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  • #16
    Re: Options Question and Education

    Originally posted by astonas View Post
    Thanks again, rogermexico, for your detailed help. I can see several places where I was simply misunderstanding things, including some pretty basic ones. You've cleared them up pretty well, though.



    (You also mention in your primer that 1 contract represents an obligation to provide 1000 oz. gold at a given price.)


    I'd remembered that you had mentioned a mini-contract in one of your earlier posts, and went hunting around for more info. I thought I'd provide the information here for the benefit of others who might have a similar not-quite-yet-a-millionaire problem. ;-)

    There are 44 different E-mini futures contracts, which are designed to have much smaller multipliers, for smaller traders. In the case of both the S&P and gold, the multiplier is 50, instead of the standard 1000.

    So, an e-mini contract would allow an investor to speculate on 50 oz. of gold, with an initial margin of $3,376, and a maintenance margin of $2,500. I have no idea about whether these are still a good deal (if the trading friction and contract costs scale well) though I suspect rogermexico could rattle that off.

    I'd suspect there's not many choices for those who don't have an account worth even the ~$71k associated with 50 oz. of gold, but it is nice to know you don't have to work in increments of ~$1.4M+. Even if one did have that much free, one might in cases prefer a more incremental speculation strategy.
    I hope it was obvious I was using large round numbers and full size contracts for purposes of illustration. E-minis are obviously much more accessible. I think they should be plenty liquid if using them for precious metals and stock indexes.

    For much smaller accounts, I think standard short selling is more appropriate than options for calls like "time to short the S and P"....

    For Comex gold the contract size is 100 ounces, not 1000. If I ever said 1000 ounces that was a typo. One contract at today's price for gold controls approx. $141,000 worth of gold, not $1.4 M. And at one third the size, the gold e-mini controls about $47,000 worth of gold.

    For Comex silver the standard contract size is 5000 ounces, and the e-mini size is 1000 ounces.


    For the S and P index, it is $250 times the index value for a standard contract, as I stated in my example. The e- mini has a multiplier of $50, so the position size would be about $80,000 at today's prices. That's indeed a lot of money, but I would guess many itulipers have enough assets that hedging or shorting the whole market with a chunk that size would be appropriate and useful.

    Standard contract size for Henry Hub natural gas is 10,000 MBTU which is $40,000 at today's prices. The gas e-mini is 2500 MBTU or about $10,000. Buy the contract 6 to 12 months out and roll forward every 3 months for a simple long NG strategy that avoids severe losses due to front month contango (when it's there). I view this as the best PCO play in terms of risk/ reward right now. Quality coal stocks are a close second at recent prices, esp. BTU which has been beaten down by China fears but which has very sound long term prospects.

    Avoid gas etfs if possible esp. ones that robotically roll the front month contracts. There will be infrastructure plays with PCO but you need to find one that offers the intermediate term upside (2-3 years) of gas doing nothing but mean reverting to its normal ratio relative to oil. I am sure they exist but I have not done the work to find them, and there are no management issues with the commodity itself.

    Oil does not even need to rise for gas to do very well.
    Last edited by rogermexico; 04-23-13, 09:53 PM.
    My educational website is linked below.

    http://www.paleonu.com/

    Comment


    • #17
      Re: Options Question and Education

      The full size gold contract is for 100 oz, the mini is for 33 oz. A gold mini contract at $1400 gold has a value of 1400*33, or $46,200. The full size contract has a value of 1400*100, or $140,000.

      The full size silver contract is for 5000 oz, the mini is for 1000 oz.

      The full size S&P 500 contract is for $250 times the index, the mini is for $50 times it. So if the S&P 500 index is at 1600, the mini contract value is 1600*$50, or $80,000.

      Again with the example of an S&P mini futures contract, let's say you have $20,000 in a futures account and sell one contract at 1600, and the S&P 500 goes down to 1550. The contract now has a value of $1550*50 or $77,500, and you close the trade.
      You have made $2500 (the $80,000 starting value less the $77,500, and less any fees or commissions).


      This may help too:
      http://www.nowandfutures.com/futures_trading.html


      oops, look like roger covered the same areas a bit before I posted.
      http://www.NowAndTheFuture.com

      Comment


      • #18
        Re: Options Question and Education

        Originally posted by bart View Post
        The full size gold contract is for 100 oz, the mini is for 33 oz. A gold mini contract at $1400 gold has a value of 1400*33, or $46,200. The full size contract has a value of 1400*100, or $140,000.

        The full size silver contract is for 5000 oz, the mini is for 1000 oz.

        The full size S&P 500 contract is for $250 times the index, the mini is for $50 times it. So if the S&P 500 index is at 1600, the mini contract value is 1600*$50, or $80,000.

        Again with the example of an S&P mini futures contract, let's say you have $20,000 in a futures account and sell one contract at 1600, and the S&P 500 goes down to 1550. The contract now has a value of $1550*50 or $77,500, and you close the trade.
        You have made $2500 (the $80,000 starting value less the $77,500, and less any fees or commissions).


        This may help too:
        http://www.nowandfutures.com/futures_trading.html


        oops, look like roger covered the same areas a bit before I posted.
        There seem to be a couple of "helpful" educational sites that quote the gold e- mini at 50 ounces. As you've stated, the correct size is 33.2 oz according to my brokerage and most reputable looking sources. But a few sites say 33.3 oz, which makes a lot more sense than 33.2.

        The nice part is the "fees and commissions" can be quite reasonable. On my full size contracts for gold, I pay $7.95 per contract each way. Right now the bid ask spread is 1410.60/1410.70. If you buy gold right now and immediately cover you would lose 007% plus the commission each way. I don't bother with limit orders with spreads this small.

        That's total friction of .017% - less than 2/100 of one percent. You can't beat that with a stick as far as I am concerned.
        My educational website is linked below.

        http://www.paleonu.com/

        Comment


        • #19
          Re: Options Question and Education

          Originally posted by rogermexico View Post
          There seem to be a couple of "helpful" educational sites that quote the gold e- mini at 50 ounces. As you've stated, the correct size is 33.2 oz according to my brokerage and most reputable looking sources. But a few sites say 33.3 oz, which makes a lot more sense than 33.2.

          The nice part is the "fees and commissions" can be quite reasonable. On my full size contracts for gold, I pay $7.95 per contract each way. Right now the bid ask spread is 1410.60/1410.70. If you buy gold right now and immediately cover you would lose 007% plus the commission each way. I don't bother with limit orders with spreads this small.

          That's total friction of .017% - less than 2/100 of one percent. You can't beat that with a stick as far as I am concerned.
          Indeed! And thanks to both you and bart for your input. The presence of sites giving wrong information is a bit distressing. It makes me glad that I posted my findings, though, since I was able to get not only corrections, but even more information.

          Comment


          • #20
            Re: Options Question and Education

            Originally posted by bart View Post
            This is very helpful. You did a great job of putting the information in easy, bit-sized chunks, too. We total newbies really benefit from that!

            Thanks!

            Comment


            • #21
              Re: Options Question and Education

              Unless i was not listening in class, Finster offered up some good advice. As you may know he follows Harry Browne's school of thought of being diversified across bonds, stocks, cash and commodities. It is designed almost alike the PRPFX. Finster once said why short the market when you can go into bonds. So i purchased 2.5% of tlt and 15% of vcalx (vanguard municipal). The vcalx tracks well with both MUB and TLT, only it is not as volatile as TLT plus i need some tax relief living in CA. Now i respect EJs get out of bonds however i do have some eyes on this besides my own.

              I dont expect to hold this bond position beyond fall 2013 and then will reposition accordingly. One of the canaries in the mind that i am watching closely for breaking resistance or rising interest rates is an inverse junk bond etf, sjb. once it breaks resistance, alerts go off and that will be my warning sign to consider exit.

              Comment


              • #22
                Re: Options Question and Education

                Originally posted by rogermexico View Post
                There seem to be a couple of "helpful" educational sites that quote the gold e- mini at 50 ounces. As you've stated, the correct size is 33.2 oz according to my brokerage and most reputable looking sources. But a few sites say 33.3 oz, which makes a lot more sense than 33.2.

                The nice part is the "fees and commissions" can be quite reasonable. On my full size contracts for gold, I pay $7.95 per contract each way. Right now the bid ask spread is 1410.60/1410.70. If you buy gold right now and immediately cover you would lose 007% plus the commission each way. I don't bother with limit orders with spreads this small.

                That's total friction of .017% - less than 2/100 of one percent. You can't beat that with a stick as far as I am concerned.
                Yes, I was imprecise on the mini gold - it's 33.2 oz, not 33 even.

                No question on the friction, it's one of the reasons that I'm a futures trader. I can manage my own rollovers from one contract to the next too, and ETFs can get hit significantly.

                The commission structure is quite good too, although fees for various market feeds can add up for smaller traders at places like IB. Small accounts or broker assisted accounts can have much higher commissions too. I've seen them well over $35 per round trip trade over the years.

                It's sure not all peaches & cream. The risks can be very substantial, like being caught in limit moves going against one's position. It's happened to me more than once, most recently in a wheat trade.
                Last edited by bart; 04-24-13, 08:52 AM.
                http://www.NowAndTheFuture.com

                Comment


                • #23
                  Re: Options Question and Education

                  Originally posted by astonas View Post
                  This is very helpful. You did a great job of putting the information in easy, bit-sized chunks, too. We total newbies really benefit from that!

                  Thanks!
                  My pleasure, glad you found it useful.
                  http://www.NowAndTheFuture.com

                  Comment


                  • #24
                    Re: Options Question and Education

                    With options - volatility itself is a big factor. This is reduced for very low duration options, but in general volatility (as expressed by VIX) can dramatically change.

                    Thus while the 'fees' ostensibly are lower than they used to be, the changes in value due to VIX changes is - I suspect - greater than before. This being due to HFT exaggerating the already existing market maker bias.

                    The last couple of years has seen low volatility, but the changes associated with a EJ/iTulip inflection point would seem to be one which would see the return of 1000 point Dow shifts - i.e. huge VIX.

                    Comment


                    • #25
                      Re: Options Question and Education

                      I am doing this too, although being "smart" I have modified allocations. (Had I had the 25% allocation to stocks this gold hit would not be so painful)
                      Current targets are 15% bonds, 50% cash, 25% gold, 10% stocks. For bonds I am using BSV because I don't see a lot of appreciatiation in bonds.
                      If i were to see the yield on the 10 treasury year move to 2.5% or so, I might increase the duration of the bonds.

                      Like you I am watching HYG, SJNK to look for cracks in the bond market. So far no stress is evident.

                      An interesting psycological effect occurs currently if 10yr hits 2.75, or short corps hits about 2%. At these points the free cash flow for rolling over old debt for new is over. So far uncle ben has the yield curve well under control.

                      Comment


                      • #26
                        Re: Options Question and Education

                        Originally posted by charliebrown View Post
                        I am doing this too, although being "smart" I have modified allocations. (Had I had the 25% allocation to stocks this gold hit would not be so painful)
                        Current targets are 15% bonds, 50% cash, 25% gold, 10% stocks. For bonds I am using BSV because I don't see a lot of appreciatiation in bonds.
                        If i were to see the yield on the 10 treasury year move to 2.5% or so, I might increase the duration of the bonds.

                        Like you I am watching HYG, SJNK to look for cracks in the bond market. So far no stress is evident.

                        An interesting psycological effect occurs currently if 10yr hits 2.75, or short corps hits about 2%. At these points the free cash flow for rolling over old debt for new is over. So far uncle ben has the yield curve well under control.
                        I am hearing of SEC considering floating NAV on money markets. http://www.bloomberg.com/news/2013-0...-with-irs.html
                        My cash is also up there near 50-60%.
                        So i am looking at MINT for parking cash sometime in early June. Its in a seasonal topping pattern now - quick glance.
                        Any thoughts besides short term treasuries?

                        Comment


                        • #27
                          Re: Options Question and Education

                          your contributions are limited but i-bonds, through treasury direct? guranteed not to lose principle and you get an inflation adjustment. Maybe a 2% yield with no principle risk? You have to at least leave them in for 1 year before you can withdrawl. I am spreading out my contributions so some money will be available every month.

                          I would not mind a floating NAV on money markets EXCEPT .... than any mm transaction in a non-retirement account becomes a taxable transaction what a pain in the petuty. I have been watching MINT too waiting for a price pull back but it is not happening. if you divide yield by price volatility, BSV is about the same as MINT. I have a brokerage account at vanguard so they let me trade BSV for free. BSV is 80% treasury, 20% corp. 3 yr duration.

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