Leveraging Capital with Futures | Ken Rose MBA, CMT | 2-18-21 | Trading Futures Correlations
hello investors so interesting day in the market last couple days we kind of went up hit a top kind of banging up there looks like we're sliding down now on some of the major indices also some interesting move with regards to yields what does that mean from a futures trader's perspective [Music] well again to want to welcome you here today for leveraging capital with futures just a little reminder you can follow me on twitter my twitter handle is at krosc underscore tda i post things over there on twitter related to futures areas as well as other areas of investing i also want to thank michael fairborne over there in the chat window he's very knowledgeable in this area i'd encourage you to chat any questions you do have over there to mike you can also follow mike a lot of valuable information that he posts over there on twitter as well i'm sure he'd be more happy to send out his twitter handle to you in wave disclosures here today just a reminder that in order to demonstrate the functionality of the platform we do need to use actual symbols however td ameritrade does not make recommendations or determine the suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely a responsibility we also want to keep in mind that futures and futures options trading is speculative and is not suitable for all investors we also use a paper money software application here do keep in mind that this paper money software application is for educational purposes only and any level of success that we may have in our paper trading account isn't necessarily indicative of the success you have in your actual live trading account as market conditions do change continuously here's a picture of the greeks we may look at doing some option trading here today we'll see how time goes if we do we'll we'll talk about the greeks as we're going along the way here with regards to our agenda here today you know given light of some of the recent movements in the market particularly as it relates to yields and the impact that they have on treasury futures i thought it might be a good idea here today to look at a study called a correlation study and look at that correlation study so we have a good understanding of it and how it can be used from a futures trader's perspective and given some time we'll add a paper trade related to what we're seeing in relationship to correlation we'll go back and look at existing trades we have see if there's any management that would be required this particular point in time then given time we'll add some additional new positions with regards to our overall portfolio so with that let's just go ahead and get in gear here just a just a little bit of a word of caution i guess you could say here it is assumed that those who are attending here today do have a basic understanding of futures and futures contracts if you don't have a basic understanding of futures and futures contract and you're more than welcome to continue to be here i do try to craft the presentation in a way that will be beneficial to everyone just keep in mind that you may feel a little bit overwhelmed at times and i will show you some additional resources the end of our session here today not only regarding futures and futures contracts but also with regards to technical analysis because we do do a fair amount of technical analysis in here as we are trading futures bringing up the thinkorswim platform right here i'm going to shift gears for a little bit and let's come over here to and we see the market starting to slide here a little bit we'll take a look at that in relationship to our existing positions here momentarily but let's first of all talk about correlation and how correlation can be used from a future trader's perspective correlation is basically a study that lets us know how two individual securities move in relationship to each other are they highly correlated or are they inversely correlated if they're highly correlated then if we're looking at a chart would would basically see something along these lines i'm just going to make this two different colors so we're looking at two different securities you know if they're highly correlated we'd see something like this something that that's that is this tight would probably have a correlation somewhere in the neighborhood of i would say a 0.95 or higher in correlation a correlation score of 1 means that they are perfectly correlated in other words both of the securities together make one single line now the other possibility to look at with regards to correlations you may have a situation like this you may have one security that is moving up like this and at the same time you could have a second security that is moving down like this if we see something like this then what would the correlation be well these would be considered to be perfectly negatively correlated so their correlation score would be a negative one and of course you could have variations of this between you know perfect correlation positive perfect correlation negative if we're looking at it from a trader's perspective what you're typically looking for is you're looking for a historical correlation that is going one way and then things break off for example we could have two securities that are moving something like this not necessarily perfectly correlated but they do have some level of correlation okay and then something something occurs and when that something occurs they become uncorrelated this could represent a potential trading opportunity because if you have a historical situation where they tend to be tightly correlated then something occurs to take them out of that correlation then from a statistical standpoint it's reasonable to assume that they could come back in a correlation in other words the one that moved out of correlation could move back and get in get closer into gear with what the historical correlation has been so we have a nice study on the thinkorswim platform that can give us a numerical number related to that correlation and to do that i'm going to come up here to studies and click on studies and come down here and click on edit studies and over here in our studies box right here i'm just going to start typing in correlation here it is right here by the way when you when you bring up the studies you'll notice that over here sometimes you'll get these question marks these questions marks also provide a definition of the study itself we're just going to use correlation right here so i'm going to click on this question mark right here box comes up this just will basically describe what we just talked about what positive correlation is what negative correlation is also one of the things we did not show earlier is that if you have a correlation coefficient that is zero it basically means they're not really positive correlated they're not really negative correlated they're just not correlated at all they just run random in relationship to each other well i've highlighted correlation here so i'm going to come down here and choose add selected to bring it over notice when i bring the correlation over here if you look right here maybe a little bit hard to see on your screen but inside of those brackets we have a symbol and that symbol is spx when we bring this study over it's going to look at the correlation between the s p 500 index and whatever we have up here that may or may not be the correlation we want to look at we may want to change things and in fact we will relate it to the example that we're going to discuss here today let's first of all just look at it though as it sits we would expect these to be highly correlated wouldn't we this is the future that follows the s p 500 and this is the s p 500 itself now in order to see this on our black background here we may want to change the width of the correlation line and also the color of the correlation line so to do that we'll come up here and we'll click on our gear and over here we can set our color it's right now it's a dark red i'm going to change that to a lighter red right now the width is one i'm going to change that width to 0 to 3 sorry we'll say okay we'll say on apply and we're going to say okay here notice what the correlation is right here the correlation is eight 0.9887 that's just about one which is what we would expect i'm thinking right up here that's probably per perfect correlation here now sometimes we may get a little bit of a dip down here although i would suspect that even with a dip when we got this far away correlated we still had a correlation of about point nine six so looking at the line here looks oh well you know there's a fair amount of disjunction here but when you look at it on the bottom side of this we're at 0.96
on the top side of this we're at one these have been tightly correlated going back the length of this chart this chart only goes back three months we're going to extend that a little bit to go back two years in looking at an example so let's do look at an example some of you may have noted a couple of days ago that there was a rather dramatic change in yields and from a historical standpoint when there's a dramatic change in yields that tends to have a greater impact on longer term treasuries versus shorter term treasuries so we want to do is we're going to look at a five-year treasury note and a two-year treasury note we're going to compare the two we're going to look at the historical correlation then we're going to look to see where the correlation is at currently and just ask ourselves the question could this represent a potential trading opportunity so first let's come up here and let's put in a symbol here for the um here's our two year here so our two year is going to be forward slash zt that's our two year and our five year here is going to be forward slash zf and we're going to check the correlation between these two so here's the two year now what are we looking at here with regards to our correlation line right here well we've got this line going on but what are we correlating to here we're correlating to the s p 500 what we want to do is we want to look at the correlation between the two-year treasury note and the five-year treasury note so to look at that correlation we're going to come in here in our correlation study and we're going to change the symbol we're correlating against from the s p 500 to the symbol for the five year treasury node here's our study here i'm going to click on the gear to open it up and then right here it gives us some choices here maybe we come over here if i go futures will that take us right into that let's see well you know what let's just type it in that five year note was forward slash zf i believe so here we have our historical our historical correlation going back three months let's go back a little bit further though let's look at this for another three months let's go back a couple of years just get a better feel for things we can see that these tend to be highly correlated look right here we've got a lot of correlation here up in this upper end of the spectrum but there are some occasional dips down like this okay but then we get back into correlation right here where we at right now though we'll notice right here that move this out of the way we recently had this dip to the downside a little bit of a move up here and then another dip back down here to the downside so would it be reasonable to expect the possibility that these could become correlated once again and why are they not correlated right now what's happened here this is this this is the chart for the two-year treasury let's bring up a chart on the same screen here of the five-year treasury just look at the comparison of recent price movement i'm going to change our time frame now because we've looked at the correlation here i'm going to change our time frame and go back into three months so we can look to see what's happened recently there's that dip actually started moving a little bit here then we've taken another dip here now when i bring up the next chart i wanted to have the same study i wanted to have the correlation study here i have here also i want to have the average true range up here it's helpful when you're looking at some of these futures just to get an idea of the average move on a day-by-day basis so if we're going to put on a trade this will help us to get an understanding of what kind of changes we can look at with regards to the notional value of the underlying security so that we can have a gut check before we take an entry realizing hey this is how much this thing tends to move on a day-by-day basis are we okay with that change in value on a day-by-day basis so to bring up the second chart with the same studies and everything else i'm going to do right click on this chart i'm going to come down here to style here and i'm going to choose set chart default now up here in the upper right hand corner on thinkorswim platform this is where you can create a chart matrix right now if you'll notice right here we just have one square if i want to create two charts here i simply click on our menu up here and i come down here and i create two squares so now i have two charts this is our this is our two year over here let's put in our five year symbol here's our five-year assembly notice our correlation is a little bit goofy down here because what is it set out well we have forward slash zf here our correlation over here is force cs zf it's the same symbol in order to bring this one more in line we want to change this correlation to this symbol so we're comparing two over here just like we're comparing two over here let's go ahead and do that click on our beak here to get into studies we'll come down here and choose edit studies here's our correlation i'm going to click on the gear i'm going to change our symbol from forward slash zf which is the five-year treasury to the two-year treasury forward slash zt that's a little bit that's this is what we were looking for you can see the lines are basically exact and notice here we're correlation then we fell out of our correlation here now we're now we're down in here so looking at this then what's one of the things we can see here well one of the things that we can identify very quickly here is that the average true range on these is significantly different the five year if we look at the average true range this is on a daily basis it's at .1692 well over here on the two-year the average daily range is at a .021 this is much more volatile this is basically what we would expect though and the reason that we would expect that is because changes in interest rates changes in interest rates we could also say yields create a more dramatic impact on longer term versus shorter term treasuries if we compared the five year to the ten year would probably see that the ten year over the last little while has been more volatile than the five year but where do we go from here though with regards to looking at this correlation and realizing that historically the correlation is much tighter than what it currently is now if our expectation was that these would get back into favor with each other in other words they would start moving closer with each other then there's got to be a shift here you know one would tend to move towards the other you know which one could they both sort of compensate each other and both move together well the answer to that question would have an impact on the nature of the type of the trade that we may consider doing in relationship to the relation of the correlation here because the five year has greater volatility we'll let this one be our driver for this trade in other words our major consideration is which direction is this one going to go it looks like we found a base here with regards to that pop-up anneals and now we're moving up here to the upside so we could we could go ahead and and buy this one we could just buy this one all by itself and just do it based on the change in correlation and just just look at it hey you know historically this is this has been a relatively tight correlation with the two-year treasury now it's out of correlation in order to get back into correlation we'd anticipate things to move up because what took it out of correlation here this is where we went out of correlation what took it out of correlation was a move to the downside so to get back into correlation we can anticipate possibly move to the upside so we just simply go long on the five year another thing we could do though in relationship to this and this would create somewhat of a somewhat of a hedge you could say so we could come over here on the two-year and we could sell the two-year now by combining these two positions right here then the net impact of this is we would typically have a less volatile overall position because let's just say hypothetically that this one that we bought instead of going up it starts to filter here maybe it starts to go down well that's going to create a loss on this long position here but would it would also possibly give us a little bit of a cushion with regards to that loss because of this cell right here the other aspect of this is if this went up okay and this one over here went up as well well the profit that we would make over here would somewhat be would somewhat be shadowed i guess you could say because we're losing on this one that we went short but this one tends to be the more volatile one so from a theoretical statistical standpoint we could still be in a place of prof possibly having some profitability so we'll do here for our sample trade here today is just as a just as a as a learning experience we'll go ahead and we'll buy this contract and we'll sell this contract now in doing this we'd like to balance them out because a a one point move in this one could be different than a one point move in this one and in fact it is if you look at the two year here a two year one point move here in the two year if you look at the notional value one point move over here i believe is one thousand we'll we will double check that i believe this one here is actually i think it's two thousand i think this one here is two thousand and this one over here is one thousand so to balance this out as far as getting that hedging type of the thing would actually come over here to want to buy two of these and sell one of these let's take a look at that though just to just to double check that i see a question over there in the chat window why do we have implied volatility over here this is just a separate study right here actually i'd actually like to have implied volatility on both of these the implied volatility this this would be part of another discussion if you're doing paris trading sometimes if there's a significant difference with regards to implied volatility you would not only look at the notional value but you would tie the difference of implied volatility into that that won't be a discussion here for today i was looking at the implied volatility on both of these there is a difference but i don't think it's great enough that that's an important part of our consideration here but in future sessions we will take a look at that as it relates to pairs trading so why don't we come up here then to the analyze tab i'm going to start by cleaning this off here just a little bit i'm going to choose reset up here and risk profile up here and reset stuff over here as well reset our slices delete simulated trades and let's add a couple simulated trades looks like we have zt up here and a simulated trade on zt and zt that was the one that i believe we were going to sell that one right yeah we were going to sell the zt and we were going to buy the zf just now by by the way investors i'm not i'm not saying this is a recommendation to buy this and sell this other we're just going through the process here okay doing this for example purposes only up here and we'll click on the bid price and then let's take a look at the risk profile so this is what we'd anticipate if we're selling actually we're moving here to the downside i want to bring up a price slice here this is the key right here this is our delta this is telling us the change in value of our position for one point change the security and that is 2 000. let's come over here and take a look at the other one we were taking a look at that's going to be our five year and that's forward slash zf forward slash zf and let's start off just make sure we have a fresh slate here we'll reset our slices and delete simulated trades add a simulated trade here and we're going to buy this one and notice that that one has a delta one thousand so if we come in here then i'm going to get a little bit more room down here just like to be able to see our position here okay so there that one so we're going to we're going to buy two of these okay in order to balance out the delts of the two and one of the nice things about futures just to comment on this is the deltas don't change if we're doing options that that delta is going to change in relationship to the price of the of the underlying movement on futures if you're just trading the futures contract now the options below the deltas are static they basically stay where they're at so for a one point move this is going to change in value one thousand one thousand dollars upside or downside let's go back over here to the two year and that's going to be forward slash zt and it looks like we've got a cell on that one already and that is our 2000 so come over here to the trade page now by the way there's not there's a functionality here on the thinkorswim platform and to be honest with you i'm still working on it okay i'm just going to pull it up here pear straighter you can use pairs traders to put the orders in here but i want to have a little chat with the folks with the folks at thinkorswim because the reason i want to have that chat is when you're doing a pairs trade like this my understanding is the impact on buying power would typically be less than the impact on buying power of the two combined positions just because one is hedging the other and using the parish trader i haven't seen that implement i don't know if that's a temporary glitch or something else is going on but until i get to the bottom of that i guess you could say i'm gonna i'm gonna i'm gonna back off on using the pears trader here but hopefully in a future session we'll come back over here and have a further discussion on using the paris trader because this appears to be a really great tool i just like to do a little bit more research about the impact that it's having with regards to the buying power effects so for right now we'll come up here to the trade page right here all products and on the two-year we're going to sell one of these and then right here it's a single order i'm going to change this to blast all and then we want to come over here to the five year forward slash zf and we're going to buy two of these just so that our deltas match up and let's go ahead and pop those in and see if we get filled if we get filled then we go ahead and follow along on this and we we know what our expectations were when we when we entered the trade right and we'll see how those expectations play out as we're going forward here and it looks like we've got a fill on those all right folks so again we'll we will follow up on those well let's shift gears here a little bit then and let's see what we've got with regards to our existing positions over here can you come over here and come in here to leveraging capital with futures and oh you know what looks like i'm going to have to move those over here i i think i decline i think i did not uh say send it to this part of our account but i'll go in after our session here and move them move the trade that we just did over to this area so that we can look at it so looking at our four slash es some of you will remember this is kind of a straggling part of an unbalanced butterfly that we did it's basically the short call vertical portion of that and we opted to roll this out and we did it and we did that at a little bit of a cost as far as a decrease of credit taken away from our original position but we thought we wanted to do that give a little bit of time and see if we could avoid the losing situation that we had now in order for this to be successful we've got eight days here and eight days from now would like the stock to be trading less than 38.55 well today we had a we had a nice move in that direction it looks like we we knocked off 34 points then we're currently at 38.93 so we have eight more days if we had anything similar to what we had today here going forward over the next eight days then we will be in good shape here so given the direction of the market and where we're at in relationship to our target prices i think we're okay leaving this one where it's at and letting the market and time play out on this one a little bit further coming over here this is a trade that we did on platinum and this trade's been rather generous to us we can see right here looks like we're having a generous day here today as well we did a fair amount of research on this but on this one we could call this an example of fundamental research if you want to look back in our previous sessions to get an idea of the basis for this trade you can just look under leveraging capital with futures platinum i believe you'll be able to find that if you if you weren't here when we put this one together this was about doing fundamental research for a futures trade looked at platinum we looked at various reports that are available to you to read about platinum and to read about the use of platinum we did an overview of those reports we opted to look at taking a long position do they always work out like this they don't could this thing reverse itself and go down rather quickly you can it has been a very volatile position to say the least what would be interested right now though is to see this sell order right here as this stock has gone up and created profitability would like to move up our stop loss in order to lock in a certain level of profitability we do want to keep in mind with regards to stop losses though there are no guarantee that they're going to take us out at the exact price that we set but we would like to see where that's at in relationship to where the price is currently at to do that on the thinkorswim platform we can pull up the chart here of platinum by the way we do want to note how many days we have in the contract we have 40.
if things are still going okay we can always roll this forward and continue to to play with the trend or to play the trend let's take a look at the chart i'm going to maximize this chart so that we can just see yeah so it looks like we came up here and now we're going sideways right here i don't see our stop-loss on here i'm going to come up here to style and click on style and come down here to settings i'm going to come over here to futures actually looks like under general we have show orders let's just click on that show orders right there and click on apply looks like our stop is down here i would say that we have justification to move that stop loss up in fact we would probably want to looking at where that stops at right now that looks like that was a stop set based on a re-entry into this stock when it broke above this resistance level some of you may remember when we were first in this we were going sideways like this and we were just going sideways forever so what we did initially is we put in an order to take us out of the trade when we came up here and we hit this top level right here we did that and we and and we captured some profit with regards to that sideways movement we also said hey when we break out of that sideways movement we're okay to re-enter which we did right here and we set a stop loss just down below that theoretical support level but now we've had a nice run up here so what we'll do is we'll come up here we'll set our support level up here and we'll move our stop loss up to about 80 percent of the average true range just below that support level right there so look at that g look at that graphically i'm going to use the price tool right here i'm going to bring a horizontal line across here i also want to bring a line across here i see you see this range the reason i want to bring two lines up here when we break out of this range there would be a technical justification at that point to move our stop loss up we don't have average true range here but i do have it up here on the chart right here so we could just use it right here so if you think about it let me just let me just throw this out to all of you do you think this is a good time to move the stop loss up or do you think we should keep it where it's at just think about that for a second what we'll do is we'll play the part of the investor that's thinking we've got a new support level up here a little bit higher where we've been bouncing along it we'll go ahead and move our stop loss up and what we'll do is we'll use 80 percent of the average true range and we'll set our stop loss at 80 percent of the average to range below this theoretical support level just to give it a little bit of room let's see where that support level's at i'm going to right click on the line and come in here to edit properties rather than do not show we're going to say show that on the left there we are right there grab a calculator here's our average true range 47.72 times 0.8 it's 38.176 minus our theoretical support level right here one two three four well you don't see that too often do you if that was a 0.5 that would really be something but it's 0.4
so where do we want to have our stop then looks like it's going to be at 1 1 9 6. to move that up we'll come over here to monitor come over here to where it says cell i'm going to do right click on that and let's see okay there it is right there and i just want to make an adjustment to that i was hoping to be able to do that right from this screen but great closing let's find it in another place we'll come up here to account statement and we're going to be wanting to look at working orders trade history let's put in here for slash pl this is i didn't expect to have trouble finding the order order history what i want to find here is just working orders what am i missing here folks oh here it is cancel replace let me just go back over there because that was kind of a disjointed thing wasn't it it's right over here where it says sell i clicked on that and this is our stop-loss order on the stop-loss we're going to right-click and then right here is cancel replace order that's the one that we want and then right here this is where we put in our new price we update it to 1196.2 and we'll say confirm and send always a relief when i put those in i don't hear a little bell go off saying that it's sold because the price was incorrect you can see that we've moved our stop loss up to this level right now and looking hopefully for a break out of that resistance level maybe a day ahead maybe a day is staying above that then we'll look to move our stop-loss up further well investors hey we're pretty much out of time here for today hey i just noticed over the chat window there is a survey a link for a survey we do have about we do have about five minutes what i'd like to ask you to do if you could please is to click on that link i'm not going to ask you to fill it out right now but if you could click on it and just open it up so it's there for you to fill out that would be greatly appreciated also with regards to that survey it's it's really appreciated if you can leave a note i'm not asking to write a paragraph or anything like that maybe just maybe just two or three or four words describing what your thoughts were with regards to our session here today and what did you find beneficial about it if we failed to meet your highest expectations maybe a note or two as far as what we could do to improve all of those things would be greatly would be greatly appreciated you know occasionally i'll get a note on twitter or even a note over in the chat well hey ken appreciate the session today learned a lot thanks a lot well um a nice way to say thanks a very nice way to say thanks for just to take a second or two to complete the survey it's really only i believe just three questions maybe four and it's primarily just clicking on numbers and that's it it's not it's not asking you to leave a note you can just you can just click on numbers and different things like that so something you could do very quickly and it would be greatly appreciated if you could take just a moment or two to do that now one of the things i indicated a little bit earlier is for those of you that may feel a little bit overwhelmed i want to show you where some additional resources are for you just to help you out if you do feel a little bit overwhelmed in that way over here on the td ameritrade website you'll notice at the top here we have an education tab and if you click on that education tab or actually just roll over the education tab come over here to the left hand side under education center and come over here and click on futures right here when you click on futures you'll notice that we have a futures course right here fundamentals of futures trading course now for those that attend our leveraging capital futures it's assumed okay that you have completed this course or or have an understanding this course would provide you again if you haven't that's fine you're more than welcome to be here love love having you here if you do feel a little bit overwhelmed though this is a great place to get some additional resources to help build a stronger foundation with regards to this area also under education right here you can come down over here you have stocks options in other areas i'm going to come over here and click on stocks here for just a second i just wanted to draw your attention here to the stocks technical analysis course now we didn't do any technical analysis today here other than we talked a little bit about support and resistance and breakouts in the life but we do do a fair amount of technical analysis here it is assumed that you do have a little bit of an understanding i would encourage you if you feel a little bit weak in this area as far as trends and breakouts and breakdowns and price patterns and like this this would be extremely beneficial as well so just like to call your attention those two areas with regards to webcast you come up here to education and click on education or just rule over education come down here and click on webcast and when the webcast page comes up i'd encourage you to come over here to webcast calendar the webcast calendar look at some of the other offerings we have here okay here's today is friday and this is our session right here leveraging capital with futures there are also webcasts in here as far as getting started with technical analysis and the like and there's also an excellent another futures class we don't see it on here because monday was a holiday but john mcnichol does a nice job with the futures class on monday morning at 9 30 a.m eastern time with regards to looking at things from a fundamental perspective if we come down here just wanted to mike's over there in the chat window if you want to get some more great information from mike he does he does a lot of stuff in here with regards to looking at fundamentals fundamentals on the market fundamentals of stocks and the like has a nice class here on tuesdays at 6 pm investing in value stocks and the like also up here with regards to growth and value strategies let's go ahead and wrap everything up here then so what did we do here today well we talked about correlation we looked at a correlation between a pair of securities we paper traded an example related to that correlation we went and we looked at our at our existing positions we didn't have time to add new positions we'll look to do that next time okay again hope to see you over there on twitter again if you take just take a moment fill out that survey that would be greatly appreciated thanks again to mike over there in the chat window helping out and also just reminded that in order to demonstrate the functionality platform we do need to use actual symbols however td ameritrade does not make recommendations or determine the suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility thanks everyone for joining us here today i hope you have a fantastic afternoon a wonderful rest of your week best of success in your investing also hope to see you next time and also just a reminder you know we've got the vaccine coming out getting rolled out and everything this would be a horrible time to get sick so let's be careful let's be safe and get on the other side of the whole culver thing that's happy and healthy investors bye everybody thanks again we'll catch you later [Music] you