Throughout the past year, I took up trading the global financial markets and learned about all aspects of trading various instruments. The trading of Derivatives quickly became my go-to due to the fast pace and global macro nature. Now, these are involved instruments and will require further research on your part, but I am banging out a data sheet for those that have thought about getting into this sort of trading but never knew where to start (I know I had no clue). We have stock threads, but I wanted something a little more dedicated to futures and options as well. I will go through everything you will need to know to start, and can go further in-depth if you guys enjoy what I throw down here.
How I got started
I started investing in the stock market at the age of 16, and had the basic understanding that if a stock goes up, you make money, if a stock goes down, you lose money. I didn't even know you could short stocks, what a stop loss was, or how to read candlesticks. In fact, I got my "ideas" from watching Jim Cramer's show "Mad Money" on CNBC. For those of you in the know, Cramer has probably lost more people money than any other personality in the world. But, it was a Bull Market, and I quickly made 40% on my portfolio, and thought of myself as a god/genius. Little did I know I simply got lucky, just like thousands before me in the dot com run of the late 90s. I had no sense of risk management, no exit strategy, and in all honesty, no fear of loss (as I literally couldn't lose).
Although this was my primer to getting far more serious about investing and trading, it was clearly a beginning built on a foundation of sand. I would learn very quickly through losses that I had no understanding whatsoever. But, it got me started, and as the saying goes, the hardest part is starting. In the following years, I would go on to do quite decently in the equities markets even though I was paying $9.99 a transaction at a bank run brokerage. This year was the year that I got sick of paying so much to open and close trades that I took my business to an independent brokerage and began looking into the depths of wall street, in which I would come out on the other side trading derivatives.
What you will need to begin
You will absolutely need a brokerage account and a bit of money. You cannot use a bank brokerage, as these instruments are riskier, and most don't support it at all (frankly I don't think most retail bankers even know about this stuff). Most brokerages will require a minimum of $2000, but to really begin, you'll want closer to $10 grand. I'll touch on this later, but it allows you to risk more money while subsequently risking less overall % of your account.
I recommend Interactive Brokers as a brokerage. I use them, and their execution of trades is exceptional, their commissions are some of the lowest in the business, and their platform is fairly straight forward, but also allows for you to grow with it and even perform involved algos and more. TD Ameritrade and their platform Thinkorswim is also a great alternative, as I have many friends that use them.
What is a Derivative?
If Micheal Moore can't understand them, you most certainly can
There are three main types of Derivatives in the world of finance. Options/Warrants, Futures/Forwards, and Swaps.
Swaps are for all intents and purposes out of our scope, as they are pretty much only available to institutional traders. These are where Credit Default Swaps, CDOs, and interest swaps fall. They are effectively a way for a bank to lend at more favorable rates to different parties by taking the interest rate offered to a better credit individual (in most cases "individual" refers to a company or business of size, or a person looking for a big loan [think mortgages]) and performing some financial magic to offer a better rate to an individual with a worse credit standing. If you want to know more, I can direct you to some videos to watch, but I don't really understand them myself.
Options/Warrants are pretty much interchangeable terms. There are two types of options: Call Options and Put Options. These give the owner the right but not the obligation to buy or sell an underlying instrument at a set date sometime in the future. You can buy options on futures, forex, stocks, bonds, and indices and all of these are referred to as the underlying asset. Calls simply give you the right to buy stock at a later date. Puts allow you to sell it at a later date. We can get super technical and talk about how options are priced via the Black-Scholes model, Implied Volatility, and the Greeks, but for the average person, you buy a call option if you think the stock is going up, and you buy a put if the stock is going to fall. Knowing this will already make you more financially literate than 85% of people.
Why buy an Option instead of just a share of stock?
1. Options limit your downside. You know what you stand to lose at the entry of a trade.
2. Options provide you with leverage. The standard option contract is for 100 shares of stock. So with a small investment, you control 100 shares. If Apple is trading at $100, you can control one share for $100, or you can control a call option worth $100 that is for 100 shares. You control all these shares and profit on the increases of the underlying stock. I can effectively make 200% on a 2% move in the underlying stock.
3. Options allow you to hedge your risk and exposure.
Example: I may think AAPL stock is going to rise in the future and it is trading at $100/share. I have $100 to spend. I could buy 1 share, or I could buy a 105 Call option for January 20th for $100. If AAPL is trading at 110 on January 20th, I just made $500 (as I control 100 shares: 110-105= $5 and $5 x 100 = $500). Simply buying one share would have only made me $10 profit.
As you can see, with $100, I made far more money than simply buying a share of stock. I know that the most I will lose is $100, as it was the purchase price of my Call option, and if AAPL is trading below 105, I will have lost all this money. This is a purely speculative way to make a lot of money, but you can also lose a substantial amount of money too. If AAPL was trading at $99 and I bought the share, I would have only lost $1. But if it was trading at $99 and I bought the option, I would have lost ALL my initial investment ($100). Cool, but also risky. How do you know if a stock is going to go up? The answer is you truly don't, but you can make educated guesses via technical analysis in the short term, and look for trends. I won't touch on this, as everyone has their own methods, and they vary widely from person to person. I recommend researching the various technical indicators, and in time, you will learn what works for you.
Futures Futures contracts are contracts that obligate a buyer or seller to buy or sell something in the future at a pre determined date. Futures lock in a price of purchase in the future (hence the name; futures). This is where options and futures differ: options you don't have to do anything, futures you do. So that means that if you are trading a contract for 1000 barrels of crude oil, you will actually take physical delivery if you don't close out your position. There have been stories of banks that didn't know this, were trading 50,000 pounds of cattle, didn't close their position, and a convoy of trucks showed up to deliver a couple hundred head of cattle. Most often, traders close out their positions at the end of the day or at the end of a trend, so this isn't a worry. You would actually be retarded to take delivery of a contract, unless it was your intention (as with physical commodity traders such as Vitol or Glencore, but even then, they use these contracts almost exclusively to hedge price risk during transit).
Why trade futures contracts?
1. Hedging Price risk if you are a producer of a commodity. Farmers want to lock in the price of their corn so they know they will be making a certain profit in the future, and consumers that buy the corn want to know the price they will be paying for the corn. They will then write out a contract and lock in prices. The fluctuation of prices are then left for speculators to bet on.
2. Speculating
What is the purpose of derivatives?
Derivatives are actually supposed to make investments safer, not riskier. You can use options contracts to limit your downside and lock in profits on shares that you own. If you own a stock at 200, and you want to lock in profit at 190, you can buy a put option that allows you to sell 100 shares even if the stock falls all the way to $20 a share! If you are an oil producer, locking in a future price for your product is imperative to the financial stability of your company.
I personally speculate with Derivatives
I use derivatives to speculate on price movements. When oil gained 9% in one day, I was there to ride the wave and make money. When The election came around, I bought options in various underlyings to bet on a Trump presidency. The understanding I have gained over the past year has lead me to profiting on some big moves, making thousands, and also losing thousands of dollars as I gained my education. The learning curve of trading is big, and you will lose money in the short term. Consider it your college education, and learn from your mistakes quickly.
I started out completely illiterate with regards to derivatives and their functions. I lost money to learn. I was impatient in the beginning, and learnt about risk management with trials by fire. Why do I still trade today?
Trading is fun. Plain and simple. With proper risk management and an understanding of the markets, it has been profitable too. This thread will be all about derivatives trading, and helping each other out in getting better, trading strategies for derivatives, and learning more about these "shady" instruments. You know if the general public is afraid of something, it's probably pretty cool.
That being said, trading is not for everyone. Some can't deal with losing money. Some can't watch fluctuations in prices without pulling out their hair. But, understanding these financial instruments will make you a better investor, and able to truly say you know about something that the vast majority of people don't. And I find that fascinating in and of itself.
Let's open up this thread, and if you have any questions, I'll be happy to answer them! I by no means am an expert, but this is a thread to bring up the skills and abilities of the forum in the art and science of derivatives.
How I got started
I started investing in the stock market at the age of 16, and had the basic understanding that if a stock goes up, you make money, if a stock goes down, you lose money. I didn't even know you could short stocks, what a stop loss was, or how to read candlesticks. In fact, I got my "ideas" from watching Jim Cramer's show "Mad Money" on CNBC. For those of you in the know, Cramer has probably lost more people money than any other personality in the world. But, it was a Bull Market, and I quickly made 40% on my portfolio, and thought of myself as a god/genius. Little did I know I simply got lucky, just like thousands before me in the dot com run of the late 90s. I had no sense of risk management, no exit strategy, and in all honesty, no fear of loss (as I literally couldn't lose).
Although this was my primer to getting far more serious about investing and trading, it was clearly a beginning built on a foundation of sand. I would learn very quickly through losses that I had no understanding whatsoever. But, it got me started, and as the saying goes, the hardest part is starting. In the following years, I would go on to do quite decently in the equities markets even though I was paying $9.99 a transaction at a bank run brokerage. This year was the year that I got sick of paying so much to open and close trades that I took my business to an independent brokerage and began looking into the depths of wall street, in which I would come out on the other side trading derivatives.
What you will need to begin
You will absolutely need a brokerage account and a bit of money. You cannot use a bank brokerage, as these instruments are riskier, and most don't support it at all (frankly I don't think most retail bankers even know about this stuff). Most brokerages will require a minimum of $2000, but to really begin, you'll want closer to $10 grand. I'll touch on this later, but it allows you to risk more money while subsequently risking less overall % of your account.
I recommend Interactive Brokers as a brokerage. I use them, and their execution of trades is exceptional, their commissions are some of the lowest in the business, and their platform is fairly straight forward, but also allows for you to grow with it and even perform involved algos and more. TD Ameritrade and their platform Thinkorswim is also a great alternative, as I have many friends that use them.
What is a Derivative?
If Micheal Moore can't understand them, you most certainly can
There are three main types of Derivatives in the world of finance. Options/Warrants, Futures/Forwards, and Swaps.
Swaps are for all intents and purposes out of our scope, as they are pretty much only available to institutional traders. These are where Credit Default Swaps, CDOs, and interest swaps fall. They are effectively a way for a bank to lend at more favorable rates to different parties by taking the interest rate offered to a better credit individual (in most cases "individual" refers to a company or business of size, or a person looking for a big loan [think mortgages]) and performing some financial magic to offer a better rate to an individual with a worse credit standing. If you want to know more, I can direct you to some videos to watch, but I don't really understand them myself.
Options/Warrants are pretty much interchangeable terms. There are two types of options: Call Options and Put Options. These give the owner the right but not the obligation to buy or sell an underlying instrument at a set date sometime in the future. You can buy options on futures, forex, stocks, bonds, and indices and all of these are referred to as the underlying asset. Calls simply give you the right to buy stock at a later date. Puts allow you to sell it at a later date. We can get super technical and talk about how options are priced via the Black-Scholes model, Implied Volatility, and the Greeks, but for the average person, you buy a call option if you think the stock is going up, and you buy a put if the stock is going to fall. Knowing this will already make you more financially literate than 85% of people.
Why buy an Option instead of just a share of stock?
1. Options limit your downside. You know what you stand to lose at the entry of a trade.
2. Options provide you with leverage. The standard option contract is for 100 shares of stock. So with a small investment, you control 100 shares. If Apple is trading at $100, you can control one share for $100, or you can control a call option worth $100 that is for 100 shares. You control all these shares and profit on the increases of the underlying stock. I can effectively make 200% on a 2% move in the underlying stock.
3. Options allow you to hedge your risk and exposure.
Example: I may think AAPL stock is going to rise in the future and it is trading at $100/share. I have $100 to spend. I could buy 1 share, or I could buy a 105 Call option for January 20th for $100. If AAPL is trading at 110 on January 20th, I just made $500 (as I control 100 shares: 110-105= $5 and $5 x 100 = $500). Simply buying one share would have only made me $10 profit.
As you can see, with $100, I made far more money than simply buying a share of stock. I know that the most I will lose is $100, as it was the purchase price of my Call option, and if AAPL is trading below 105, I will have lost all this money. This is a purely speculative way to make a lot of money, but you can also lose a substantial amount of money too. If AAPL was trading at $99 and I bought the share, I would have only lost $1. But if it was trading at $99 and I bought the option, I would have lost ALL my initial investment ($100). Cool, but also risky. How do you know if a stock is going to go up? The answer is you truly don't, but you can make educated guesses via technical analysis in the short term, and look for trends. I won't touch on this, as everyone has their own methods, and they vary widely from person to person. I recommend researching the various technical indicators, and in time, you will learn what works for you.
Futures Futures contracts are contracts that obligate a buyer or seller to buy or sell something in the future at a pre determined date. Futures lock in a price of purchase in the future (hence the name; futures). This is where options and futures differ: options you don't have to do anything, futures you do. So that means that if you are trading a contract for 1000 barrels of crude oil, you will actually take physical delivery if you don't close out your position. There have been stories of banks that didn't know this, were trading 50,000 pounds of cattle, didn't close their position, and a convoy of trucks showed up to deliver a couple hundred head of cattle. Most often, traders close out their positions at the end of the day or at the end of a trend, so this isn't a worry. You would actually be retarded to take delivery of a contract, unless it was your intention (as with physical commodity traders such as Vitol or Glencore, but even then, they use these contracts almost exclusively to hedge price risk during transit).
Why trade futures contracts?
1. Hedging Price risk if you are a producer of a commodity. Farmers want to lock in the price of their corn so they know they will be making a certain profit in the future, and consumers that buy the corn want to know the price they will be paying for the corn. They will then write out a contract and lock in prices. The fluctuation of prices are then left for speculators to bet on.
2. Speculating
What is the purpose of derivatives?
Derivatives are actually supposed to make investments safer, not riskier. You can use options contracts to limit your downside and lock in profits on shares that you own. If you own a stock at 200, and you want to lock in profit at 190, you can buy a put option that allows you to sell 100 shares even if the stock falls all the way to $20 a share! If you are an oil producer, locking in a future price for your product is imperative to the financial stability of your company.
I personally speculate with Derivatives
I use derivatives to speculate on price movements. When oil gained 9% in one day, I was there to ride the wave and make money. When The election came around, I bought options in various underlyings to bet on a Trump presidency. The understanding I have gained over the past year has lead me to profiting on some big moves, making thousands, and also losing thousands of dollars as I gained my education. The learning curve of trading is big, and you will lose money in the short term. Consider it your college education, and learn from your mistakes quickly.
I started out completely illiterate with regards to derivatives and their functions. I lost money to learn. I was impatient in the beginning, and learnt about risk management with trials by fire. Why do I still trade today?
Trading is fun. Plain and simple. With proper risk management and an understanding of the markets, it has been profitable too. This thread will be all about derivatives trading, and helping each other out in getting better, trading strategies for derivatives, and learning more about these "shady" instruments. You know if the general public is afraid of something, it's probably pretty cool.
That being said, trading is not for everyone. Some can't deal with losing money. Some can't watch fluctuations in prices without pulling out their hair. But, understanding these financial instruments will make you a better investor, and able to truly say you know about something that the vast majority of people don't. And I find that fascinating in and of itself.
Let's open up this thread, and if you have any questions, I'll be happy to answer them! I by no means am an expert, but this is a thread to bring up the skills and abilities of the forum in the art and science of derivatives.
"Money over bitches, nigga stick to the script." - Jay-Z
They gonna love me for my ambition.
