• What are margin requirements & how do they work?

  • Margin is the amount of money set aside in your account to trade a specific contract. For instance, if you have a $3000 account and you purchase a contract of corn, $540 is set aside in your account to trade that contract (the initial margin). Now your excess to trade is $2460. Keep in mind that your excess to trade changes along with your open trade equity. If you make or lose $200 that day, is added or subtracted to your margin excess (available funds to trade with).

   

• What is the difference between initial & maintenance margin?

  • Initial margin is the amount of money set aside to trade a specific contract. The maintenance margin is the level at which a margin call is triggered. For instance, if you have a $3000 account and you purchase a contract of corn, the total equity changes as the market moves for or against you. If the market moves against you by 10 cents or $500-your total equity is now $3000-$500 or $2500. If the total equity in the account drops below the maintenance margin level you will be placed on a margin call and will need to deposit enough funds to bring you back to your initial margin level.

   

• Do margin requirements change?

  • Yes. Remember that margin is a reflection of risk. If the volatility in a market increases so can the margin. Margins are subject to change without notice and can be changed after you establish a position. Always check with your broker for the most current margin requirements

   

• I'm just starting to papertrade. How many markets should I watch?

  • Everyone has their own comfort level in the number of markets they can effectively watch. The most common mistake that most papertraders make is watching too many markets. They feel compelled to watch every trade on a market update and sometimes can get completely overwhelmed with the whole process. If you are watching 5 markets and are having trouble keeping up with your technical or fundamental system of trading, consider cutting the number back. Try to make your paper trading experience as real as possible. Select markets that are realistic to trade in. If you never plan to trade with more than $2000 why paper trade a market with a margin requirement of over $5000?

   

• Does the futures price have to trade through my strike price to make money on an option?

  • No. This is the most common misconception about options. The expression I use to clearly state the relationship of an option to the futures is "the option will increase in value at an increasing rate the more it approaches the strike price". Options, just like futures, have trading ranges throughout the day. If the high of the day is 6 cents and the low was 3 cents that would illustrate the gain or loss potential in the value of that option that session.

   

• What is the difference between extrinsic and intrinsic value in options?

  • An option has intrinsic value if it would be profitable to exercise the option. Extrinsic value is just 'time value' and reflects the amount of money that buyers are willing to pay in hope that an option will be worth exercising at or before expiration. For example, if Dec corn futures is selling at 2.16 and a Dec corn 2.00 call is selling for 18, then the intrinsic value equals 16 cents (the difference between the strike and the futures) and the time value of 2 cents (the difference between the total premium and the intrinsic value). An options time value decreases as it approaches expiration. It will have no time value at expiration and any remaining value will consist of only intrinsic value. *

   

• Calls and Puts confuse me, is there any solid definition that is helpful in understanding them?

  • Having a solid understand of futures will help provide a foundation in understanding options trading. A call is the right but not the obligation to buy the underlying futures at that strike price. A put is the right but not the obligation to sell the underlying futures at that strike price. The "right but not the obligation" illustrates that it is not required for you to exercise your option but you have the right to if you have incentive to do so.

   

• How do I know if I should exercise my option?

  • You can sell your option or exercise it. You can simply pencil it out to determine which scenario will profit more. Remember, when you exercise your option you give up the premium. Lets use a real example using real prices. On Sept 18 you bought a Dec Corn 270 call for 7 ¼. Today, the futures price is at 282 ¾ and the premium is now at 13 ¾ . If you exercise you will be long in futures from 270. If the futures market is at 282 ¾ then your open trade equity would be 12 ¾. Don't forget that you give up the 7 ¼ you paid in premium making the net profit potential 12 ¾-7 ¼ or 5 ½ cents. If you simply liquidate your option however, you realize a net gain of 6 ½ (13 ¾ -7 ¼). In sum, you would make a little more by simply liquidating or (selling your option back) and not exercising. In other words, you have no 'incentive' to exercise.

   

• What is the difference between volume & open interest?

  • Volume is the number of contracts traded (one side of each trade only) for each delivery month during that trading period. Open interest is the accumulated total of all currently outstanding contracts.

   

• What is 'marking to the market'?

  • At the end of each trading day and all following days that your position remains open, the contract value is 'marked to the market'; your account is either credited or debited based on that days trading session close. An updated status of your account is available from your broker on a daily basis based on these figures.

   

• Is it better to trade the fundamentals then the technicals?

  • There is no right or wrong answer to this question. The markets are very dynamic and react to a massive variety of different types of information -both fundamental and technical. The job of the prudent trader is sorting through what information is important and what is not (i.e. what the market has "factored in" and what is a "surprise" to the market).

   

• I'm not understanding how commissions work. What exactly is a roundturn?

  • Commission rates are commonly quoted in roundturns. This means for a full buy and sell in one contract or option. A $65 roundturn would mean $32.50 in and $32.50 out. Many brokerages charge all of the commission up front for options and $0 to liquidate. Yet other brokerages will charge half in and half out just like futures with no commission charge if the option expires. This can work well if you are 'fishing' for out of the money options that may expire and can prove to be of significant savings in the long run. Also spread trades can be charged differently, depending on where you trade. One brokerage may charge $80 roundturn for a spread trade; still others may hit you with the full commission and offer a small 'rebate'. In addition, your brokerage may provide reduced rates for mini contracts. Be sure and ask your account representative exactly how their commissions are charged in futures AND options.

   

• What criteria should I use to choose a broker?

  • The relationship you have with your broker is an important one. Be sure and ask questions about the level of experience and the background they have. Papertrading with your broker first can make a big difference. You shouldn't feel rushed on the phone or like you are bothering them. After several conversations, it will be easy to determine how well you will work with that individual and how knowledgeable they are about the markets.

   

• Is there a resource for further study?

  • Definitely. Your education in the markets should never stop. You can request a free catalog from traders library which contains several books dedicated to the futures markets. Your broker should also be a student of the markets and might be a good resource for recommended reading. You can call Traders Library at 800-272-2855.

   

• What is the real difference between discount and full-service?

  • Service. If you are just starting out in the markets it is important to consider the service & not just the rate. A full service broker will often watch for any egregious errors that new traders might make and help identify those errors before it becomes a costly lesson. In addition, they can assist you in the proper use of orders and walk you through some of the education in the markets. At a discount firm, you're on your own. The little amount of commission you save by not choosing a full service firm may quickly be offset by an unpleasant experience at a discount firm.

   

• What can I do to clearly outline my trading plan to my broker?

  • Call. It almost seems to be a ridiculous answer-but it's not. If you have several unsuccessful trades in a row and you believe your trading system may not be consistent enough for you to continue trading it-ask your broker for some suggestions. Communication is the most important element in the broker/client relationship. Communicate your objectives, voice your concerns, you'll be surprised at the useful suggestions they will provide you.

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