INTRODUCTION TO FUTURES

Futures contracts are financial instruments focused on discovering the price of a

specific commodity or asset at a specific time in the future. A futures contract allows a
trader to speculate on the direction of the security. You have the obligation to buy (long)
or sell (short) based on leverage.

Key notes on Futures:

❖ In futures contracts, there is no theta (or greeks). Trading futures are like trading
stocks.
➢ When volatility is high, IV (or theta), the futures contract is not affected like
option contracts are. Vist TAE Eductaction on options trading for a refresh
on theta and volatility.
❖ Futures are leverage. No premiums, and primarily price action based.
➢ Trading futures are the best form of practice to read price action. Futures
are the most liquid common asset.
➢ Focus on key levels. When the market gets to those levels, you want to
judge how the market reacts to that price and then make your conviction
from there.

What is Margin?

Simply put, margin is essentially a good-faith deposit. To our benefit, it represents a

small percentage of the dollar value of the contract you have agreed to buy or sell at a
future date. There are two types of margin, initial margin and maintenance margin.

Initial margin is the amount of cash (small percentage of the position) you must have in
your account at the time of entry. Maintenance margin is the amount of cash that must
be maintained in the account to continue to hold the futures position.

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Speculators vs. Hedgers

Similar to stock trading, speculators in futures use both fundamentals and technical
analysis (price action) to generate signals as to the future price movements of a specific
contract. The volume of trading generated by speculators provides liquidity for hedgers.

Hedgers use the futures market to combat the price risk that is inherent in their
business. Stock traders and option traders can use the options market as a great
hedging tool as well. For example, if you swing options long, and price action is bearish,
then you can trade futures in the opposite direction to hedge your loss.

Where is the best place to start?

❖ Brokerages
➢ Tradovate
➢ NInja Trader
➢ TD Ameritrade
❖ Micro Contracts
Micro E-mini futures are smaller versions of the traditional E-mini stock index
futures contracts (1/10th the size).
➢ Micro E-mini S&P 500
■ Dollar value per tick: $1.25
➢ Micro E-mini Nasdaq-100
■ Dollar value per tick: $0.50
➢ Analyze the big “macro” picture to determine key levels (5 min. chart),
then determine the entry via price action (15 sec. chart).

Key points to consider:

❖ How strong is the market?

❖ What are the emotions of the market?
➢ For example: If buying pressure is high (they were happy to buy), but
selling pressure is constant, is this an opportunity to short?
❖ Price action is all about reading the emotions of the market.

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