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How to Use This Guide

Futures & Options Strategies Guide Overview

This publication was designed, not as a complete guide to every possible scenario, but rather as an easy-to-use manual that suggests possible trading strategies.  One way to use it effectively is to follow these simple steps:

1.  Determine Your Market Outlook.

Are you generally bullish, bearish, or undecided on future market moves?

2.  Determine Your Volatility Outlook.

Do you feel that volatility will rise, fall, or are you undecided?

3.  Look Up the Corresponding Strategy on the Appropriate Table.

Whether you are initiating a position or trying to follow up a current position, line up the correct row and column on the proper table to find a strategy that will help you make the most of your outlook.

4.  Determine the “Best” Strike Price.

By analyzing your market and volatility outlook further you should be able to select the option strike that provides the best opportunity.  The Guide does not go into detail on selecting the best strikes.  You can do this by calculating a few “What-If” scenarios.

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Some Things You Should Be Aware Of:

  • In addition to breaking down market analysis into two main questions (“What is your market outlook?” and “What is your volatility outlook?”), you must also consider margin requirements, commission costs, taxes and execution costs, as well as other possible factors.
  • The follow-up strategies in this Guide are usually “One Trade” changes.  In other words, we asked: “How can a trader transform a position into a more desirable position with just one trade?” We did, however, bend this rule a little when one trade produced no acceptable strategy.
  • Although you may be able to transform a trade with just one transaction, the resulting position can contain options at strikes that may or may not be appropriate for your new outlook.
  • The ratio spreads and ratio backspreads are strategies that do not fit neatly into one of the nine scenarios.  Therefore, a trader MUST analyze these strategies in greater depth.  The strikes chosen bear greatly on the resulting profit/loss.  Do several “What-If” scenarios before using these strategies.
  • There are many other strategies, such as: calendar spreads, condors, Christmas trees, and option strips that are not addressed here.  While they are all valid strategies, they do not fit neatly into this approach.
  • The suggested strategies on the following pages are just that – suggestions.  Because of limited space, the strategies suggested may or may not the “best” ones for your trading plan.

How to Use The Tables

On the next page is a table suggesting strategies to use when “Initiating a Market Position.” Let’s go through an example: A trader has been watching a major increase in the value of the S&P 500® futures contract and feels the market is poised for a minor downward move.  A small market drop with volatility dropping and futures leveling off is this trader’s outlook.

The market scenario is bearish.  The trader looks across the top of the page and finds “BEARISH.”

The volatility scenario is down.  The trader looks down the left of the page and finds “VOLATILITY FALLING.”

The trader lines up the BEARISH colum with the VOLATILITY FALLING row and finds two possible suggested market scenarios: Number 6, SHORT CALL, and Number 18, RATIO PUT SPREAD.

The trader now does a number of “What-If” scenarios to determine the best strike, the profit objective and loss tolerance before making any trading decisions.

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Futures & Options Strategies

Contents Courtesy of CME Group.