upside to it, whatever that stock underlying may be, maybe it's a biotech, maybe it's a precious metal, maybe it's a the hot new IPO, whatever it is, you're going to find huge skew to the upside, meaning calls are going to be more expensive than puts. So, what the market does is it prices the options based on the perception of where is the velocity of risk. That doesn't mean in the index products there's more risk to the downside than the upside. It doesn't mean in some biotech there's more risk to the upside than downside. Okay? Or that the stock I'm sorry it doesn't mean that the stock's going to go higher. And to the index it doesn't mean the stock's going to go lower. What it means is the perception of risk is those is those directions. What does that mean for you as a strategist? Well, as a strategist, it means, okay, I might, you know, want to do something where I take advantage of that pricing skew because I know that pricing in the end is random. Just something to be aware of, not something that's that there's there's a specific takeaway other than awareness. I call it market awareness. So, probability of profit is the theoretical probability of making one penny on a trade. For naked options, a cheat sheet way, back of the envelope way of doing it, if they have a delta of between 10 and 40, you can use those deltas to estimate the probability that the option will expire in the money. So if an option has a 25 delta, it has approximately a 25% chance of expiring one penny in the money. So the probability of profit is essentially going to be the inverse of the delta if you're selling that option. So I wrote it out. I wrote it out in this slide. For example, a 25 delta put has about a 25% chance of expiring the money, meaning that it has a 75% pop for selling that put for a spread. You divide the max loss by the width of the spread, and you're going to get the exact theoretical pop. So, it's a little bit more discretionary. There's a little more wiggle room on a naked option, but for a spread, the theoretical probability is going to be spoton. So, a quick little recap because I just I can't get diversification out of my head. I know how important this is. Diversification with respect to time tends to reduce portfolio allocation if you use different a few different expiration dates. You don't have to use weeklies necessarily, but sometimes you mix in, you know, a daily, a weekly or a little bit something a little bit longer than 30 or 45 days. Diversification with undefined risk and defined risk is so important. That's that 7525 discussion we had earlier in the segment. Diversification with respect to underlying is probably still the single most essential function of portfolio risk management. It is critical that you look for underlyings that are not correlated. Our technology is very clear and our research is very clear about correlated underlyings and the benefits of using non-correlated underlyings. Pop is a very important factor because overall portfolio pop gives you an idea and you can set reasonable expectations for your portfolio. And the whole idea of the whole concept of getting in a rotation of getting in of getting into um a methodology of managing your trades early either according to dates to expiration or according to a profit target or just simply defaulting to earlier is the most effective way to reduce P&L volatility and to reduce outlier risk on a per trade basis. Here's a couple of stats to end the discussion on that are really going to help you as takeaways. So the pop, your property profit is going to remain the same. So don't be fooled by that regardless if you hold to expiration or manage early. That's not going to change. But what does change is compared to managing early, managing at the halfway to expiration or at the 50% profit. And these are three huge takeaways. Nearly a 30% higher average daily P&L, nearly a 60% lower per trade P&L standard deviation. That's your volatility. You reduce by 60%. And nearly a 60% lower per trade sear. That's conditional value at risk. That is your outlier risk the worst 5% of the time. So essentially you're taking 60% of your outlier risk off 60% of your daily volatility and reduce and and adding 30% higher average daily P&L. Those to me are fascinating statistics and a great takeaway. Hi, I'm Pete Mulat. I'm here to talk to you a little bit today about futures trading. Starting to understand futures, put them to work for you, and you're going to be surprised at the power of futures and what futures let you do as an active individual trader. And that the jump from stocks, from options to futures, and that's usually the journey. Doesn't necessarily have to be that journey. Futures could be part of your trading stable, your trading arsenal, your trading toolbox. They're important components. and we'll talk a little bit about how you best use them, how you put them to work, and how can you how can you empower yourself to use them given what you're trading right now. So, we'll spend some time on all those pieces. I've been trading futures now for over 40 years. I started on the floor of the CME uh and the currency pits. So, I've traded currencies, everything from oil to energy uh to uh cattle and hogs and S&Ps uh I throughout my 40-year career. and the efficiency, the uh liquidity and the ability to express an opinion is really futures are incredible. There's so many things you can do with them. So, what are we going to talk about here is as a trader, what do we look for? Well, we look for products that are liquid, products that move, products that give us and we often we we use this term, we we like to trade small, trade often. Well, there's a reason we do that. A diversified set of occurrences is so important to a productive trading methodology. And how do we diversify? Well, we add more products to the mix. What limits us from doing that sometimes? Well, the cost of adding more products, whether it be margin, buying power, or capital, however you want to look at it, that cost of diversifying strategies, diversifying across products is something that sometimes impedes our ability to get a truly diversified portfolio. Well, futures bring you efficiency. Now, I look at it I call it I refer to it as capital efficiency. Now, um you've you've heard the term leverage used to futures are leverage. They are leverage often used poratively as a kind of a negative connotation, but really it's capital efficiency. It's doing more with less. Now, it's important. It's so important you understand what you're trading and the size of what you're trading and make sure that you're trading the right size product to fit what your goals are and uh your strategies are. But futures afford you that efficiency. They give you that access. Now futures have less slippage. They've got a tighter bid ass spread. They trade 23 hours a day. And you know, oftentimes people new to futures always will say to me, well, you know, that that scares me, the 23 hours a day. None of us stay up all night. We can't manage our positions, you know, all day, all all night. But what that does is that gives you the ability to trade markets, manage your exposure, and find opportunity when you want to. Not the eight hours a day that the the world of equity gives you from 8:30 to 3:00, but around the clock. So when markets move and opportunities unfold, you can take advantage of them with futures. So that access is so important to be able to get at product when you want to. Now futures really around the clock have that liquidity which is incredible. We'll talk a little bit about time zones and liquidities but they are they are leverage. So you are getting a you're and really leverage is you're controlling more notional more of the underlying with less capital. So that makes for a much more efficient type of trade. Now what can we trade? Well we can trade pretty much everything under the sun. equity indexes, the S&Ps, NASDAQ, Dow, and Russell. We could go over and trade interest rates, everything from two-year notes to 30-year bonds, uh energy, crude oil, natural gas, uh gasoline, heating oil, currency, euro, yen, sterling, cable, uh uh Australian dollar, all the currency pairs are there to trade. Metals, gold, and silver, even things like agriculture, beans, corn, and wheat. You know, I I get asked so often, why would I trade currencies? Currencies aren't necessarily something I trade, and I I always ask people, well, tell me a little bit about what you what what do you have on? What do you what's your exposure, and how are you diversified? And they go, well, I've got some Apple, got some Tesla, but I also have some GM, I've got some Ford, and maybe I've got some USO for crude oil. But you know what you have? You've got a lot of dollar exposure because every product we trade in the States is priced in dollars. So you have a ton of dollar exposure looking as we talk about trading small trading often and most importantly a diversified set of occurrences and why that's important we're going to talk a little bit about you start to diversify away uh you create a consistent set of returns and one way to do that is to take some of that dollar exposure out so all these products can fit into that world of capitalally efficient trading giving you pure product exposure exposure 23 hours a day. Now, what I love, one of the things I love about futures is that they're a uh neutral security. What do I mean by a neutral security? It means you can buy it or sell it with equal ease. Now, we know selling stock short is a little bit of a challenge. You you've got to borrow the stock. There's a cost to it. Um other products are difficult to sell short. So, they're not neutral securities. there there is a little bit of uh difficulty, complexity and cost trading one side of it versus the other. So with futures you could trade either side of the market long or short. It's as simple as buying or selling. There is no additional margin. There is no additional commission. There's no additional costs either side of the market. What that does is it frees us to make decisions, find strategies and put our ideas into play at that same low and efficient cost. Very important aspect. So you know that concept of how can I sell something I don't own. It's very simple with a futures contract. It's a futures contract. And what I mean is it's a contract, not the good itself. So you're not buying or selling corn. You're not buying or selling crude oil. You're s buy buying or selling a contract for future delivery. So you can sell it as easily as buy it and there is no delivery. There is no worrying about a thousand barrels of crude oil being delivered to your backyard. Everything is handled. Most products we trade are cash settled. The ones that aren't there's a very clear mechanism to make sure that as self-directed retail traders, we're not involved in that physical aspect of delivery. Now buying power. This is what I'm talking about when I talk about capital efficiency. What does it require? What do I need to put up to control a contract? Well, there are big contracts and there are microcontracts. You can put less than $300 to control a microcontract in futures. Now, going through some of the big ones here, S&Ps, crude oil, gold, T-bonds. Now, we see crude oil. The buying power there is $18,000 on a big crude oil contract. There's also a micro crude contract at onetenth the size. You look at euro now eurousd that's €125,000 euros almost $150,000 of exposure. You would think why is something with so much exposure have such small buying power. It is the volatility futures margining is different than the world of equities and options. In the worlds of equities and options we basically have uh reggg t. So we've got 50% margin for most of us or it's full full cost. In the world of futures, there is something called spann or dynamic margining. What that does is it looks at movement. It looks at volatility and it assigns what they what the model constructs as a good faith deposit. What you need to to uh deposit to hold that product either long or short. So the higher the volatility of the product you're trading and the larger its notional size, the more margin you'll be required to to post. Does margin change in futures? It does, but over time it doesn't necessarily change daytoday by dramatic amounts. So you will see as volatility es and falls, margin will rise and fall for a certain product. But what's great is you really get that efficiency of if you're looking at products that are not trading with a lot of volatility that have a lower V structure like currencies always have a much lower V structure than something like um gold or uh crude oil. So we would always see a lower structure and per notional a lower buying power in uh the currency futures than we would say a crude oil or a natural gas future. Um that helps us with product decisions and sizing as well is understanding what is the capital requirement, what is the volatility and what's the expected move. So higher val higher margin as we said buying power rises with volatility and product size and vice versa. So we can see here the volatility is along the um the second to the right rail there and we see the margin rate. So lower volatility lower margin and that euro margin is only 2% of the underlying where we see it at 17% for crude oil. So this dynamic margin model is another way we gain efficiency with using futures. We need to understand that volatility is the driver of that and be mindful when we ch when we select product and when we select strategy we we understand that component but it is one way where you really get to rightsize your trade rightsize your strategy you know in something like crude oil with volatility where it is maybe you go instead of a a 30 delta strangle you're going to a 15 a 10 or a five that's your choice to make but with future you have that flexibility to do so. Now, higher leverage is really important when we look at what we can do with our capital. You look at shares being margin at 50%. Options, we'll just use a ballpark at 20%. And futures margin between 1 and 20%. You can see and really think a little bit about time frame. Where does this very efficient capital market with this very efficient product exposure really serve us best? It's in some shorter term trading. Not our necessarily longer term or core positions, but shorter term back and forth is where capital efficiency really resonates for all of us. Now, we talked about trading small, trading often, and trading a diversified set of occurrences. Why is that so important? Well, we're going to talk a little bit about the law of large numbers and how that really works with a diversified set of occurrences, what futures give you. Now, we know in the world of stocks and we looked at four equity indexes earlier on, S&PS, NASDAQ, Dow, Russell, are they perfectly correlated? Absolutely not. Are they positively correlated? Absolutely. Probably north of 80% if not closer to 90 on some of the pairs. When I'm long Russell and I'm short S&P or I'm long Amazon and I'm short Tesla, do I have one product against another? Absolutely. Uh if I am long a set of equities, do I have diversification? You have that first level of diversification, you started to move out from one underlying to several, but you're still into a highly correlated asset class, which is equities. By moving into futures, you're moving into uncorrelated returns. And that is so important. Let's take a look at the correlation map here and we can see what we're talking about. When we go through the asset classes, we can start up in the upper leftand corner here. S&Ps, NASDAQ, Dow, and Russell. I mentioned that's ES, NQ, RTY, and for YM is Dow futures. Now, the green boxes are all positively correlated. But what's fascinating and what really speaks to the value of adding futures is diversification along with capital efficiency. When we run between equities and metals or we go down to the ZT ZFZN those are treasury futures or down to the currencies below 6E 6B um or even crude oil and natural gas we see little or no correlation or a negative correlation. Now we're starting to get into the area where if we can size pro product properly and we can trade it in a um in an efficient manner, we are really moving to that next level of diversification which is so important to be able to do. So I had mentioned the law of large numbers. I want to talk a little bit about that right now. Now your average occurrence will reach the expected outcome as the number of occurrences grow and if those occurrences this is the key point are independent non-correlated occurrences. So if we have a strategy whether that be one based on uh probabilities and statistics or technical analysis or whatever you find that works for you. The idea of an independent set of occurrences lets you find that true return. if you employ uh if you use futures to find that diversification and start to move to those uh type of outcomes. So the large law of large numbers will play in our favor as we move using futures to do so. So let's talk a little bit about liquidity. There are three major time zones with futures. There's Asia, Europe, and the US. Now, as I said, futures run 23 hours a day, 5 days a week. So, the US time zone, we're going to find tons of liquidity from 7 in the morning all the way through when futures close at 4 in the afternoon. These are central daylight times. Um, Asia picks up at 5 in the evening our time and it'll be a little thinner for the first hour or two. It'll just be New Zealand and Australia, but as the rest of Asia comes in, the markets continue to grow and they the volume and and uh the depth of book continues to expand all the way through Europe back into the US. The clock never stops going. So that liquidity is always there. Now, at certain points of time and depending on certain product, um you'll see greater depth of book, greater liquidity than at other times. You need to be mindful of that. But you always want to look at a product before you start trading it. You want to make sure that liquidity is there, that bid ask is tight, it's consistent, and there's depth. Whether you're trading futures or options on futures, you want to understand the construct of liquidity. Because remember, when we look at costs, what are our costs? Well, we know there's commissions, there's fees, but our greatest cost of trading is slippage. The bid offer spread. A tight, efficient market, one tick wide, 50 or 100 up, lets us trade in and out all day long with as little slippage as possible. Critically important. We want to be m always be mindful that we're looking for products that are liquid and very efficient. So, let's take a minute and do a little bit deep dive into a couple of trading strategies we can look at where we can use probabilities to take that 5050 coin flip of trading futures directionally and also take a little bit of a look at options on futures. Now, if you're an options trader right now trading equity options or ETF options, um you've got your mechanics down. You know when to trade, when to manage, what to look for in terms of volatility. Now, do options mechanics apply? Do your existing ones apply? Absolutely. IVR, management, etc. They all apply. Do futures options cost less? They are more capitalally efficient. So, the cost of capital or the cost of holding that position is less. So, it is a more efficient trade. You're gaining more efficient exposure using futures than equities or stock options. Uh, is IV different for SPY versus ES? Uh, no. The markets are very, very similar. When do you roll futures options? Just like stock stock options, 21 days to expiration. We look to put them on at 45. We look to manage them at 21. How big should each trade be? Important component because remember, we're using leverage and we're using capital efficient leverage which can give us more exposure for less money. We want to understand that margin should be less than 5% of net liquidating value. So we want to make sure that we can have a diversified set of occurrences. We don't want to overcommit to one product. What should f your futures allocation be? This depends on the trader. Now mine is usually sits a little bit higher than average. I trade a lot of futures, but I would say for the really a diversified portfolio, you're looking at your futures should be uh 20% or less for your overall portfolio. Now, the strategies you can employ using SPY, an ETF on the S&P or ES futures, which are the S&P 500 futures, same strategy, but the capital efficiency here, I want to speak to a little bit. a spy strangle. You're going to generate a credit of about $375 on this strangle. It's going to cost you about $130,000 to put that strangle on. Now, you're going to go put on an ES strangle of equivalent width at the same deltas. That credit's going to be about $1,800. Why? Because you're controlling more notional, but the buying power on that trade's going to be $17,000. Why is it so much less? Different margin model. So it's understanding that the efficiency and the capital usage we do in futures is different than we do in the equities world. It's more efficient. So we're going to take advantage of that and be mindful though that what do I have on? I've got a trade that is more capitalally efficient but also a bigger trade. So this is the case where I want to be mindful of what size exposure do I have and is it the right uh fit for the balance of my portfolio. very important questions when we go through. Now we talk about trading volatility and taking advantage of high IV and this is something we we focus a lot of time and energy on. Now scalping which is just the directional buying and selling of futures can be a substitute for trading volatility. trading back and forth inside price action, buying lows, selling highs, turning product back and forth. If the markets are liquid if the products are right size, which means a suite of minis and micros for smaller traders, you always have benchmark trader uh products, bigger products if you want, but those efficient liquid markets let you trade back and forth very easily, very efficiently, and 23 hours a day. So they are another way to trade and benefit on a short-term basis from inside price action back and forth. Now we talked about the directional trade and I am a believer in in the random walk and that there is no guessing as to what the next trade's going to be. It's a coin flip. And what we do want to do though is what I'd like to do is take a look and see how I can take probabilities around statistical movement and can I use those probabilities to tilt the 50/50 bet a little bit in my favor? And if we take a look at the idea of standard deviations and how can we use standard deviations to help us find trade location around markets that give us a statistical edge. This is something that I think everybody's going to find really interesting. Now, we know that a one standard deviation move um happens 68% of the time in a particular market. A two standard deviation move only happens 5% of the time. Now, 95% of the time, the market stays within that two standard deviation range. And remember that standard deviation is determined by um in dollar amount, the size of the product and its volatility. So different products have different standard deviation widths. One standard deviation in the currencies in something like Euro FX could be 40 ticks where one standard deviation in crude oil could be $3 or 300 ticks of range. So what's great though using standard deviations it kind of normalizes that. You don't have to worry about tweaking it. If you use this methodology, you can really kind of break down what is a normal day, what's an inside day, what is an outside day, and start to build strategies around that. And the standard deviations will be your guide to where that is for each product because each product will be a little bit different. So when we look at the normal distribution, we know where that falls. One standard deviation, 68%. Two standard deviations, 95% of the time the markets come back in. So, can we use this to to day trade around? Absolutely. If we take a look and we just pick any point of the day and we say, "I'm going to be long or short," we know that coin flip comes into play. And what's that telling me is that I've got a 50% chance of being right and 50% chance of being wrong. But if I go and take a look at the idea around standard deviations and I wait for that one standard deviation move during that day, I have now taken if I'm using that as an entry point either to buy or to sell and I'm looking for reversion to the mean. I've now taken that 50/50 bet and over the long run, remember it's always over the long run, I've now increased my statistical probability to 6832. If I wait for a two standard deviation range, what have I done? Well, I've created a trade with a 95% probability of reverting back into the in towards the mean. Not necessarily all the way, but towards the mean. Now, let's not forget though, we're turning the odds from 50/50, but we're never going to turn them to a perfect situation where they're 100%. So, that 68% trade still means 32% of the time I'm going to be wrong. And this is where symmetrical loss management becomes important if you're scalping with probabilities, which is what I use. So if I'm going to look at this one standard deviation level to get in and I'm going to take that 68% probability, I'm going to look to manage on a reversion of about half a standard deviation. But if I'm wrong and say market got down there, I bought and it continued to fall, I'm going to manage that loss at about half a standard deviation. So what I've done is taken that entry and exit point and made them symmetrical. So basically 50% on either side, but my trade itself is put on at a 68% level. So that is where my edge comes from. consistent management around symmetrical gains and losses lets you take advantage of the probability trading we're talking about here. So, this sets up for being able to enter and exit trades during the day on a scalping basis, taking advantage of the efficiency of futures across a number of different products. Manage your profits and losses symmetrically. That's the key here because if you do let them go, you you you create unsymmetrical returns. you've now destroyed your probability that you've turned in your favors of um with your standard deviations and you've also your consistent independent occurrences we talked about with the law of large numbers now it's no longer in place. So you need to be mechanical just like we are in options scalping futures same thing we need to be mechanical we need to be aware of where the statistics lie the probabilities lie and take advantage of those and that will give you some really interesting tradeable opportunity now standard deviations are at the core of almost every future strategy like IVR is for options so and this is what I was talking about depending on the volatility crude oil 2% up or down is about one standard dev deviation. S&P is about a percent. Currencies much smaller volatility. Term structure it's only up or down about 4/10en of a percent. So these are very straightforward. They are very easy to determine and they are the great equalizer for using probabilities to trade across a number of different products. So consistency is always key in the way we allocate, the way we trade and the way we manage. Diversified strategies and occurrences have to be disciplined and consistent for us to see um positive results, positive returns. So set mechanics and stick with them. I like to look at about 15% of my trading, 15 to 20% in futures or futures options. I manage them around half a standard deviation. 35% of stock options which we like to manage at around 50%. And then I've got a core position of a number of different things that I'm holding for longer term strategies. So that's kind of the breakdown of the way I like to look at bucketing how futures fit. And the one thing guys I want you to think about is for a lot of us there was always and I was actually a little different. I started trading futures uh very young and have always traded them. But there's usually a kind of a normal life cycle of trading equities, then moving to options on those equities, options on the and then futures. Now, there's nothing that says for the self-directed trader that he's got to take that journey that I have to take this journey of no leverage to a little leverage to some leverage to more leverage. If I understand the products and I have consistent and sound methodology, I'm product indifferent. I don't care if it's a future, if it's an option, or if it's a stock. If there's an opportunity, I want to take advantage of it. And that's what's so important. So, when you think about futures, think about them as this efficient tool to fit in to your existing strategies. And that it it doesn't require you to run down a certain learning curve. You obviously need to understand the product, the size of it, and the way it it ticks. But in terms of implementing strategies, whether that be options or sculping strategies like we talked about, it could be very straightforward and very efficient for you to do. Just stay consistent. I hope you uh walk away understanding futures a little bit more, the power of futures and how you can put them to work to create a diversified set of occurrences and really uh find some new trading opportunities for your portfolio. Hello everybody. We are back for the second half of the futures segment of this four-part series. Um, I am following up Pete Mulmat who was our futures expert at Tasty Live and uh person he's probably the person I I don't think I've ever met anybody that knows more about the futures markets than Pete. He's a he's a third generation futures trader and his fourth generation his son is actually working for us on our trade desk. Um Pete's just a incredible ball of knowledge from start to finish, historian as well as um a very active trader and uh an unbelievable resource if you ever any futures questions or um or just industry questions regarding you know the futures or futures um strategies or futures products and things like that. So again my name is Tom Sausnoff. I am the uh founder and CEO of Tasty Live. And uh let's take it from here. Got a nice presentation for you. It's kind of the final piece to this to this four-part puzzle. Um we covered Jamal Chandler and myself covered the option side and Pete Matt and myself are covering the future side. I'm going to take you through a discussion of um futures of allocations of the way the product structure is done or built and then also um uh through a whole payers trading discussion and then end with a little bit on expected move and probabilities with respect to futures. So I hope you enjoy this and uh here we go. So, just to give you a little bit of background on me, um, if you just coming in late or missed the first part, um, I was a market maker on the floor of the SIBO for 20 years before we built Thinker Slim and then before we built Tasty. So, that's kind of my four decade career. But uh I use futures as a um for my entire career I've used futures as a combination of a scalping tool, a speculative tool and as a hedging tool. And I think there's now a lot more modern uses. That was kind of before the uh world went fully electronic and fully high frequency. Um today I use futures as a scalping tool. Still, I use futures um as a directional tool. I use as a pairs trading tool, which didn't really exist back in kind of back in the day where I was a floor trader. And um occasionally I'll use futures as a hedging tool. But I think the the gist of today's discussion is really focusing on futures as an offensive tool, not as a defensive tool. And I should be clear about this. that um uh at Tasty we tend to and I can just talk about my own trades um we tend to be about 75 or 80% listed options and about 20 to 25% futures trades and there's a reason for that. First of all, futures the futures marketplace is not correlated to the equity marketplace um in the sense that of course there are equity indexes in the futures world but the majority of futures products do not have a heavy correlation to stock products which makes them a really nice diversification tool. The other thing is futures use span margining and equities use SEC based and FINRA based margining. So equities are about six times less capital efficient than the futures margin system which is called span span. SPAN margining takes into account um volatility. It takes into account duration. It obviously takes into account expected move which is volatility but it's much more liberal. It's much more generous intraday and it is much more generous overnight. Now it changes. It's not static. It's a dynamic margin tool. But what makes futures interesting, specifically futures options, is the high the high amount of leverage and the way you can combine that leverage with an equity portfolio. And I think that's one of the points that we're going to try to kind of drive home today. So I'm going to start off this discussion with um uh with a segment I call managing futures. and I talk about it and how to allocate and manage futures positions. The allure of futures is that they are the lead product in the market. So when you look at a uh a screen, a watch list, if you look at see what the market's doing. When you are a passive investor, you really have no idea what futures are. When you are an active trader, the futures drive the cash markets. Cash markets are the equity markets. The futures markets lead the cash markets. Why is that? It's because the futures markets are have much more depth of liquidity. They're one tick wide and they have this huge pool of liquidity and futures have all this additional leverage. So you go to the product with the deepest liquidity and the most amount of leverage and that becomes for example index futures. So if you want to know what the market's doing, you'll always look at the S&P futures. I know that sounds kind of weird, but that is the nature of the business on the active trader side. So the first thing most people do when they think about futures, they think about, okay, I'm going to use this to scalp with. I'm going to use this to hedge with. But ultimately, you're going to learn, and we do this at Tasty. We trade more futures options than we trade individual futures. As crazy as that sounds. So the first thing is we're going to look at what I call direction verse duration. And one of the things that I've tried to do over the years with respect to futures is create um is to create a variety of strategies and to do a ton of research that allows us to extend duration of future strategies and futures trades because if you can extend duration and give people time to be right, you can put them in a position where they have a lot more optionality about making money. So, first thing to note about futures is the like I mentioned before is the leverage and liquidity of futures makes them the best scalping vehicle in all of trading. Um, they are very in the underlyings themselves are very one-dimensional. They're static. You want them, you buy them if you want them to go up, you sell them. If you want them to go down, there's nothing else to it. There's no premium decay. There's no theta involved in the model. they had they use the same um when it comes to the options you'll see they use the same black shells model the same pricing same volatilities and everything else but futures um as a pure static scalping or directional vehicle uh the beauty of them 245 so there's no markets don't really ever close and the liquidity is there around the clock price discovery wise you're going to see it's basically one tick wide that makes them incredibly attractive and most of the futures underlyings are one tick wide as well. So the real value though when it comes to scalping futures is engagement and engagement comes in the form of number of occurrences. Engagement is all about how many occurrences can I create? Because with each occurrence comes a decision and with each decision comes it it takes you to a different level of understanding and a different level of confidence and it increases your brain processing speed and it increases your decision-m speed. So it increases your ability to make to make efficient probabilistic decisions and at the same time it increases the speed of those decisions and success is all a byproduct or is all a derivative of speed. the odds of success when you're just scalping futures. And I've been doing this for now for over 40 years. And I can tell you even to this day, and I've been watching futures every essentially every minute of my life, which is both scary and sad, but also good, I guess, in other ways. The odds are 50/50. Whether you love it, you hate it, you think that's crazy, you think you're better than that, whatever it is, it all comes down to being essentially around 50/50. It all comes down to this to trading small, trading often, which is kind of the mantra tasty. And also be really careful when using stops in the futures marketplace. I don't see I've never been able to see at all. Our research confirms it that stop orders are a very, if not most the most dangerous order type. If you are going to use stop orders at all with futures and with stocks and with options and spreads and anything else, please only consider stop limits. Never use a um a marketable stop order. That's just that's just just dangerous to your health. Stop limit orders. That's the only way to go if you're going to use those at all. We don't use them at all. We use mental stops, but not what we call hard stops. Um but anyway, that's my first just quick discussion of of scalping. I'm not going to spend a lot of time on that because that's not something that I think I don't know if that's can be a learned skill. I don't know if that's something that anybody can ever quote master. Maybe a very small percentage. But with respect to trading futures, I think the important thing is to to to just to always remember a couple things in the back of your head. First, stay small. And if you forget everything else, just remember stay small. So with respect to futures, they are a large notional contract. And again, um, when it comes to future size, if you're ever in question or something like that, stay small. The in industrywide, the average number of futures contracts that trades is only like one and a half or something per order, cuz they're almost 10x the size of a traditional options trade. Also, when you set up your software, whatever software you use to trade with, when you set up your software, set your trade size to a minimum trunch size. So if your trunch size for let's say listed options is five or 10, your trunch size for futures should be one. It's not the same thing. If you're trading, you know, a thousand shares of stock or 100 shares of stock or 500 shares of stock or 5,000 shares of stock, you still set your trunch size for futures at one. And then you can, you know, obviously scroll up and and adjust it accordingly. But that should be your minimum. You always set it to minimum trunch size because with futures, they are big contracts. With micros you can do that differently. You can set your trunch size to two or three or five if you want. Um but you generally if you're trading micros one two three or five if you're trading the minis one contract. Micros add a lot more flexibility. The only thing you have to be careful with respect to micro micro futures contracts is just the option side of those things. The option side of micros can be very thin and might not trade and might not have the open interest or the volume or the liquidity that you're looking for. But on the mini side, they'll have it. On the micro side, maybe not. With respect to the futures themselves, all the micros are essentially liquid. So on the future side, the minis and the micros are all liquid. On the option side, the minis tend to be more liquid than the micros for options. And so just be very conscious of that. Be very aware and also understand that the deltas work the same way. If you're doing a 50 delta option on a mini contract, it's the equivalent of five micros. If you're doing a 10 delta contract, it's the equivalent of one micro contract in most cases. Most cases, micros are onetenth the size of the minis. So the micros add a lot more flexibility, but always stay small and always go to or always use the minimum trunch size. It's really important. Now let's talk about futures options versus futures. Strategists and I consider myself a strategist. Strategists prefer options because of the different durational choices because of the different strategic choices because of all options offer you just so much more. I hate to use the word but optionality. Options offer you so much more strategy. Options are this gray area instrument and they allow you to trade in ways that are essentially in in some cases nondirectional, in some cases what we call omnidirectional. For self-directed investors, 95% of futures trades are offensive, not hedge trades. Hedge trades would be traditionally like for example the counterparty or high frequency firm might make a couple trades in an in an S&P index and then they'll hedge it with S&P futures or they might have a portfolio delta and they'll hedge it with index futures. Retail investors don't really do that. Retail investors um are focused on using futures. Like I said 95% of the time it's offensive. Meaning that future strategy that's your objective. You're not using the futures to hedge a position. You're using the futures as a position. Whether it's futures contracts themselves straight out. Um whether it's directional or whether it's using options. 95% of opening futures trades are offensive and not hedges. Be aware. And this is the one there's there's a couple things you have to be aware, but the one of the most important things to be aware of is that futures are a nuanced product. I know Pete touched on this, but futures are they have nuanced knowhow. Futures are no different than stocks than are than stock options, than any other asset class. Could be digital assets, it could be anything else. They're just another asset class. The difference is with futures, they have non-standard multipliers, which means one contract, one point in one contract might be worth $50 in one underlying, $20 in another underlying, $100 in another underlying. And so we call those non-standard multipliers. Why do they have those? I don't know. I mean, it's just the way they've been doing business for, you know, a hundred years or however long it's been. So that is the only thing is that they're non they have non-standard multipliers. We would we hope at some point they all go to standardization and a straight decimalization and standardization of multipliers. But right now, if you trade, no matter what like listed stock option you trade, um, a dollar is a dollar. A dollar in IBM is the same as a dollar in Nvidia is the same as a dollar in Google is a dollar in Microsoft is a dollar in Apple. Okay, it's all the same. Or it's a dollar in Exxon Mobile. But if you trade different multipliers, like you trade options in the NASDAQ futures, it's $20 a point. If you trade options in the S&P futures, it's $50 a point. So different underlyings have different non-standard contract multipliers and that's the only thing you kind of have to get familiar with. That's nuance knowhow. Futures and this is just an important thing to know. Most futures contracts, not all but most futures contracts are approximately 10 times the size of most um 100 share ETFs. So in other words, let's say you were and some of them are a little nuanced again. So for examples, if you were trading the S&P 500 or the spiders, for example, the spiders are 15th the size of the S&P E- Minis. That's the regular ES. The um if you were trading the NASDAQ futures, they're about 800 shares of the QQQ. If you're trading the S&P, which is the cash, it's it's the it's the equivalent of 1/ half of a contract of SPX. So, it's it's not the same all across the board. And that's the only confusing part about futures is that they have non-standard multipliers and that or that's the most confusing part is they have non-standard multipliers and they're approximately 10 times the size of most ETFs. Not exactly, but approximately. Okay? because each one's a little bit different. So I thought I'd give you a couple examples here to show you. So ES which is the most popular and the most actively traded futures contract ES and the microcontract is MEES super simple. The the ratio of notional values is 10:1 in CL the um which is which is crude oil and the micro the micro in this case is MCL. It's 10 to1 meaning it's onetenth the size in GC which is gold. The micro is MGC and it's onetenth the size. And in 6E which is the euro because people do like to trade currencies. 6E is the euro and M6E is the micro euro and it's oneten the size. So that's in general kind of just to give you an idea of the microcontracts toward the the regular contract which is a mini and the micro contract in these cases is onetenth the size. These are four of the most actively traded minis and micros just so you can see. So there is some standardization but there could be other ones that are a little bit different as well. So as an option I like to consider myself as an option trader. Futures options and um equity options are about 93 94% of all the stuff that I trade. The rest is futures um stocks and digital assets. So what's important to take away here is there is little or no difference when making an intrammonth delta adjustment using futures options compared to equity options. So in the first part of our presentation today, if you went through the equity option piece and you learned to manage early, you learned to diversify, you learned what expected move was, you you you learned takeaway of some of the strategies, there is no difference in the roll forward piece. There is no difference in the adjustments we make. There is no difference in the manage at 50% of max profit. There is no difference in roll at 21 DTE. We use the same logic, the same mechanics, the same IVRs like IVR has to be over 30. Um, we use the same duration cycle. Optimal is 45 days to expiration. the math model, the the the variation of black shaws that we use, which is the math model that supports all our futures and fut all all our futures options trading and all our option trading is the exact same for futures options and for listed equity options. So we use the same logic, the same mechanics, the same IVR and the same optimal durations for futures options and regular listed options. And that's one of the that's something that a lot of people get scared of which makes them a little apprehensive about using futures options and we want to we want to just nip that in the bud. You know what? Don't worry about that. Use the exact same mechanics. All the optimal mechanics stay the same. So the rule for equity options and does it apply to futures options. So sell premium when the IVR is over 30. Yes. Manage options at 21 days to expiration. Yes. Sell closest to 45 days. That's when you're opening a trade. Yes. And roll the untested side when the short options are tested. Yes. Everything that we do rule everything that we do mechanical optimized rules for equity options are applied to futures options. It's the same game. Different underlying different different margin structure. The only thing for for for us is as as self-directed do-it-yourself investors is greater capital efficiency and more leverage. Greater capital efficiency with futures options and more leverage. So that means if we're successful, our returns are going to be magnified and they're going to add alpha to our equity returns because of the additional capital efficiency of futures options. I've done a couple different pieces on this over the last couple of years. We actually used to do a full seminar on futures options just talking about how much essentially how additive they were for portfolio returns and in some cases it can add as much as 35 to 50% of total portfolio returns just with the additional leverage. Very interesting. The reason people don't do only futures options is because there's a very limited universe of underlyings. It's somewhere between 7 to 10 that really are liquid enough to trade. The other ones are just, you know, the markets are a little thin for us. But where there is one tick wide price efficiency, which means wherever the mid price is, you move it one tick, you're filled, is about 7 to 10 different underlyings. And that's also during during trading hours, during the day, at night, the liquidity goes down a little bit in meaning the overnight sessions. It's usually just two or three different ones. So rolling futures positions. Now the optimal time to roll futures options is 21d. The optimal strike to roll to when you're rolling futures options because this confuses people because futures are not perpetual. So if you look at for example take a stock like IBM IBM doesn't ch the IBM is the underlying and so therefore the stock doesn't change from one expiration cycle to the next. Futures expire on a quarterly basis and each quarterly futures expiration is tied to a different underlying. So you can have because futures have what we call cost to carry. In some cases they have dividends built in. In other cases they have a cost to carry built in because there is no quote margin on futures. So the the cost to carry that basket of stocks or that position is built into the futures price. So they could have this this quarter's futures which may expire in December. the next quarter's futures which expire in March may be 20 $30 higher, maybe $2 higher, depends on the underlying. So what you do is you roll to the same delta, not necessarily the same strike. That's the only nuance difference. So when you're rolling futures options, you roll to the same delta, you do not roll to the same strike. And the only time to roll futures is when the active month officially becomes the front month. How do you know? you will either get um an email or a note from your brokerage firm or you will get a um on your watch list, the month will change on your watch list automatically for you. At at Tasty Trade, they change the month on the watch list for you and they send you an email letting you know the futures are rolling. Can't speak for other firms. So allocations based on net lick because I think this is important. So the first thing to know about futures or options or everything else is that we are product indifferent. We have started a crusade you know almost 13 years ago with respect to product indifference. We don't want people to think oh I'm a futures trader. Oh I'm an options trader. Oh I'm a stock trader. Oh I'm a I'm a cryptocurrency trader. Oh I'm an FX trader. There's no such thing anymore. Everybody, I grew up in this business as an option trader. But you know what? Today, I'm just a trader. I trade any product. I'm completely indifferent to product. You have to be indifferent to product because opportunity is indifferent to product. So, in 2023, we are all product indifferent. Wherever the opportunity is, wherever the capital efficiency is, that's where we go. Um, and that allows for more trades, that allows for different types of allocation. And again, wherever you can find the most capital efficiency, that's where you'll go to make certain trades. Span margin provides up to six times the leverage of traditional equity margin, which again allows for more incur allows for more occurrences, allows for more capital efficiency, and it allows for better diversification and more total positions in a portfolio. you use with futures a much smaller contract size due to the higher notional value. So what gets confusing is if you were to trade a five lot or a six lot or a three lot or a 10 lot of listed options, you're only going to do one contract of futures options. Okay, that's that's the difference. So smaller contract size due to higher notional contract size, but remember you're getting about six times the leverage in the overnight futures positions than you are in a listed option position. And I'll show you that in a couple seconds. What we usually say is we're going to commit significantly less capital to futures and futures options. In a total portfolio view that number might be 20 to 25% as it's not going to be 50 or 75% of total capital allocation just because of the greater leverage the greater margin and you know you're protecting the franchise. You're always protecting the franchise. Individual futures options positions should use 30% less capital than similar equity positions. That's just how you allocate the capital. So, if you're allocating, you know, if you're allocating, let's just say um you're allocating $10,000 to you're allocating $10,000 to equity option positions, you don't want to allocate much more than5 to $7,000 to similar futures options positions. The per trade size should be limited per trade size should be limited 2 to 4% of net lick. But in many cases it's in many cases that's going to vary based on the underlying and I say 2 to 4% which because that's just about 30% lower than we talk about for equity options. But here's the most important takeaway from this particular slide which is that futures allocation in a balanced self-directed portfolio should not exceed 20 to 25% of your net lick. you stick to those allocations, you're just about perfect on the futures portion of your portfolio. And to give you a little idea about this is one of the coolest things about futures and futures allocations based on net lick because the fact that you span margin, it's a little bit different than the equity side. So on the equity side, for example, if you trade a kind of like a a stock with high volatility or you trade a stock with low volatility, the requirements based on the price of the stock. So high volatility stock is going to have the same capital requirement by definition as a low volatility stock. Meaning you're going to be taking a lot more risk with a high volatility stock than you would with a low volatility stock. But you have to put up the same amount of capital which doesn't really make much sense. It's a little antiquated. It's a little outdated. In the futures world it's different. So as you can see here the S&Ps they require about 13 to1 leverage. And leverage will give you an idea of how what risk is. Where you have lower leverage factor you have more risk. So crude oil is 7-2. That shows that crude oil is much riskier than S&Ps. The euro is 38 to1 is I'm sorry is is the the euro is essentially 38 to1 leverage. So so it's a very different animal in in the euro in the sense that the volatility is really low. So they give you tons more leverage. Gold is 18 to1, bonds are 22:1, and natural gas is 3 12:1. So you get these you get to these different underlyings and you'll say things like, "Oh, wow. Natural gas must be pretty risky." It is. It is. Natural gas, which is only a $22,000 contract, has it cost se $5,700 to hold that contract overnight. And it is but it only has less than 4:1 leverage. whereas the S&Ps have 13 to1. So everything you can determine risk by leverage. You can also determine back of the envelope risk by buying power reduction. If you kind of want to know where your risk is, you always look at your buying power reduction. In this entire industry, just if you want a back of the envelope way of looking at risk, look at your buying power reduction. whatever the brokerage firm requires you to put up on for a specific to make a specific trade that usually goes out to about two standard deviations of risk and that is a very good measure of how much risk you're taking. So BPR is and the leverage behind BPR in the futures world is really a great back of the envelope way of determining what your risk factor is. Okay, now I'm going to take you on a brief discussion of pairs trading. And the reason I'm going to do this is because very few people talk about pairs. We kind of there's always been this this world of what we call basis ARB. Basis ARB is the difference between is trading the spread between two different underlyings. The essentially the spread becomes a product. When I grew up in this business, I was trading the spread between the S&P 100 and the S&P 500 for almost 20 years of my life. I traded that one particular spread. Made markets in the S&P 100 and I used the S&P 500 to hedge it. That's what we call pairs trading. At the time, we called it basis orb. When we got into the retail side of the business, we changed the name because basis or was too complicated and we made the name pairs trading. Now, with everything being electronic, pairs trading is essentially a great way or an interesting way to trade futures when you feel like there's a divergence in price. And what pairs trading does is it allows you to trade different futures products that are highly correlated against one another to reduce your risk and extend your duration. Again, th this is so interesting because it was never explained to us this way when we were on the floor trading and since we've built, you know, retail technology and we run a think tank right now and Tasty Life creates all this research. What we learned about pairs trading is it's a directional bet. There's no theoretical edge whatsoever, but you make the determination based on price extreme. And when you feel that either a spread has gotten too wide or a spread has gotten too narrow, like for example, when you feel like gold is too expensive relative to silver or silver's too expensive relative to gold or natural gas is too expensive relative to crude oil or crude oil is too expensive relative to natural gas or the S&Ps are too expensive relative to NASDAQ or the NASDAQ's too expensive relative to S&Ps. Those are all highly correlated underlyings. And what we do is you make the determination on which way the price is extreme. And then you buy one and sell the other. Because they're so highly correlated, the risk is reduced as opposed to doing one of them on their own naked. Either way, the risk is reduced by about 80 to 85%. On the CME website, you can actually see how much the risk is reduced because they post all the intermarket spreads and they show the risk reduction. So each one's a little bit different, but the average is between 80 and 85%. And the other beautiful thing about pairs is because you have offsetting positions and because they're so highly correlated, they extend duration, which makes them fascinating. So pairs trading is a strategy that diversifies diversifies a portfolio by taking advantage of or trying to take advantage of price extremes in correlated markets. It's important to account for contract size and implied volatility to determine how many to do. So, like for example, I'm going to do five two-year notes against against um against one 10-year note. I'm going to do I'm going to do five micro Russell contracts against two mini NASDAQ contracts because those are all we call VA adjusted notional. You'll learn that. It's not complicated. We'll show you in a couple seconds. Pairs trades are also referred to as basis arbitrate arbitrage because you're betting on the spread. You're not betting on either underlying. You're betting on the spread between each underlying. Most retail customers when they trade futures for any extended period of time when they want to give themselves time to be right, they trade pairs. So some interesting pairs I posted on the I'll post on this trade here. So what constitutes a pairs trade? Well, gold verse silver one one notes verse bonds two notes verse one bond ZN or notes ZB is bonds British pound verse euro two British pound contracts to one euro contract these are all these are all kind of standardized and standardized and you can see all the standardized pairs on the CME website if you want to go there these are taken directly from their website Russell vers NASDAQ 5 RTY to 2NQ Q or you can use the micro version of any of these. Corn verse soybeans two corn verse one soybeans corn is ZC soybeans is ZS. So again these are all highly correlated underlyings and they're all they're val adjusted notional so that the amount of capital committed to each side essentially equals each other adjusted for volatility. So it's essentially a longer duration trade. It's a highly correlated longer duration trade with a reduction of risk kicked into the back end. So why use pairs? Pairs are designed to be delta neutral and you're betting on the spread. You're using IV to adjust for the notional risk. You can also adjust adjust trade size by buying power reduction if you prefer. So the beautiful thing about about futures unlike listed options and and and underlying stocks is that in the futures world everything is vol adjusted. So if you use buying power you just use buying power to match up both sides. Pairs trades generally reduce risk by up to 85%. Like I just mentioned long or short it's easy. There's no additional requirements that are needed um to perform a short sell. You can long or short anything you want. There's no uptick rules or anything like that. There's also no pattern day trading. You don't have to worry about that for minis or micro contracts and micros have made pairs trading much more accessible to retail investors. So why use pairs trades? Because they're highly correlated and that gives you a sense of stability. It gives you a sense of um it gives you a sense of comfort knowing that you are long or short two highly long and short. Two highly correlated underlyings. Why use pairs trades? because they reduce the volatility of a naked futures trade or a static we call a naked futures trade a static futures trade. Pairs trades reduce the volatility of a static futures trade. How do you manage a pair trade? So this is the hard part. Since it's a very black and white trade, they are a pure directional bet on a spread or on the basis. So you can either reduce the size. So you've done a bunch of contracts, you can reduce size. That's one way to manage. Or you can manage by P&L. If you're up some money, you take a profit, then you might leave some on or just take the whole thing off. But you have to manage essentially by P&L. But generally speaking, we do not sell options against pairs because it complicates and kind of mucks up the um the trade itself. So we either reduce size or we close out some of the pos we reduce size or we take some of the position off. We tend not to sell options against the um futures trades and keep in mind that the tick sizes for futures products are not standardized. So just be careful there. It's not like you the again this is what we call nuance knowhow. Just be aware of this little thing called nuance knowhow. When you talk about futures, you you can't have a futures discussion without understanding that futures work the same way that stock options work. Futures options work the same way that stock options work. And that futures, the expected moving futures is virtually the same as the expected move stock. It's all just a derivative of implied volatility. So once you know what implied volatility is, you can tell what the one day expected move is in futures. So a 19% implied volatility in a future is going to equal an expected move of 1%. So for example, if just to give you an example, if if the S&Ps as measured by the VIX, if the S&P volatility is 17%. If the VIX is 7, the VIX futures are 17%, the VIX is 17%. The expected 1-day move in the S&P futures is just a hair under 1%. So knowing the daily, the weekly and monthly um expected move ranges helps you establish reasonable intraday price targets with respect to the options. The easiest way to do this and again this is a highly is to use a highly correlated ETF or to you can use the futures itself if you want of course but you can also use a highly correlated ETF to establish a futures implied volatility and then you can just take the expected move right from the ETF or you can take the volatility and then determine the you take the volatility from the ETF and determine the expected move from futures. It's a really cool back of the envelope way to do it. It's also a super simple way for really advanced technology um like they offer at Tasty Trade. Really advanced technology like that already does all that work for you and then it beta weights the futures um the futures implied volatility and beta weights it to the spy. So what you end up with is an expected move on any futures product that is given to you in spy terms. It's a very slick way of doing it and it helps to normalize and essentially commoditize all your positions whether they're futures, futures options, you know, um, regular options, stocks, whatever it is, everything gets beta weighted to spies off of the various futures ETFs. So, how do you determine expected move? Well, there's the same model that we just essentially gave you. So, if you wanted to know the math behind this, you can always go look up um in uh just go back to this slide or if you want to see, you know, there's there's a hundred different kinds of models around, but basically they all get to within within a basis point or two of the same number. So, I'm going to wrap this up with talking about probabilities and understanding why probabilities matter for futures options. The probability of the underlying closing one penny in the money is the per strike delta. So if you're looking at a futures options, I'm just going to give you I'm going to make up an example of of of an of a future. Let's just say I took a future. I don't even know if they have orange juice futures anymore. I don't I'm not even sure if they do. I don't think so. I'm just thinking back in my head to the old days of trading places. And let's say there was a crazy out of the money option and it was like it was you know it was at least close to two standard deviations away to the upside and you looked at it and it had a delta of five. So XYZ future has a delta of five and you looked at that you said what are the chances of this option going in the money. So as a buyer of that option you say well it's got a five because it has a delta of five so it has a 5% chance of going in the money. So, if you were buying it, you have a 95% chance of losing and a 5% chance of getting making of it being worth one penny. If you're selling it, you say I have a 95% chance of success because it's only got a 5% chance of going in the money. That's using the per strike delta to give you a probability or probabilistic outcome. Expected move. Understanding expected move helps you set the strike selection, helps you adjust different levels when you've already made a trade. It also helps you with setting exit targets based on, you know, if you're long something, where you want it to go, if you're short something, where an expectation, like you're not going to, if something has an expected move of $20, you're not going to play for it to move $50. I hope not. And if something has an expected move of $50, you're not going to play for it, you know, to move $100. It's just setting reasonable expectations. It matters for listed options. It matters for futures options.