MRCI is often asked "Can I use MRCI research to trade options and, if so, how?"
The follow-up question then is "How do I use MRCI's volatility research?"
Every trader, before placing his first order, should ask himself, "What
mechanisms do I want to trade? Do I want to trade only futures, only options,
or do I want to hedge futures positions with options to define risk?" Everyone's
methodology will grow over time, and the answer may change; but this question
will continue to underlie the decisions made and be revisited time and again.
What you are not going to see here are complex formulas that provide the
mathematics of trading options. Likewise, we will not directly discuss Premium,
Delta, Gamma, Theta, Vega, and Rho, the fundamental elements of options trading.
If one does not already understand these, or does not already know what the
various options strategies are and how to use them, then we have the following
- Buy one or more books on options trading which are written at the level you
require. Everyone needs something different, but some possibilities are:
- Options Volatility & Pricing: Advanced Trading Strategies and Techniques - Sheldon Natenberg
- CBOT Handbook of Futures and Options - CBOT
- Trading and Hedging with Agricultural Futures and Options - James B. Bittman
- McMillan on Options - Lawrence G. McMillan
- Visit a web-site with educational options information. There are probably many
more, but two such are:
- Attend seminars or webinars which provide options education.
- Additionally, utilize an options trading platform with intra-day data, some of
which will have training, seminars, or webinars available. Some examples (with
no implied recommendation) are:
It is far beyond the scope of any single essay to outline all the possibilities
for utilizing options to replace or hedge outright or spread positions with any
of the possible variations using options. There are various synthetic positions,
straddles, strangles, covered calls, naked puts, etc. The possible combinations
are as varied as are the opinions of traders. Ultimately, a trader must
understand why he wants to use options and what various option strategies can
provide when executing trading strategies.
It is every individual trader's responsibility to be as knowledgeable as
possible in his craft. Consider these three specific items pertaining to
Be very aware of where the volume is because the Bid/Ask spread can be brutal.
This is true for either futures or options and why an intraday platform is
Be aware of volatility levels - both in the market generally and for individual
Take a look at some type of covered write as an alternative to naked futures
positions to assist in defining, or possibly limiting, risk.
First, let's take a look at "How can MRCI research be used to trade options?"
This particular question really should be "How do I use options to trade MRCI
Research?" and its inverse "How do I use MRCI research for options trading?"
How do I use options to trade MRCI Research?
From a seasonal trading viewpoint, upon evaluating a particular seasonal
strategy, a trader either agrees, disagrees, or is undecided. An options
strategy can be found to attempt to capitalize on the trader's anticipated
outcome. To illustrate, the link http://www.theoptionsguide.com/bullish-trading-strategies.aspx
at The Options Guide illustrates many bullish options strategies. Additionally,
the link http://www.theoptionsguide.com/option-trading-strategies.aspx allows a
trader to specify filters as to the features of a given strategy based on
several factors. The link http://www.investopedia.com/active-trading/options-and-futures/
on Investopedia provides similar guides and tutorials.
Let's look at a specific seasonal strategy. MRCI's April 2019 published
research featured a strategy stating that June Live Cattle (CME) had closed
higher on 5/12 than on 4/22 in 13 of the last 15 years.
A futures position trader doing his due diligence might:
Analyze the historical detail
Consider historical drawdowns
Evaluate the current market
Fundamental or technical analysis, or both
Assess acceptable risk
Personal risk level
Place entry order (price level or MOC)
Be prepared for adverse action
Either place or know where your stop is
Consider all possibilities
Have an exit strategy
An options position trader performing due diligence might:
Analyze the historical detail
Look at past volatility levels (both historical and implied)
Look at seasonal volatility
Evaluate current market trends
Assess acceptable risk
Call vs Put
Buy (Long) vs. Write (Short)
Evaluate current volatility levels
Buying high volatility or selling low volatility is typically contra-indicated
You can be right on direction but still lose if wrong on volatility
Evaluate the impact of time decay
Be prepared for adverse action
Ultimately, MRCI publishes historical analysis of the futures market - period.
It is every trader's responsibility to understand the ramifications of each and
every position or strategy and to do the homework required to attempt to
maximize the possibility of success. Remember that options can expire before a
futures strategy ends.
How do I use MRCI research for options trading?
There are a couple of possibilities here, from the general to the specific.
Generically, options traders can be bullish, bearish, or neutral insofar as
market direction is concerned. There are options strategies which are designed
to optimize results in each type of market.
MRCI Seasonal Patterns
The most typical use for MRCI's Seasonal Patterns is to seek those time periods
during which markets move consistently and significantly over time. This is
usually represented visually by a sharp short-term change or a long-term trend
with minimal deviation. However, they can also be viewed for time periods
wherein the market typically moves sideways. Of course, one might wish to
analyze historical daily charts to find out whether the apparent sideways
movement in a seasonal pattern implies historical "sideways" trading or a market
in which direction is a coin toss - sharply up one year but sharply down the
next. Both could generate much the same pattern.
An options trader armed with such general seasonal information about a
particular market can assume a position with potential to take advantage of
either volatile or non-volatile time periods. For example, a trader - either
novice or professional - who knows that prices tend to rise over the next two or
three months can assume one of the most basic of options positions by buying a
call. Buying a call gives one the right but not the obligation to be long at a
particular price (the "strike price") at any time between purchase and option
expiry. (The purchase price of an option is called the premium, the amount of
which is determined primarily by (1) the amount of time to expiry, (2) the
distance of the strike price from the current market price, and (3) the level of
Conversely, a trader who seeks to take advantage of a seasonal downtrend can buy
a put. Buying a put gives one the right but not the obligation to be short at
the strike price at any time between purchase and option expiry.
Unlike an outright futures position, the risk in buying either a put or call is
limited to the amount of premium paid. In other words, a long option can expire
with its premium worthless, but no additional money is required. The offset to
that limited risk, however, is that a large majority of options do expire
Thus, some more experienced traders prefer to write, or to sell short, an option,
hoping thereby to collect premium. Those who sell outright a put or a call are
paid the premium immediately but then face theoretically unlimited risk and are
required to margin accordingly.
Option traders who like to sell options to collect premium might look for a
segment of a seasonal pattern in which the market has tended to meander sideways
in a range. For example, a trader who notes a market that tends to trade
sideways for a few weeks might estimate the potential boundaries of such a range
in the current year and try to sell both puts and calls with strike prices
outside that range. Such a strategy, if successful, could collect premium from
MRCI Seasonal Strategies
MRCI's Seasonal Strategies can be utilized individually to provide more specific
direction and timing. As discussed above, a trader could trade a particular seasonal strategy, and
utilize a covered write to additionally define risk. One could use synthetic
positions to simulate a futures position, but that could just add complications
by adding time decay to risk already incurred.
How do I use MRCI's Volatility Research?
There are several option pricing models (Black-Scholes, Whaley Quadratic, and
Cox-Ross-Rubinstein to name a few of the more famous). All have particular
reasons why they were created. Some are easier to compute, some are more precise,
some work better with European style options vs. American style options, etc.
The implied volatility utilized in MRCI's Volatility Research is derived from
the Black-Scholes model and is downloaded daily from CRB (http://www.crbtrader.com).
Realizing fully that implied volatility truly only applies to a specific option
strike, the implied volatility as it applies to the underlying futures contract
in MRCI's Volatility Research is computed as the four strike average of the
implied volatility of the first two out of the money calls and puts.
MRCI's Volatility Research consists of four items which place a market's
volatility into historical perspective. The table containing each contract
evaluated consists of the most recent implied and historical volatility values,
the values for the central tendency (average) of historical volatility, and ±1
standard deviation, the change in implied volatility from the previous day, and
how many days it is to option expiration. Additionally there are links to
daily, weekly continuation and monthly continuation volatility charts.
At its most basic, similar to buying low and selling high when trading outright
stocks or futures, the same concept exists in relation to volatility. A trader
doesn't usually want buy high volatility, nor sell low volatility. Both
adversely affect the value of the premium. You will pay too much premium if
volatility is high, and get too little premium if volatility is low. MRCI's
Volatility Research defines how high is high, and how low is low.
- Table - Provides a snapshot of the most recent day.
- IV: Implied Volatility
- Number is red if it is more than one standerd deviation (-1SD) below, green if it is more than 1 SD above (+1SD) of Historical
- HV: 20-day Historical Volatility
- Number is red if it is below -1SD, Green if it is above +1SD.
- ±1SD: one Standard Deviation above or below the Central Tendency (CTHV)
- CTHV: Central Tendency of Historical Volatility (Average)
- IV+-%: The percentage the current Implied Volatility (IV) is above or below the Central Tendency (CTHV).
- D2Ex: Days to expiration of options for that contract (serial style options
using the same underlying futures contract are not represented).
- Daily: Link to daily chart
- Weekly/Monthly: Links to implied volatility weekly and monthly continuation
|Apr19 Live Cattle(CME)
|Jun19 Live Cattle(CME)
|Aug19 Live Cattle(CME)
|Oct19 Live Cattle(CME)
- Daily Chart - Provides relativity for the values pursuant to the current
contract, and the daily volatility bands. As well as the relationship between
historical and implied volatility.
- Weekly Continuation Chart - Provides weekly perspective for up to the most
recent 10 years of Implied Volatility.
- Monthly Continuation Chart - Provides monthly perspective for up to the most
recent 30 years of Implied Volatility.
Hopefully this essay has provided some points to ponder. There is no holy grail
in options any more than there is in stock, futures, or spreads. Trading is
hard work and it is every trader's duty to arm themselves with the best tools
and the most knowledge, in order to provide the best possible edge.
Know your craft, know the risks, know yourself, and most of all be
|*There is a risk of loss in futures trading.