Stock Market: FUTURES INTRODUCTION | Scott Reese | Skillshare

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teacher avatar Scott Reese, Engineer & Investor

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Lessons in This Class

7 Lessons (55m)
    • 1. Introduction

    • 2. What Are Futures?

    • 3. Price & Notional Value

    • 4. Tick Size & Symbols

    • 5. Futures Markets

    • 6. Explaining Margin

    • 7. Wrapping Up

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About This Class

So what are futures? These are financial products similar to options, yet they come with a few key advantages such as far better capital efficiency (due to greater leverage). Futures allow you to speculate on price direction for a vast variety of products (oil, gold, interest rates, the S&P 500, etc.), and through the superior leverage they offer, you can generate very large returns on a small amount of capital. However, there are always risks involved, so if you're interested in learning more about these products, this is the course for you!

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Scott Reese

Engineer & Investor


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1. Introduction: did you know you can trade more than just stocks and options and financial markets? If so, then perhaps you've heard of futures. And if not, well, now is the time to learn about them. Futures contracts are form of derivative, just like options, but they're much more simplistic in nature and also come with some huge advantage is the biggest of which is great capital efficiency because of the much greater leverage that comes the trading. These products simply stated, that means you can put up a small amount of capital and make much bigger gains with that capital than if you were to trade, say, stock or options. Now that also means, however, you can incur much bigger losses as well. But don't worry. This course will show you all the INS announce of how futures contracts work on all the risks and advantages that come with them, so that by the end of the course, you can start trading this products with confidence. And this is the first course of mine that you've come across. My name is Scott Reese. I'm a soft engineer currently in the financial services industry, animals, an options trader, and my strategy is all about selling options when implied Volatilities high and I always give myself high probabilities of success on every trade. So whether you're trading options like me or stock or for actual whatever, introducing futures, trading into your strategy could be a great way to diversify your portfolio. So if a lot being said, let's dive in. 2. What Are Futures?: All right, Welcome to the first video, this course on introduction to futures contracts and this first video here. I just want to give you a high level overview of what future contracts actually are. You have a good foundation for when we move forward in this course, and we start getting into the more nitty gritty details and specifics of how these contracts work. So to kick things off, what is a futures contract, Right? Well, the basic definition in which I have written up right here it's simply a contract that obligates one to either buy or sell a certain quantity of a product for a predetermined price at some point in the future. And the predetermined price is basically just the price of the contract, and the some point in the future is the expiration date of the contract. Futures contracts are actually very similar to options contracts. If you have any familiarity with those financial products, they're both a form of derivative. That's the technical way you can refer to these kinds of products, meaning their price for their value is derived from something else. If we're talking about call and put options on Apple stock for example, the prices of those options are derived from things like the price of Apple stock. The strike price implied volatility, interest rates, the time left to the expiration date. Things like that. Futures contracts work the same way. Their value. The price of the contracts are drive from similar things, like the the current trading price of the underlying product, whether that's crude oil or gold, silver wheat, which have a product that you're looking at, and some other things as well, like the time left to the expiration day and storage costs and things like that. But there are very simple product. Understand. If I purchase a futures contract, that means I will have to purchase a certain quantity of whichever product the contract is tied to buy the expiration date. And if I sell the contract, that means I'm now obligated to sell a certain quantity of the product on the expiration date. And that's really it. That being said, whoever and I'll get more into this and in many here, but you never actually have to buy or sell the physical product that these contracts are tied to. You certainly can if you want. If you actually hold these contracts to the expiration date, and you are actually in the business of buying and selling products that crude oil or gold or silver or wheat. But most other people in the futures markets are simply trying to speculate on the price movement of these products without ever actually having to take delivery or sell the products themselves. And the main advantages that come with trading these contracts is you have much better leverage as well as much better trading hours. And I'll unpack these two things throughout the course. And if I come over to my train platform here just to give you some more concrete examples, what you're seeing here on the upper portion of my screen, these are futures contracts on the product, crude oil, and you can see if I scroll down. There are many, many different kinds of contracts I can be trading with, and they're all basically identical, with the exception of just the expiration date you can see in this column right here. These are all the expiration months for these contracts, and they're sorted simply from the contract at the top, being the ones that expire soonest as you go down. These contracts expire later and later. The one atop is expiring in August of this year 2020 which is about a month away at this point. And then the contract blow that expires in September, the one blow that expires in October and so on and so forth. So these would be the months in which I would actually have to when they when these dates arrive, purchase or sell barrels of crude oil in this case for whichever price that I bought or sold these contracts for. If I come over here, look at these two columns. These are how you determine the prices at which you ca nbae I or sell these contracts for these were the bids. And here are the asks If you're not familiar with the bidden ask pricing structure, this is applicable to really any financial product. Whether we're talking about options, stocks, bonds, futures, whatever. Basically, the bid represents the highest price someone in the market is currently willing to purchase this contract for and, he asked, is the lowest price currently that someone in the market is going to sell this contract for You'll notice if you look at these contracts, The bid is always gonna be lower than the ask. It's just how the markets are structured. And that being said, if you wanted to buy or sell these these contracts, generally speaking, if you place an order saying that I wanted to buy or sell when his contracts at a price somewhere in between the bid and the ask, you will generally be filled in that order rather quickly because even though right then and there, when you make the orders, no. One the market may be willing to come down in price or come up in price to meet you halfway , gently speaking soon after someone will. Markets are always changing and fluctuating prices are moving very frequently. So if you place an order with a price somewhere in between, someone out there in the market is going to come down or come up in price enough to meet you, and you'll both agree on some price and the order will go through. So if I was looking at this first contract right here and for some reason, this number actually just changed before I started this video, he ask, was originally about 40.6 or so, So the bill is still 40.28 The ask. I'm gonna still go with the before. It changed randomly for some reason. 40.6. So somewhere in between that's a 40.5. That would be the price at which I would be interested in buying or selling this contract for That's the way you interpret these prices is they represent the price per barrel of crude oil that these contracts represents. So just to kind of give you an example that ties all this together, let's say I'm interested in buying barrels of crude oil in August of this year, so I'd be looking to purchase this contract. And, like I said, I'd be looking to purchase contract for about $40.50 per barrel. That's kind of right in between the bid and the ask, although again that's changed with some reasons, so you can ignore that. But $40.50 is the price at which I'd be looking to buy this contract for which, if you recall going back to the definition here, that's the predetermined price that I'm going to be purchasing these barrels of crude oil four on the expiration date. So come August expiration. When that day arrives, I will then purchase X amount of barrels of crude oil for $40.50 per barrel. And that's where godless of what crude oil is actually trading for when that date actually arrives. Whether it's trading at $41 on that day or it's gone down to 39 or exploded up to 45 it's regardless, I am in this contract and I have to purchase a barrel of crude oil for exactly $40.50 per barrel. And the same is true for the person on the other side. The trade, the seller, right? If I wanted to sell barrels of crude oil in August, I would instead of, you know, buying this contract. I would just sell it initially, and I would sell it, Let's say, for the same price of $40.50 per barrel, So then come expiration in August. If I was the seller now, then I would be obligated to sell barrels of crude oil for exactly $40.50 per barrel. And again, that's regardless of what crude oil is actually trading for in the market on that day. Now, with all that being said, practically nobody actually ever takes delivery of barrels of crude oil when they're trading these futures contracts. Most people in the market that are trading futures are simply trying to speculate on the price movements of that underlying products. So in this case, they're just trying to speculate on where the price of crude oil is going to move in the future. So, as an example, if I thought crude oil was going to increase in price, let's say, by August I could still purchase this contract for $40.50 per barrel. And that would technically obligate me to buy actual physical bears of oil on expiration. Let's say a few days from now the price of crude oil actually does go up, and I was correct. Then I could simply sell this contract back close on my position in the process, and I would never actually have to take delivery of any barrels of crude oil. I bought this contract for $40.50 per barrel, and the price of crude oil went from 40.5 to, let's say 41 then I would sell this contract back in the market for a price of $41 per barrel, and that means I would make a 50 cent profit per barrel on that particular trade. The same kind of scenario can be applied. If I was bearish on crude oil, I thought the prices were going to go down by August. Then I could sell this contract initially 4 $40.50 per barrel again. That would technically obligate me to sell barrels of crude oil in August. But a few days down the road go by and the price of oil drops, then I could simply by the contract back at a lower price and make the difference is profit . And again, I would never actually have to sell anything on August expiration day, now speaking briefly about leverage because, as I mentioned, one of the advantages of trading futures contracts is that they are very highly leveraged products and they can give you great capital efficiency. What that means is you only have to put up a small amount of your own capital to buy or sell one of these contracts these contracts are actually quite large in the amount of what's called notional value of the products that they control. So the prices you see here again on a per barrel basis $40.50 per barrel and the examples I was walking you through, but each of these contracts represents 1000 barrels of crude oil. So in reality, the way you calculate the notional value, the total value of these contracts is you have to take the price that's given on a per barrel basis and multiply it by 1000. So looking at this contract again, $40.50 for one barrel well, multiply that by 1000 and now we're at a notional value of $40,500 for this contract. But as I said, because we have leverage available with these contracts, you don't actually need to fork over $40,000 of your own money to buy this contract. You actually only need to hand over or initially put up a few $1000 and you would technically borrow the rest from your broker and you would be able to hold this position. The same is true if you are selling this contract again, putting up only a few $1000 borrowing the rest from your broker and you would be able to enter and hold that position. And using leverage allows you to really magnify your potential profits right. You only have to put up a small amount of money to control a huge amount of money. And that huge amount of money moves even in a small way that's going to generate a very large magnified return on the initial capital that you put up so as an example, like a pulpit calculator here, let's say I bought this futures contract for again $40.50 per barrel. And let's say I was bullish on the price of crude oil and a few days go by and now it's the price of crude oil goes from 40.5 to 41. So at that point I might want to sell this contract back in the market and close my position. And that's also say, in order to even get into this position, I had to put up maybe $5000 of my own capital, knowing that my $5000 is actually controlling over $40,000 of notional value, so the price of crude oil goes from 40.5 to 41. That means I would make a profit of 50 cents per barrel, which may not sound like a lot. But remember, these contracts represent 1000 barrels, so that 50 cent profit gets applied to 1000 barrels of crude oil, which we do the math 0.5 times 1000. That's a $500 profit. And if I only had to put up, let's say, $5000 of my own capital and divide that by $5000 that's a 10% return on only a 50 cent move in the price of crude oil. Now, if I did not have leverage, and I had to actually put up $40,000 of my own money and I was still able to generate a $500 profit on that trade, that means my return on capital again, $500 divided by now, 40,000. That's only a 1.2% return very, very small and rather insignificant. But because we have leverage and were allowed to only put up a small amount of capital and still take advantage of the returns that are generated by a much larger notional value. That means the potential returns the profits you can make are magnified in terms of a percentage return on capital basis. From the flip side, that means your losses are also going to be magnified as well. Right swabs on their example. If my bullish assumption on crude oil was wrong and the price actually dropped and moved against me by, let's say, a full dollar, so the price went from 40.5 to 39.5. That means I'm going to lose $1 per barrel times 1000 barrels. That's obviously going to be a $1000 loss if I divide that. But my $5000 that initially had to put up to hold that position that's going to be a minus 20% return on capital. So you obviously want to be careful here when you're dealing with leverage products because they can clearly be a great thing and in helping to magnify your profits and returns when you are correct, that's why when you are wrong, it's very important to have a good trading strategy in place so that you know when to cut losses and get out of a position that's moving against you. Because small losses can really accelerate. Intern to big Losses If you're not careful in cutting them early and speaking of cutting losses when you do a positions that move against you and you do want to get out, trading futures allows you to do so at almost any time that you want. And this is referring to the second major advantage of futures, which is better trading hours. Right? Because if you are just trading stock or options in the normal stock market, the hours of trading are only from 9 30 in the morning to 4 p.m. Eastern time, five days a week. Futures, however, with a couple exceptions. But for the most part, futures trade 23 hours a day, five days a week. So like I said, you can pretty much come into your platform and cut your losses or make new trades adjustments, whatever it is you want at almost any time of the day. With the exception of that one hour in which futures markets are closed, so I believe that wraps this video up. So just a recap Futures contracts again are literally a contract that obligates one to buy or sell a certain quantity of a product for a predetermined price at some point in the future. And the major advantages that come with futures are better leverage to really magnify those returns and better trading hours and the next video coming up, we'll be diving MAWR into the details of futures contracts and specifically talk about the pricing structure for these contracts, as well as talking a bit more about notional value, so seen the next one thanks. 3. Price & Notional Value: all right. Thanks for joining me here again in the next video of this course. And so now in this video, I want to take a deeper dive into the actual pricing structure for futures contracts, as always, talking a bit more about the notional value of futures contracts. So taking things are first. I first want to discuss the actual pricing model for futures contracts. And as I mentioned the previous video, you know, again, these are technically refer to as derivatives, meaning the value or prices of these contracts are derived from something else. And you can see here this is the mathematical model, the mathematical calculation that you can use to figure out what the theoretical price of really any futures contract should be trading. For now, it's not required to understand this math or how it works in any way. But I still want to explain this on a conceptual level that you at least have a good understanding of why these contracts are priced the way they are. And you can see there are basically four main factors that go into cackling the price of a futures contract. There's the spot price storage costs risk free interest rates as well as attend expiration . There's also this e constant as well, but looking first at the spot price. What does this mean, right? The spot price is simply the current market price for every product that you're looking at . So the last video we were talking about crude oil, so I will continue with that example in this video. So the spot price for crude oil is simply the current market price for one barrel of crude oil. Now, because futures contracts deal with buying and selling some sort of product in the future, it's actually incorrect to assume that you would be able to buy or sell crude oil. In this case, let's say, six months down the line for the current market trading price, the price that's training for today. That's because there are things like storage costs and interest rates that you now have to consider when you're dealing with trading something in the future. So, as an example, let's assume that I am an actual seller of crude oil, right? I know. I mentioned last video that most people are simply buying and selling this contracts to just speculate on the price movements of the underlying product. But of course, there are still some people in the market that are actually looking to buy and sell the physical product, actual barrels of crude oil. And so, if I was a crude oil seller, I want to sell, let's say, 1000 barrels of crude oil that my company has produced. I may want to sell a futures contract with an expiration date of six months in the future again meaning six months down the line at that point that I'm going to be selling my barrels of crude oil at whatever price I sold the contract for initially. However, because that's six months away. That means I'm gonna have to store my oil for six months. And there are, of course, going to be storage costs associated with that. The actual storage facility obviously requires maintenance and rent payments. The actual maintenance of the barrels themselves, I'm sure, have cost associated with them. And as a seller, I'm gonna have to be eating those costs for the next six months. But I'm also gonna want to be compensated for those costs by being able to sell my oil six months down the line at a slightly higher price than where it's currently trading for right now. Moreover, getting into this piece now involving interest rates, I'm not going to be able to enjoy any sort of risk free return on my barrels of crude oil, Right? Let's say I sold this contract for $40 in 50 cents per barrel and again with these contracts representing 1000 barrels of oil, that means I'm gonna have 1000 barrels sitting there for six months, which is over $40,000 of notional value. Just sitting there, not being able to earn any sort of return, you know, if I were to instead have that $40,000 locked up in oil, if I just had that in cash, I could easily put that into a high yield savings account, for example, and I would or maybe one or 2% return per year, and that would be a great thing. But if instead, money is just locked up in barrels of crude oil for the next six months and just sitting there, I also want to be compensated for not being able to enjoy a sort of risk free return for the next six months. So those two things right, not being able to enjoy any risk free return as well as you know, the storage costs that are involved with just maintaining barrels of oil for the next six months. Those two costs, if you will, I want to be compensated for. And so that's why when you were to plug in all these different factors and perform this calculation, you're going to get a price that is slightly greater than the current spot price of crude oil. If the current market price of crude oil right now today was exactly $40 per barrel, then, after performing this calculation, I might get the result of $40.50. Right? As I said in my example here, let's say I sold his contract for $40.50 per barrel. That extra 50 cents over what the current market price is is my compensation for these storage costs and also not being able to enjoy any risk free return. Moreover, the further out in time you go, let's say, instead of six months in the future, I was selling contracts a year out in the future or two years out in the future, that's more time than not gonna be able to enjoy any risk free interest rate return as well as that's gonna be much Maurin storage costs. So the prices of those future contracts further out in time are gonna be even greater than the current spot price of crude oil. As an example, if I go back to my platform here, you can see the contracts for crude oil expiring in nine days. Um, as you saw the last video right in between the bid and the ask, it's about $40.50 per barrel. It's what these contracts were trading for. But now, if I were to go out into December, these contracts expire in 131 days. You can see these contracts are trading for a little over $41 per barrel. So again, the further out in time you go, the more I'm gonna want to be compensated for those additional storage costs and my not being able to enjoy any sort of risk free return on the money that's basically stored locked up in those barrels of crude oil. So that covers the pricing model for futures contracts. And last thing. I want to talk about this video again. It's just touching mawr on notional value. It's a much simpler calculation. It's simply taking the futures price right the price of the actual contract and multiply it by the quantity of the product that the contract is tied to again with crude oil, it's Each contract represents 1000 barrels of crude oil, but every product is going toe, have different quantities. Associate it when it comes to trading their futures contracts on them. So crude oil. It's measured in 1000 barrels per contract. But if you were to trade gold futures, for example, those air measured in 100 ounces. So just as another example, I go to the gold futures contracts. Symbol for gold futures is ford slash GC. You can see here the prices of these contracts are treating for around $1800 per ounce. Right. The prices of these contracts are always gonna be shown on a per ounce basis per barrel basis per bushel basis if you're dealing with wheat, but it's up to you to figure out whether it's just looking up online or memorizing the actual quantity of what these contracts actually represent and then multiplying the quantity by the prices here. So for gold, like I said, each contract represents 100 ounces of gold. And so if I was looking at this contract right here, the current trading prices I'll just round down in, say, 1800 bucks per ounce you most by that by 100 ounces. That gives you the total notional value of these contracts being about $180,000. So it's always very important to before you ever pull the trigger. When you are trading his contracts to first know the actual notional value of the contract that you are trading, some contracts are quite large and it can be in the hundreds of thousands. Some contracts are much smaller. Their notional value can only be in the tens of thousands. And obviously the amount of money you have to put up initially for much larger contracts is gonna be larger and for smaller contracts is gonna be smaller. But you still want to know what you're actually trading the value of what actually trading . So you have an idea of how much leverage you are taking on because, as you saw last video leverage can certainly be a good thing. It can magnify your profits. But on the flip side, if you are wrong, it can certainly magnify our losses. And the more leverage you're taking on the worst, your losses could be. So again, just knowing what you are actually trading in terms of the notional value, it's very important. I believe that covers everything for this video. And then the next one coming up, I'm gonna be discussing what tick sizes as well as explained more about the actual naming convention of futures contracts. So see the next one Thanks. 4. Tick Size & Symbols: all right, thanks for joining me again here in the next video of this course. And so now we're talking about ticks size as well as futures contract naming conventions. So to start things off, we'll look at tick size first and the basic definition, which I have written up right here. Is it simply the minimum price movement for a particular futures contract? This might be a bit of a peculiar concept for some of you, because in the stock market role, for example, the minimum price movement for any stock is simply one cent, right? The minimum amount that the that apple stock, for example, can move in. Price is one penny, either up or down now in the futures market. However, for futures contracts, depending on the product that you're looking at, this may not be the case. So, for example, if you look at crude oil futures, which you've already seen in this course is far in this case, the minimum price movement for a futures contract is still one penny. So this would obviously be a very familiar concept, just like in the stock market world, and we refer to this minimum price movement as one tick and you could see if I go back to my training platform and I pull up the crude oil futures contracts you can see right here. This is the current trading price for crude oil futures that are expiring in August, and you can see the price per barrel goes down to one penny right, $40 in 99 cents per barrel. So, like I said, that should be a very familiar concept. And it also means that for a one tick movement in the price of a futures contract that equates to a notional value movement of $10 again it's because each futures contract represents 1000 barrels. So for a one cent move in the price of these futures contracts or a one tick move, have to multiply that by 1000 barrels per contract. In this case, one cent times 1000 equals $10. So for everyone, take move. That's either going. Teoh, move your position $10 for you or against you. Now when we get to gold futures, for example, now this is where the tick size gets a little bit different. The minimum price movement for a gold futures contract. One tick is equal to 10 cents. Right. There is no penny movement of gold futures pricing, and you can see when I go to my platform here, I pull it the gold futures contracts. You can see the current trading price for gold futures expiring in August. You can see the current trading price is $1813.40 per ounce of gold, and that's it. There's the prices, not go down to the penny in this case. And if you look at the bid and ask column here for all these contracts and I was a little bit cut off, it's hard to see. But all the prices here there simply price down to the dine. Basically right, 18 11 exactly 18 13 and 50 cents. 18 20 exactly 18 25 and 20 cents. Right. There's no there's no more penny increments in terms of how the pricing of these contracts change anymore. And so that case that means a one tick movement in the price of a gold futures contract equates to a notional value of $10. Right? Each tick represents a 10 cent change, and each contract represents 100 ounces of gold. So game, multiply those together. Every take that these contracts move is a $10 overall notional value movement either for you or against you in your position and last example I have Here are four e mini s and P 500 futures contracts. The minimum price movement or a one tick movement for these contracts is 25 cents. The pricing only goes down to the quarter basically again going back to my platform Here I pull up the Emini s and P 500 futures. You can see here the price currently for futures contracts expiring in September, and they're really training right now and you'll see as they fluctuate, they only move in increments of 25. Basically, you'll never have a price of 32 10.3 or 30 to 10.15 It's always in increments of 25 cents, which means going back here, a one tick movement in the S and P 500 futures contracts equates to a notional value change of $12.50. These contracts could be a little bit more complicated to understand in terms of their notional value. But each tick corresponds to a 1/4 point of the actual S and P 500 index, and one full point of the S and P 500 corresponds to $50. So in this case, you simply multiply 50 times 500.25 which is the minimum tick size, and you get a notional value change of $12.50 for every one tick that these contracts move in price. So I hope this concept makes sense. I know it's a bit annoying with how these contracts fluctuating prices and how they're different from each other, depending on the product you're looking at. But this is simply just one of the characteristics associated with the futures world. So if you are getting involved in turning futures, this is just something you're gonna have to memorize or just have written down somewhere. So that covers tick size. And now we're going to start covering the actual futures naming convention because it is quite a bit different than your typical stock ticker names, for example. So the general formula for actually naming a specific futures contract is simply ford slash plus a product code, plus a month code and then plus the year and specifically the last two digits of the year. So, looking first at the product code, I have a couple examples here for you to see. And as you saw above the product code for the Mini S and P 500 futures contracts is yes, for talking about NASDAQ futures than the product of that is in Cuba. Crude oil, as you've already seen this course is C L Natural gas is in G. Gold is G. C and so on and so forth. And there are obviously many, many more different product codes and futures contracts. So this is the first part of the overall futures contract naming convention. And so the next piece of a futures contract ticker symbol is the month code. So coming down here is all the month codes for each month. And this is where things could get a little bit complicated because a Z can see here obviously each month has a particular letter code associate with it. But each letter is really kind of randomly paired to the month. You know, February is G. June is M in October is V So this is again something you might just have to have written down or have memorized. But just remember that each month has a one character letter code associated with it. And the final piece, obviously, is the year component of a futures ticker symbol. And as I said, that's just the last two numbers of the year in which these futures contracts expire. So coming down here to show you a few examples, you can see right here this is the full ticker symbol for a gold futures contract expiring in July 2020. You can see that first piece is the Ford Slash. Then we have the product Code GC corresponds to gold futures. Then we have the month code in which corresponds to July and then the last two digits of the year in which this contract expires. So 2000 and 20. Then we have an E mini S and P 500 futures contract expiring in December of 2020. I give me get the Ford slash product code. Yes, That month, Code Z corresponds to December and then the last two digits of the year in which it expires again. 2020 and then the last example have for you is a euro futures contract expiring in March 2021. So ford slash six e is the product code for Euro futures. H is the month code corresponding to March and then 21 the last two digits of the year 2021 . So it's a pretty simple formula to describe the full ticker symbol for any futures contract you're looking at. But obviously you have to understand all the rules and components of these ticker symbols to really decipher what they mean. And the last thing I want to mention before up this video up is, if you just want to pull up all the futures contracts that correspond to a certain product , you don't need to include the month code or the your code. You just have to type in the Ford Slash, plus the product code. So what you're seeing here again are all the e mini s and P 500 futures contracts for all the expiration dates. And I just had a type in Ford slash es to pull this up. Same thing if I wanted to pull up gold futures, just typing ford slash d c and then this will pull up all of the gold futures contracts for all expirations. And you can see in this symbol climb right here. This is where for each contract you get that full ticker symbol naming convention for its last you see the month code, you and then the last two digits of the year in which it expires. So this ford slash g C U 20 corresponds to obviously the gold futures contract expiring in September of 2020. So I believe that wraps this video up. And in the next one coming up, we'll be talking about futures markets. So see the next one. Thanks. 5. Futures Markets: all right, welcome back. And this video will be talking about futures markets and specifically will be looking at the trading hours for futures markets as well as the various market sectors and market participants that are actually involved in trading those contracts. So starting things off. Looking at trading hours now, as I've already said in this course futures contracts, for the most part, there are a few exceptions. These contracts trade 23 hours a day Sunday through Friday, the exceptions being agricultural related futures contracts. So corn, wheat, soybeans, etcetera. So if you're not trading anything in agricultural, so gold equities bonds for exchange etcetera than the hours of trading are gonna be very simple. Sunday through Friday. 6 p.m. Eastern is when these futures markets open. And then they tried all the way to the following day and close at 5 p.m. For one hour. And then they reopened, obviously again at 6 p.m. So as you can see obviously 23 hours a day, five days a week, Sunday through Friday. And one thing I like to do is on Sunday evenings. When these markets open is I like to hop onto my platform and take a look at where the s and P 500 futures contracts trading, which gives you a pretty good idea of where the actual stock market is going to be opening up, what it might be doing the following day at the opening at 9 30 in the morning Eastern time . Now, when it comes to agriculture related products, so again, soybeans, wheat, corn, etcetera they obviously have some more bizarre treating hours. Still, Sunday through Friday. But the first interval in which these contracts trade is 9:30 a.m. Eastern 22 20 PM Eastern . So pretty much stock market like ours. But then they reopen again from 8 p.m. Eastern and tried all the way through the night to the fully morning at 8:45 a.m. So if you do have an interest in trading corn or soybeans or wheat or whatever, um, this might be something you just have to have written down and memorized. A zit is not very intuitive and a bit confusing, but so literally anything else will be trading within this much more simple interval of just 6 p.m. Eastern to 5 p.m. Eastern the following day. So as in the example, you know, maybe I hop onto my trading platform on a Wednesday night, maybe around nine or 10 PM Just see what's going on. What you're seeing here is the price action chart for gold For its last GC, as you should recall from this course are gold futures. So perhaps I'm looking at these charts. Maybe I'm looking at some news, and I come across something that makes me bullish on gold over the next couple of months. As you can see here, you know, this is a one year time. Siri's gold has clearly from the beginning of last year has gone quite a bit higher, from $1411 per ounce, all the way up to a high of 1800 around up and say $30 per ounce. So perhaps I think this train is going to continue, and maybe I want to get involved in these markets right now. So even at 10 PM on a Wednesday night, I could just come into the trade tab here and take a look at the various gold futures contracts that are available. Maybe I think over the next month or two months, gold is gonna be continuing to increase in price. It's clearly training for about $1812 per ounce. Perhaps I think it's gonna go all the way to 18 50 or higher by September. So perhaps I want to be buying this September expiration Gold futures contracts. Looking at the bid, Ask spread and going kind of right in between taking an average between the two, I'd be looking to purchase this contract for about $1815 per ounce. So I go ahead and set the trade just for you to see. And what you are looking at down here is a limit order that has, by default, just set a price of $1822 per ounce. It's basically just the ask that it defaults to, but because this is a limit order, I obviously have control over which have a price that I want to actually purchase this contract for assuming there's a seller out there willing to come down and meet me at the price that I have specified. So as I said, I'd be looking to purchase this contract for about $1815 per ounce. And if I hit, confirm and send. This would just show a little dialogue box of what I'm about to do and looking right here. This 9900. This is the initial margin that I'm required to put up to hold this position, and we'll talk a lot more about margin and how it works in the next video. But gold futures are very large contracts. Each contract has a notional value of about $180,000. But you can see here that I'm only required to put up rounding up about $10,000 of capital initially to hold this position, which means my leverages 18 to 1. And that basically means that if you take the notional value, the true dollar amount of what I'm actually trading here. So 180,000 give or take. If I divide that by the capital, I have to put up rounding up in saying 10,000 will do this in the calculator to just so you can see visually, so $180,000 in notional value divided by the capital. I'm required to put up 10,000. You obviously get 18. So the amount of capital that I have to put up is 18 times smaller than the actual notional value of the product that I'm actually controlling and leverage like this, you know, 18 to 1 16 toe 1 20 to 1. You really only can get this kind of leverage when your trading futures and this as I've what I've shown you in the first video. This courses truly one of the major advantages of trading his contract. You can get really, really efficient leverage. And just as a side note, you know, obviously $10,000 to put up initially is still a large amount of money, even though you still have 18 times leverage. So if you have a smaller trading account and you still want to get involved in trading futures, then you know gold may not be an option for you. But you can certainly trade agricultural products like wheat and corn and soybeans and some other um, products like natural gas and in crude oil for much less. Those products only require typically a few $1000 of initial margin to put up and to hold those positions. So this point, Aiken, simply hit send here, and that would send my order through and assuming there is a seller out there willing to meet me at this price than the transaction would be filled, and I would now be a holder of a futures contract in gold, and I would be in this position up to the expiration date in September. This would be the absolute latest point at which I would hold this contract because again, if you hold these contracts through the expiration date, then at that point you will actually have to take delivery or sell the product that these contracts are tied to. I'm simply trying to speculate on the price of gold and hope we make money on the price of it going up over the next couple weeks and months. But if the price of gold just stays flat or goes down and September starts getting closer and closer and closer, I may just have to close out of this position for loss to avoid having to actually take delivery of 100 ounces of pure physical gold. So, assuming my order did go through at $1815 per ounce than just kind of letting this back to tick size again. Gold futures have a text size of 10 cents. So the price of my positions going to fluctuate on a dime basis basically and converting that into notional value. Since each contract represents 100 ounces of gold, that just means every 10 cents at these contracts that this contract moves in price. That's going to be a $10 overall movement, either for my position or against my position. If I bought this contract at 18 15 per ounce, then if the price of gold goes up by 10 cents Soto 18 15.1, then I would make $10 if instead, the price dropped to 18 14.9 and I would lose $10. And if my overall assumption of where go pricing was gonna go by September was correct and let's say the price of gold did actually increase to about $1850 per ounce, then my profit on this train would be actually pretty decent. I pulled the calculator here just doing the math, So if the price of gold per rounds did reach 18 50 maybe a couple of days or weeks before the September expiration. I just take 18 50. Mine is the price I purchased this contract for, which was 18 15 per ounce. That's a $35 profit per ounce of gold. And again, with his contracts representing 100 ounces of gold. That means my overall profit is $3500. And if I had only put up $10,000 of initial capital or margin, then that means my percentage return on capital is 35%. That's pretty darn good. And what's even cooler is, you know, if gold actually rallied to 18 50 per ounce, right, and that would basically be in terms of a percentage change, do the math here. Um, so that would be a 2% change in the actual price of gold. And so, just on a 2% move on the price of gold, I was able to generate a 35% return on capital, and that is again because of the leverage that is involved with futures contracts. I'm able to generate profit on a $180,000 product by only having to put up $10,000. So come back over here that covers trading hours and also just the little example I wanted to throw in there as well. So now I want to talk about market sectors. There are six major sectors with products you can be treating in there, of course, other sectors as well. But he six ones I'm about to show you are the most liquid. They have the most liquid products, which basically means there are the most. There's the most trading activity involved in these sectors, which is gonna allow you to be ableto get in out of your trades very easily. So the 1st 1 is equities, and this basically has everything to do with the actual stock market and in particular market indexes. There are no futures on individual stocks like Netflix for Apple or things like that. They're only futures on broader stock market indexes. So as you've already seen this course four slash yes, this represents the S and P 500. Ford Slash and Q is the NASDAQ four slash y m is the Dow Jones and Ford slash rt y is the Russell 2000 which is basically just a aggregate of 2000 small cap companies. So if you have any assumptions on where the stock market may go in the near future, or maybe in the longer term, then these are the four major tickers and products will be want to be treating the next sector is interest rates. Now there are no actual futures. You can be trading on interest rates themselves. So the way you get exposure to interest rates is by trading futures on bonds. Each of these example tickers that I have listed for you these are all just on U. S. Treasury bonds with different maturity date somewhere very short term, like a few months and somewhere much more long term, such as 10 years, 20 years, 30 years, Right? So whatever your assumptions are in regards to interest rates, maybe they're more short term or long term. That's gonna dictate which these products will be trading. And that's again because bond pricing is directly correlated to where interest rates are. So next up is foreign exchange. So this is gonna be your currencies like the euro or the Japanese yen, British pound, Canadian dollar, things like that. So, um four slash six years you've already seen is the euro six. J is the Japanese yen. Six b is the British pound, six c is the Canadian dollar and six a is Thea Australian dollar and all these products are relative to the U. S. Dollars. So, for example, if you think the euro is going to become stronger relative to the dollar than you may want to be buying euro futures contracts. Conversely, if you think the British pound is going to become ah, weaker relative to the U. S. Dollar, then you may want to be selling British pound futures contracts. Then we have energy, which, as you've already seen this course, we have the two major products ford slash c l is crude oil and then four slash and G is natural gas that we have medals GC is You've already seen his gold as I is silver and then lastly, we have agriculture. So Zs is soybeans. Z w is wheat and ZC is corn. So against six major sectors all these products all these examples here are very liquid. There's plenty of buyers and sellers training these contracts all the time, So 23 hours a day you can go into your platform. Of course, with the exception of agriculture, they got some weird hours. But for the most part, 23 hours a day you can hop into your training platform and trade any of these underlines and you'll be able, as I said, to get in and out of positions very easily. And last thing I want to cover our market participants. So these are the people actually trading in futures markets and the first of which are producers or hedgers. These are the people that are actually trying to buy and sell the physical product, like crude oil or gold or wheat and their trading futures contracts to hedge their positions in the future. So, for example, if I was a seller of crude oil and I had reason to believe that the price of crude oil was going to be dropping over the next year, then as a seller, that's going to be problematic, right? I want to be selling my product for the highest price possible. And if I'm not gonna be ready to sell my bears of credible for a year, then if the price does drop, then I'm obviously gonna be losing money. So what I can do is sell a futures contract in crude oil with an expiration date of around a year from now, and that will lock in the price at which I will be able to sell my barrels of crude oil at the expiration date. So if the price does actually drop and I was correct, then it won't matter. I'll still be able to sell my oil at the price at which I sold the contract for. But that also means if I'm wrong and the price does increase over the next year, then too bad I still have to some my 1000 barrels of crude oil at the contract price and I will not be able to participate in that increase in crude oil prices over the next year. But that's why this is a hedge. It's meant to hedge or protect myself from the possibility from the price of crude oil going down and us having to sell my crude oil at that lower price. But I don't want that to happen. No matter what I can sell contract, and even if the price of crude oil rises, you know I may not care if I know I have a guaranteed price set in stone and the next year . Participants in futures markets are very similar that we have institutions and retail traders. Both of these participants are just trying to speculate on the price movement of products, right? They're not trying to actually take delivery of crude oil or actually sell physical ounces of gold. They are just doing what I showed you my example earlier in this video of just buying and selling contracts before the expiration date arrives to make money on the price swings of the underlying products and institutions being like, you know, the big investment banks like Goldman Sachs, JP Morgan, Morgan Stanley. Things like that. And then retail traders are people like you and me. We have a brokerage account with TD Ameritrade or Charles Schwab or Robin Hood, whatever. And we are as individuals trying to trade in the stock market, the futures market, the bonds market, whatever and trying to obviously make money, of course. And that wraps it up for this video, and the next one coming up, we'll be talking a lot more about margin 6. Explaining Margin: okay, we'll come back to the final value, this course where we'll be taking an in depth look at how margin works. You did see a little bit of this in the last video where I walk you through That example of buying a gold futures contract and the initial $10,000 I had to put up is what the initial margin would be. Get to this in a second here, but kicking things out first. I do want to talk about Spin, which is basically just an acronym that represents the various formulas and methods that futures exchanges can use to set minimum margin requirements for various products. Right futures exchanges are the main governing entities, if you will over futures markets, and they have, like I said, various models and and formulas they can use to literally calculate what the initial amount of capital that you have to put up should be for whether you're trading gold or S and P 500 futures or we whatever the product may be. And these calculations involved a variety of things. But the main things would be historical price volatility of the product, because obviously gold, maybe more volatile than euro or the euro, maybe less volatile and wheat. So that obviously has to be taken into account. And also, current market conditions in general also are factored into these calculations as well. Now is, it said, these are the minimum margin requirements that all brokerage firms must abide by. However, depending on the broker you are trading through, whether that be TD Ameritrade or Charles Schwab Interactive brokers, whatever they do, have the power to require additional margin on top of those minimums. So if your brokerage companies may be a little more conservative than most, they may charge a little bit more than usual on those minimum requirements. But I would say for the most part, individual brokerage companies typically stick to around what the minimums are already set in place by the actual futures exchanges. So not getting into initial margin. And this is what you saw in the last video. This is the initial amount of capital that you have to deposit or put up to hold a futures position. So going back to my platform here again, this $9900 was thean initial margin that I have to put up or to buy one of these gold futures contracts. And again, that number is calculated based on span and brokerage requirements, and I'm moving on. We'll get into maintenance margin now. This is a little bit more tricky, but it's just the amount of additional capital you must Postwar deposit after one of your positions has incurred a specific I'm not. The losses and the amount of capital that you have to add back in is supposed to get you back to that initial margin level. So, for example, if the initial margin on that gold futures contract that I bought in the last video was $10,000 the maintenance margin maybe $1000 right, just as a side note maintenance margin is typically 10% of the initial margin. But what that really means is, you know, since I'm bullish on gold, that's why I bought the contract right. But my assumption could always be wrong, and gold could fall in price. And if that continues to happen day after day, week after week, I'm obviously going to be incurring more and more losses. And if the total amount of losses I have incurred equals $1000 that I'm going to receive what's called a margin call. That's basically just my brokerage company notifying me that I need to post more capital maintenance margin amount to get myself back to $10,000. So, again, I initially post $10,000 to buy that contract. As the days will by. The price of gold goes down, down, down. And at some point, if I'm currently down $1000 in my position, I will get a margin call for my broker saying that I now have to deposit $1000 back into my account to bring myself back to that $10,000 initial margin amount Now. This is only required, however, if you still want to be in the position. If, after incurring 1000 or more dollars in losses, you realize that you just might be wrong on the trade. You can just exit your trade by the contract back or sell it depending on however you open the position. To begin with, you can close out your position and just move on and cut your losses. The margin call and the additional deposit of capital is only required if you want to stay in the position and keep it going. However, just keep in mind that if you're losses keep on growing and you lose another $1000 or more , you're going to receive another margin call that's gonna require you to post even more capital to once again get back to that $10,000 initial margin amount, and then you can carry on and move forward. But this process can just keep repeating over and over and over again, until, at some point you just have to close a position yourself before you run out of money. Now your broker can also close oppositions 40 you if you simply do nothing right. If you get a margin call and you just ignore it and the price of gold is not, rebound back in your favor. Then soon after, your broker would just come in and close the position for you. Just keep in mind, however, that when this happens, your broker might charge you additional fees and commissions to do this. So so my recommendation is, if you do, you just want to get out of your position. Just do it yourself. Obviously, you have 23 hours a day to go in your platform and close it out. And that's really all there is to it. I know it can be a little bit intricate, but just the main idea. The key take away here is just You have to post the initial line of capital to hold that position and has losses incurred. They get big enough. You just gotta keep replenishing your account back up that initial point and you can carry on from there. And I believe that covers it for this video. So in the last one coming up next, I'll just be wrapping something's up and sending you on your way. So see the next one. Thanks. 7. Wrapping Up: All right, congratulations on finishing this course. I hope you able to gain a lot of value out of it. And to help you get started trading futures contracts. You can take a look at the course project down below. Now, before up this video up, I do just want to say that if you are brand new to futures trading, which I imagine you are, if you just watch this introductory course, then if you want to get started trading those contracts, I recommend you do so first in a paper trading account, which means using fake money. As you've seen this course with greater leverage comes much greater returns. But that could also come with much bigger losses than expected. So as you are learning and likely making mistakes along the way like I certainly did, in my view, it's much better to make those mistakes while you don't have your hard earned money on the line. And once you have that confidence and you've a firm understanding of what you're doing, it's very easy to switch over and start using your real money and then go from there. So that being said, thank you so much watching this course. I am Scott Reese again. I do try and publish one new course every two weeks. Please do also check out the other courses I have on skill share and follow me on the platform as well, so that you will get notified every time I come out with a new course. So thank you for watching and happy trading.