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Futures Trading Strategies

Summary

  • Futures trading allows investors to speculate on the direction of a futures contract by buying (going long) or selling (going short) a futures contract.
  • Investors can speculate on price convergences or divergences by placing an outright futures calendar spread trade or pairs trade.
  • Futures are not subject to Pattern Day Trading rules.
  • The safeguards that futures exchanges have in place to maintain a sound marketplace may affect order submission and resting futures orders.

Outright Futures Trading Strategies

Investors can speculate on the direction of a futures contract by going long (buy to open) or short (sell to open) a futures contract. Moreover, investors noticing price convergences or divergences between different contract months of the same future, or between two separate futures contracts, can speculate by establishing an outright futures calendar spread trade or pairs trade, respectively.

Futures are not subject to Pattern Day Trading rules, unlike trading stocks or options. Investors seeking to speculate by day trading futures actively are not limited by how many day trades they perform within a trading session.

Buying/Long Individual Outright Futures

Investors speculating that the price of a futures contract will go up can establish a long position by buying to open the contract. An investor can profit from a long futures contract as the price rises. Losses occur when the futures contract price falls below the contract's purchase price or cost basis.

Selling/Short Outright Futures

Investors speculating that the price of a futures contract will go down can establish a short position by selling to open the contract. An investor can profit from a short futures contract as the price falls. Unlike long positions, losses occur from a short futures contract position when the price rises above the sale price.

Outright Futures Calendar Spreads and Pairs Trades

Investors who notice price deviations between different contract months of a specific futures contract or notice that prices between two separate futures contracts are inverse can speculate by placing an outright futures calendar spread trade or pairs trade.

An outright futures calendar spread, or intramarket spread, describes a strategy where an investor buys or sells the active month futures contract and performs the opposite order action on the same future in a back-month contract. It's important to note that investors can speculate between any two contract months of a specific futures contract. It’s worth noting that available contract months vary for each outright futures contract.

Similar to intramarket futures spreads, a futures pairs trade describes a strategy where an investor buys or sells a futures contract and performs the opposite order action to a different contract. Investors can speculate between the inverse price action of two futures contracts by placing a pairs trade.

Whether an investor speculates by establishing an outright futures spread trade or a pairs trade, both have the same goal of price convergence or divergence.

Before we discuss an example, it’s essential to understand what convergence and divergence mean in a futures calendar spread or pairs trade.

Convergence assumes the two products or contracts are at price extremes far away from each other. A convergence would profit when the prices of the two products moved towards each other over time.

Futures-Calendar-Spread-Convergence

For example, if we are long the front-month /MESH4 futures contract at 4,000 and short the back-month /MESM4 futures contract at 4,050, we would see profitability if the price of the front-month contract rose and the back-month contract fell. Of course, when the inverse occurs in the example above, we would see losses on both contracts.

TT1653_Futures-Calendar-Spread-Convergence02.png

The example above shows the spread narrowing from -50 points to -15 points due to the long front month /MES contract increasing 20 points for a $100 gain (20 pts x $5) and the short back-month /MES contract dropping by 15 points for a $75 gain (15 pts x $5). This equates to $175 total profit between the two contracts ($100 + $75).

Conversely, traders can speculate on a divergence. Traders speculating on a divergence assume the price of each futures contract in an outright futures calendar spread will move away from each other over time.

Futures-Calendar-Spread-Divergence

For example, let’s say we are short the front-month /MESH4 futures contract at 4,000 and long the back-month /MESM4 futures contract at 4,050. We would see profitability if the price of the front-month contract fell and the back-month contract rose. Both contracts are moving away from each other or diverging. If the price of both contracts started moving toward each other, in this example, a loss would incur.

Futures-Calendar-Spread-Divergence

The example above shows the spread widening by 10 points due to the short front-month /MESH4 contract dropping by 10 points (from 4,000 to 3,990) for a $50 gain (10 pts x $5) and the long back-month /MESM4 contract rising by 10 points. This equates to a $100 profit between the two contracts.

Before establishing, it’s essential to fully understand the risks of futures calendar spreads and pairs trades. The tastytrade desktop trading platform has the Pairs Trading mode for investors seeking to establish futures spread or futures pairs trade. Please visit the tastytrade Help Center to learn more about the Pairs Trading mode.

How to Place a Futures Trade

Like the start of any trade, it all starts with entering the futures root symbol into the active symbol field at the top of the tastytrade desktop trading platform. The tastytrade Help Center also has video instructions on how to set up a futures trade on the platforms.

Do you need a refresher on the symbol methodology for futures contracts or the symbol for a specific contract? Refer back to our How Futures Quote and Price section.

How to set up a Long Futures Trade

  1. Enter the futures root symbol.
  2. Click on the Ask price.
  3. Go to the order ticket to determine the quantity, price, time-in-force (TIF), etc., before clicking Review and Send. Verify your order including commissions and fees before clicking Send to place the order.
long futures

Directional Bias

Bullish

Buying Power Effect

Cash account: not allowed

IRA* & margin account: overnight requirement

Max Profit

Unlimited

Max Loss

Unlimited

Breakeven Price

Purchase price

Account Type Required

Margin with The Works

IRA The Works

* Establishing an outright futures position in an IRA account requires 125% or 1.25X the standard overnight requirement. Please visit the tastytrade Help Center to learn more about buying power requirements when establishing a futures position in an IRA.


How to set up a Short Futures Trade

  1. Enter the futures root symbol.
  2. Click on the Bid price.
  3. Go to the order ticket to determine the quantity, price, time-in-force (TIF), etc., before clicking Review and Send. Verify your order including commissions and fees before clicking Send to place the order.
How to short futures on the tastytrade platform

Directional Bias

Bearish

Buying Power Effect

Cash account: not allowed

IRA* & margin account: overnight requirement

Max Profit

Unlimited

Max Loss

Unlimited

Breakeven Price

Purchase price

Account Type Required

Margin with The Works

IRA The Works

* Establishing an outright futures position in an IRA account requires 125% or 1.25X the standard overnight requirement. Please visit the tastytrade Help Center to learn more about buying power requirements when establishing a futures position in an IRA.

Features like the Active Trader Interface on the tastytrade desktop platform are purpose-built for active futures traders.

At tastytrade, margin accounts with our highest trading level, "The Works," can trade futures after enabling it. While there is no minimum to enable futures trading, investors must have enough account equity to satisfy the overnight or SPAN requirement when establishing a futures position. Futures trading is also available in IRAs with our highest trading level, "IRA The Works," after satisfying account minimums.

Please visit the tastytrade Help Center to learn more about our trading levels, including how to enable futures trading after your account is open and minimums for IRAs.

Futures Trading Capital Requirements

The idea of paying when buying and collecting cash when selling is widely understood when considering buying or selling any asset. However, when trading outright futures contracts, that changes a bit.

Since an outright futures contract is a binding agreement between two parties, an agreement is established between two parties when opening a futures position. Unlike other asset classes where you pay to go long or collect proceeds when going short, with outright futures contracts, investors do not "pay" or "collect" anything when establishing a futures position. Instead, they assume the risk of the contract being long or short from that point.

This section covers what's required when opening an outright futures position and how it differs from other asset classes. This section can help investors seeking to expand from equity or equity options trading to futures by understanding the unique nature of the capital required to open an outright futures position.

OVERNIGHT REQUIREMENTS

After enabling futures trading, investors looking to trade outright futures contracts must satisfy the overnight requirement to establish a long or short futures position.

The overnight requirement is the dollar amount investors must have in available options buying power (non-marginable equity) to open an outright long or short futures contract position. Moreover, it's important to note that the futures exchange determines the overnight requirements for each contract.

Even if you do not plan on holding a futures contract overnight, investors looking to trade them must satisfy the entire overnight requirement to establish a position. The overnight requirement amount will also vary by contract, with Micro E-mini contracts generally requiring a fraction of their E-Mini counterpart. It's important to note that the overnight requirement of a futures contract could increase or decrease throughout each trading session, especially during periods of heightened volatility, and require additional capital to maintain the position.

Lastly, it is essential to note that the overnight requirement investors must post when establishing long or short futures positions is not exactly a "cost." After closing an outright futures position or holding any financially settled futures to expiration, the held overnight requirement will be released back to your buying power, net any final gain or loss, commissions, and closing fees.

Please visit the tastytrade Help Center to view a complete list of available futures contracts, including the real-time overnight requirement for each contract.

Futures trading in an IRA is subject to account minimums and additional suitability requirements. Please visit the tastytrade Help Center to learn about IRA minimums for futures trading, including instructions on potentially upgrading to "IRA The Works."

INTRADAY FUTURES MARGIN

Investors seeking to trade futures intraday from 8:30 AM to 3:00 PM CT and not carry them overnight or establish options on futures positions against their outright futures position can utilize intraday futures margin for additional leverage. Intraday futures margin is only available for non-IRA margin accounts.

Investors eligible for intraday futures margin only need to post 1/4 of a future's overnight requirement, effectively providing investors with 4X futures leverage. For example, an investor with intraday futures margin enabled looking to establish a futures contract with an overnight requirement of $10,000 will only have to post $2,500 per contract to establish a long or short outright futures position instead.

It's important to note that outright futures contracts, by their nature, are already leveraged products. By enabling intraday futures margins, investors can yield accelerated profits if the position works in their favor. However, it can expose investors to accelerated losses too.

Lastly, any outright futures contracts held after the stock market close (3:00 PM CT) on days when markets are open will revert to the standard overnight requirement. Investors with insufficient account equity to maintain those positions established may incur a negative buying power and be required to liquidate positions to free up account equity or become subject to a Futures Maintenance (FM) Margin Call.

Please visit the tastytrade Help Center to learn more about account minimums to enable intraday futures margins and much more.

Intraday futures margin trading hours differ for Agricultural and Livestock futures due to their unique trading hours.

All investments involve risk of loss. Please carefully consider the risks associated with your investments and if such trading is suitable for you before deciding to trade certain products or strategies. You are solely responsible for making your investment and trading decisions and for evaluating the risks associated with your investments.

Futures and futures options trading is speculative and is not suitable for all investors. Please read the Futures & Exchange-Traded Options Risk Disclosure Statement prior to trading futures products.


tastytrade, Inc. (“tastytrade”) does not provide investment, tax, or legal advice. tastytrade’s website and brokerage services are not intended for persons of any jurisdiction where tastytrade is not authorized to do business or where such products and other services offered by the tastytrade would be contrary to the securities regulations, futures regulations or other local laws and regulations of that jurisdiction. Options involve risk and are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially significant losses. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC). All customer futures accounts’ positions and cash balances are segregated by Apex Clearing Corporation. Futures and futures options trading is speculative and is not suitable for all investors. Please read the Futures & Exchange-Traded Options Risk Disclosure Statement prior to trading futures products.

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