Probability of Profit Trading Futures and Options

Each position one establishes should involve the analysis of not only the market trend and particular bias, but the likelihood that a move in the futures or options contract is going to produce a reasonable profit after slippage and commissions. I have been publishing a Nightly Futures and Options Report every evening on www.insidefutures.com. In this report, I focus on the Dollar Value Range of many commodities. This number, the greater it is, provides a better opportunity to trade a market where commissions will not have a substantial impact on profitability. It is a rather obvious thought, but not always considered when trading, particularly options trading.

Let’s analyze the theory. Given one price for commissions, and a profile of similar slippage and fair value for options settlements, if one Buys a 10% out-of-the-money Call Option on March Coffee for $3,536.25 (March $1.85 Calls) versus Buying a 10% out-of-the-money Call Option on March Sugar for $1,612.80 (March 21.25 Calls) the impact on the transactions, based on commissions as a percentage of the value of the transaction is quite large. The point is that as a percentage of risk/reward, it is better to trade the larger contract because commissions will have a significantly softer impact on long-term profitability. For those lacking the financial resources to trade larger contracts, the likelihood of making money for a substantial period of time, is limited.

In my Nightly Futures and Options Report, the following markets are amongst those with the largest Dollar Value Average Trading Range and substantial liquidity: Coffee, S&P, Nasdaq, Euro, Wheat, Crude Oil and Gold. For those of you with a directional bias in any of these markets, the options and futures contracts provide an excellent long-term probability of profit versus commissions. The Options Contracts provide traders with the opportunity to build positions while analyzing the implied and historical volatility and skew. If you have a certain market bias, I can assist you in meeting your goals by designing an options strategy that makes sense. Call me to test out the theory and I’ll explain why commissions and contract size are so important. I’m so convinced of the theory that I’ll share the trade with you commission free. I can be reached at 347-949-4546.

All options on futures strategies involve implied and historical volatility and skew analysis. Vega, gamma and delta calculations are also monitored. In addition, understanding slippage is essential. Please call me to be sure you are using the correct strategy for your needs. You can call me directly at 212-383-9453 or reach me at fred.oltarsh@libanman.com. You can also visit our website www.libanman.com.

FUTURES AND OPTIONS TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. INFORMATION IS OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT IS IN NO WAY GUARANTEED. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS