Daily Tip - Index Futures
In our daily tip today, we will take a break from Volatility and continue on “Trading of Index Futures”.
Our mind is blown away seeing the tremendous profits that a small capital is bringing when trading index futures.
I am sure you would also like to learn this aspect which will bring a new perspective to your investment strategies.
Our basic approach
Now a days, we stay away from individual stocks. All we do is Volatility and Indexes which follow a math and logic. And of course, we are in Crypto’s in a small way. We are very rigid that we do not touch individual stocks, leave alone trade them.
The Right Brokerage
If you are inclined to trade Index Futures, then you need the right brokerage.
You can use the below referral link to open a tastyworks.com account
Remember that once you have a tastyworks.com account, you need to be approved for futures by them. It is a simple, one click application that you make at tastyworks.com.
Understanding the tickers, tick, tick value and initial margin
We already covered this in one of our blogs. Please review it at the below link
The strategy we follow is pretty simple. Let us take E-mini S&P 500 (/ES) as an example. We deal with March contracts – so the ticker is /ESH8.
Currently ESH8 is priced around 2,844 at the time of writing this daily alert.
The strategy is to buy 1 contract now or at a dip. One way to look at it is, this is a rather safe trade. Just hold it till end of 2018. Of course, you would have to roll the contract 3 more times as ES contracts expire in March, June and September.
The general consensus is S&P 500 will be 3,000 or 3,100 by end of December 2018. If this happens, taking 3,000 as the price of ES, we are looking at a profit of (3000 – 2844) = 156 which in dollar value comes to 156 x 4 (ticks) x $12.5 (tick value) = $7,800
Remember, 1 ES contract has an investment of $4,950.
So, your ROI is (7,800/4,950) x 100 = 157% annual ROI
The above strategy of buy & hold ES for 1 year is good for a passive investor who is not in front of a computer screen 24 x 7. But what if you want to actively trade these index futures?
We wanted to. So we thought that we will ask our developer to develop a software algorithm that can automate our trading activities for index futures.
Here is the high level logic of the algo. Normally, no one shares such “valuable” tips / tricks / intellectual property and that too free. However, for us sharing our learning has become a passion and so here is what we do.
I Buy 1 ESH8 contract now or at a dip. If the price rises – say 8 to 10 ticks, sell and book profits. 10 ticks would give me a decent $120 profit ($12.5 x10 minus $5 commission & fees).
As soon as the contract is sold, place a buy order for 1 ES at a price of 2 ticks below the current ask price. I are surprised that most of the times, as soon as I are able to sell the ES on hand, I are successful in buying another ES at a price 2 ticks below the sold price.
But let us look at the negative scenario. What if I bought 1 ES. And the price keeps on dropping. Well, surely, I am at a loss. After an appreciable fall of 25 to 30 ticks (and one can refine this based on the market conditions), I buy 1 more ES.
Bottom line, invest no more than 2 contracts per index. That is a maximum $10,000 investment at any point of time.
Now if the price rises, sell the second ES contract and book profit and immediately place another ES buy order for 1 more ES.
No Charts, No Bollinger Bands
A friend spoke to tastyworks.com Futures support and they said that Bollinger Bands for futures is not reliable. We prefer to still perform the above logic and till the time the software algo is developed and implemented, we are performing the logic manually with great success.
Advantages of Trading Index Futures
Trading 24 x 7, very low capital requirement (just $5,000 per contract) and tremendous tax benefits are some of the advantages. We are planning to write another book on index futures and we will deal with these advantages in more details in the book.
Webinar of Index Futures
We will be holding our next FREE webinar with Brennan on “Trading Index Futures” soon. There, we intend going though the above methodology, which I am sure you would have lots and lots of questions. There is no selling here. All these communications including webinar are totally free.
And finally the disclaimer
This is not investment advice. Please do your due diligence!!
Thanks and Happy Shorting Volatility
Even if one life is changed by our educational attempts, we would consider our efforts in writing the book a success.
The material in this newsletter, the website http://TradingVolatility.info as well as in the book "Trading Volatility - Using the 50-30-20 Strategy" is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. As an investor, you are fully responsible for any investment decision that you make.