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Using Stock Futures to Hedge Against Market Corrections

How would you like to make $7,175 in 4 days?  

That's the kind of money that gets even rich people's attention and it also happens to be how much money you would have made trading just ONE CONTRACT on each of our 3 Futures hedges from Tuesday Morning's post.  This wasn't some "secret" play, either – this was a public call to short the Futures (along with my explanation as to why you should) that was published at www.philstockworld.com, www.seekingalpha.com and was tweeted out and put up on our Facebook Page - all before the markets opened on Tuesday.

Most traders are TERRIFIED of the Futures market but it's really not much different than the options market with the great exception being that it's open almost 24 hours a day.  That's what we LOVE about trading the futures – if we hear news that's going to move the market when it opens, we don't have to wait to make a trade that can profit from it.  In the case of these Futures shorts, we initiated those trades in our Live Chat Room at 5:50 am, where I said to our Members:

Dow having a particularly rough time with IBM dragging it down.  18,000 on /YM is still our shorting line there and 2,120 on /ES and 4,675 on /NQ and 1,270 on /TF is long gone (1,258) but below 1,260 is a good signal that shorts still work.  IBM is in transition mode and I still like them and they are missing from the LTP so I'll be looking for a play once the dust settles. 

We KNEW, for a FACT, that IBM had disappointing earnings (which we considered a buying opportunity) that would drag the Dow lower (because IBM is a key, price-weighted component) and Futures trading allowed us to take advantage by shorting the Dow Futures (/YM) at 18,000 before the market opened.  As it turned out, the 18,000 line did hold up into the open (see our premise on manipulated openings from the same day's post) and everyone got a chance to join us in our Futures shorts.  

Futures Trading is a fantastic way to protect your portfolio if you happen to be lined up on the wrong side of the market but also a wonderful way to pick up a little day-trading money, WITHOUT paying all those ridiculous broker fees (something else we teach our Members to avoid).  Step one in helping you to get comfortable with Futures Trading is to de-mystify the process.  Much like stock options, futures are misunderstood and feared by the average investor.

When we sell a Futures Contract on the Dow (/YM), the S&P (/ES), the Nasdaq (/NQ) or the Russell (/TF) we initiate a bet at the line we enter the trade.  In the case of the Dow (/YM) above, it was the 18,000 line where we sold our contracts, putting us in a short position on the Futures.  Currently, the default contracts are the September contracts, which expire on the 18th (also options expiration day).  Futures contracts are quarterly.  

That's why the Futures contracts are not fully aligned with the underlying index – the Futures are "cash-settled" on the 18th of September, meaning our bet, like an option, is that the Dow will be below 18,000 on September 18th.  The pricing on July 21st or the 24th is then a reflection of the sentiment on that day, which generally does track up and down with the underlying index (just like an option).  

Unlike an option, a Futures Contract pays a very fixed amount against a move in the index.  In the case of the /YM futures on the Dow (officially called "Mini Futures" because they are 1/5th the size of a standard Dow contract), each tick above or below your line (18,000 in our case) is worth $5 for each contract you purchase.  Since the payouts are steady, the margin requirement is also steady and, for /YM Futures, the margin requirement (your broker may vary) is $4,290 per contract.  Investopedia does a good job explaining this, so I won't.  

We teach our Members HOW to trade the Futures in our Live Weekly Webinars (Tuesday's 1pm) and we also have archives where past Webinars may be viewed.  For now, let's focus on the strategy decisions involved in using the Futures as a valuable tool in our trading tool belt.  

INDU WEEKLYAs I noted above, we KNEW on Tuesday morning that the 18,000 line on /YM would offer resistance, as well as 2,120 on /ES, which was the 2,130 line on the S&P Index.  In fact, the post that morning was titled "2,130 Tuesday – 5th Time's a Charm?" in reference to the S&P's constant attempts (and failures) to get over that line.  IBM is a big part of the Dow and the S&P and we had valuable information (their earnings report) that gave us good reason to expect there would be a drag at the open.  

Our risk was limited as 18,000 is a pretty solid line in the Dow and the Dow doesn't usually jump up or down more than 100 points in an hour – no matter what the news – so we were reasonably certain we could pull the plug before we lost more than $500 per contract.  Cash management is THE KEY when playing the Futures.  Assuming you are right 50% of the time, if you keep your losses small and have the occasional big winner (like we did this week), you can still come out far ahead.  

Let's say, for example, you had $100,000 bullishly invested in the Dow and you were concerned that IBM's news would cause you a loss.  Adding just one Futures contract (/YM) short paid off $2,500 when the Dow fell 500 points, which is 2.5% of 18,000 (our entry).  So a single contract mitigated $2,500 of damage on a 2.5% drop in the Dow – that makes hedging very simple indeed.  If the Dow had gone up, stopping out at $500 may have cost a little, but the bullish Dow positions in your portfolio hopefully would have made up for it. 

When you have a well-balanced portfolio (see Smart Portfolio Management, Part 1, Part 2 and Part 3), you will know how much money you expect to lose when the market goes against you but what good is that knowledge if it comes at 6pm and the markets are closed?  Futures allow you to move to a more neutral overall position by re-balancing on the fly – day or night (not Friday 6pm – Sunday 6pm).  Is that something you DON'T want to be able to do?

It takes seconds to enter or exit a futures trade and you can do it on your phone, your pad or your watch, wherever you are.  Have you ever been out and heard something on the news that put you on the wrong side of a trade and you wished you could do something about it?  Well you can!  

We'll be doing a FREE Live Webinar this Tuesday at 1pm (EST) to go over the basics of playing the Futures – come join us!  

 


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  1. Phil,

    Is there any particular webinar you would recommend for the best review of futures trading?


  2. Sorry, Nols, but we don't have any kind of indexing on the webinars BUT, we can make the next one about futures trading. So just make sure you remind me and ask questions during the webinar.


  3. From Bloomberg, Jul 26, 2015, 5:00:01 PM

    His party is split, government undermined and the economy lies in tatters. Yet in the rubble of Greece, Prime Minister Alexis Tsipras reigns supreme.


  4. From Bloomberg, Jul 26, 2015, 5:00:01 PM

    Russia’s cooling
    market climate has spurred an exodus of international investors. And the forecast calls for the cold snap to linger.


  5. From Bloomberg, Jul 23, 2015, 8:00:03 AM

    Jul 22 — Former New York City Taxi & Limo Commission chairman Matthew Daus, Technet vice president of state policy and politics John Doherty and Bloomberg’s David Gura discuss New York City Mayor Bill De Blasio’s decision to drop ridesharing cap plan with Emily Chang on “Bloomberg West.” (Source: Bloomberg)

    Uber Chief Executive Officer Travis Kalanick has said he wants to refashion the car-booking company into a sort of politician to fight against the taxicab industry. Kalanick should get the confetti ready because Uber just won perhaps its biggest campaign yet. New York City Mayor Bill de Blasio backed down on a plan to stall the growth of Uber and similar ride-hailing apps.


  6. From Bloomberg, Jul 22, 2015, 6:00:19 AM
      Aerial view of Lower Manhattan in New York, U.S.

    New York City, Los Angeles, Honolulu: They’re all places you would think would be popular destinations for Americans. So it might come as a surprise that these are among the cities U.S. residents are fleeing in droves. 


  7. From Bloomberg, Jul 26, 2015, 5:00:00 PM

    The Japanese economy likely contracted last quarter, dragged down by weak consumer spending and a slump in exports, according to a top forecaster.


  8. From Bloomberg, Jul 26, 2015, 5:00:00 PM

    Water ponding at Bay Q8 at Kuala Lumpur International Airport’s new budget terminal. Source: via Bloomberg

    Kuala Lumpur International Airport’s new budget passenger terminal is sinking, with cracks appearing in the taxiway and water forming pools that planes must drive through.


  9. From Bloomberg, Jul 26, 2015, 4:00:00 PM

    The slump in gold that took prices to a five-year low may have further to run after hedge funds swung into a net-short position for the first time.


  10. From Bloomberg, Jul 26, 2015, 7:07:58 AM
      Greece’s prime minister Alexis Tsipras, with newly appointed deputy foreign minister for European affairs Sia Anagnostopoulou and government spokeswoman Olga Gerovasili. Photographer: Kostas Tsironis/Bloomberg

    Greece’s cash-strapped government is set to begin talks with creditors on a new bailout agreement, as capital controls and the shutdown of the country’s financial markets enter a fifth week.


  11. This is quite interesting now because both the S&P and Nasdaq are lagging the other indices on the downside now – about 2% for the S&P and close to 5% for the Nasdaq. It's not a small disconnect. Could be various implications.


  12. Quote of the day:

    "One of biggest investing lessons I've learned is that the more precise you try to calculate, the further from reality you're likely to end up."
    (Morgan Housel)


  13. I don't know how much we can read in the news about hedge funds being net short gold now:

    These guys were very short at the end of 2008 and gold doubled in prices within 2 years! And they went long again at the end of 2014 and look where we are! They were the most bullish around 2011 when the market topped. So not the best of indicator I would suggest.


  14. From Bloomberg, Jul 26, 2015, 6:00:03 PM
     

    For Hong Kong, it’s been one thing after another.


  15. From Bloomberg, Jul 26, 2015, 6:00:08 PM
     China needs more.

    The flash deal was unlike any that had appeared before on the Chinese group-buying website Juhuasuan: Qualified young men could be paid as much as 5,000 yuan ($805) for making a donation to a government-run sperm bank. The colorful advertisement only appeared for two days on the site owned by the e-commerce titan Alibaba, but it received 22,017 responses.


  16. From Bloomberg, Jul 26, 2015, 8:14:12 PM

    Hedge funds are the most bullish on the dollar in four months before a Federal Reserve policy meeting this week that may offer clues on the timing of a first interest-rate increase since 2006.


  17. From Bloomberg, Jul 26, 2015, 8:03:31 PM

    Japanese stocks fell as a commodities slump deepened and poor earnings in the U.S. heightened investor concerns ahead of the start to Japan’s earnings season.


  18. From Bloomberg, Jul 26, 2015, 8:03:26 PM

    Asian stocks fell, after the Dow Jones Industrial Average posted its worst week since January, as investors awaited data on China amid a selloff in commodities.


  19. From Bloomberg, Jul 26, 2015, 8:02:19 PM

    Thailand, Brazil lead exporters among top sugar producers

    Sugar output in Thailand will probably expand to a record as recent rain defies a strengthening El Nino to boost cane-crop growth, according to the Office of Cane and Sugar Board.


  20. From Bloomberg, Jul 26, 2015, 7:42:32 PM

    Oil held losses in a bear market as a rebound in U.S. drilling added to signs producers will keep pumping amid a global glut.


  21. From Bloomberg, Jul 26, 2015, 7:07:55 PM

    Asian stocks extended losses into a fourth day following the worst week for global equities this year amid a selloff in commodities and the rallying dollar. Oil and gold retreated as copper dropped to near a six-year low.


  22. From Bloomberg, Jul 26, 2015, 7:01:00 PM
      ECB President Mario Draghi during a news conference in Frankfurt on Thursday, July 16, 2015. Photographer: Martin Leissl/Bloomberg

    Mario Draghi can take a break from being a full-time Greek crisis firefighter and get back to the job of fostering economic recovery across the euro area.


  23. From Bloomberg, Jul 26, 2015, 7:01:00 PM

    Speculators’ conviction that oil will rally weakened at the fastest pace in three years, just before futures tumbled into a bear market.


  24. From Bloomberg, Jul 26, 2015, 7:00:00 PM
      A worker loads a delivery truck with empty Coca-Cola bottles in Mexico City. Photographer: Susana Gonzalez/Bloomberg

    Venezuela’s deepening economic crisis is costing Mexican bottler Coca-Cola Femsa SAB.


  25. China! Biggest drop  in years……


  26. From Bloomberg, Jul 26, 2015, 9:24:54 PM

    China’s stocks tumbled, with the benchmark index falling the most since February 2007, amid concern a three-week rally sparked by unprecedented government intervention is unsustainable.


  27. From Bloomberg, Jul 27, 2015, 12:00:01 AM

    The Federal Reserve’s message for the market this week could contain hints about the timing of its first interest-rate rise that echo the advice once offered in an old teen love song popular in the 60s: “See You in September.”


  28. From Bloomberg, Jul 26, 2015, 6:01:00 PM

    Pearson Plc moved closer to an exit from business publishing as it announced plans to dispose of its stake in the 172-year-old Economist magazine, just days after the sale of The Financial Times newspaper.


  29. From Bloomberg, Jul 27, 2015, 3:11:09 AM

    Foreign direct investment in Indonesia stagnated last quarter, indicating President Joko Widodo has yet to engineer a turnaround for an economy growing at its slowest pace in more than five years.


  30. From Bloomberg, Jul 27, 2015, 2:21:07 AM

    European stocks declined for a fifth day, as investors weighed company earnings amid a rout in Asian shares.


  31. From Bloomberg, Jul 27, 2015, 2:02:19 AM

    India’s rupee fell to its lowest level in almost six weeks on speculation importers are stepping up dollar purchases to pay month-end bills.


  32. From Bloomberg, Jul 27, 2015, 1:10:35 AM

    Hedge funds and other large speculators are gobbling up the dollar and Treasuries in the hunt for yield.


  33. From Bloomberg, Jul 27, 2015, 12:01:00 AM

    The quality of some of the first wheat harvested by U.S. farmers in 2015 is the worst in at least 17 years, according to one measure, following heavy rainfall across parts of the Midwest.


  34. From Bloomberg, Jul 27, 2015, 12:00:13 AM

    China’s overnight money-market rate climbed to the highest level since early May amid rising demand for funds as the end of the month approaches.


  35. From Bloomberg, Jul 27, 2015, 12:01:00 AM

    The release of Microsoft Corp.’s new Windows 10 operating system — an event that in years past sparked a surge of computer buying — will do little to ease the four-year sales slump that’s been dogging the PC industry.


  36. From Bloomberg, Jul 27, 2015, 12:00:01 AM

    U.S. automakers typically back trade agreements that open markets for their products, yet they aren’t cheering for a pact among 12 Pacific nations that’s entering its final negotiations.


  37. From Bloomberg, Jul 26, 2015, 10:21:41 PM

    Indian stocks declined for a third day, with the benchmark index extending its weekly retreat, as industrials and lenders dropped.


  38. From Bloomberg, Jul 26, 2015, 10:43:24 PM

    Japan’s environment minister plans to oppose two new coal-fired power projects amid concerns Japan may fail to meet its target to reduce greenhouse gas emissions, the Nikkei newspaper reported.


  39. From Bloomberg, Jul 26, 2015, 10:49:06 PM

    Best Buy Co. will start selling the Apple Watch next month, becoming the first national retail chain to offer the device beside Apple Inc. itself.


  40. The meltdown in the price of gold may be cause for optimism

    The meltdown in the price of gold may be cause for optimism


    businessinsider.com / Johan Rewilak, The Conversation

    Gold prices have tumbled to a five-year low. As a tradeable commodity, the price of gold is largely linked to supply and demand. While supply remains fa…


  41. Critics fear Pacific trade deal favours big business over states

    Critics fear Pacific trade deal favours big business over states


    businessinsider.com / Glenda Kwek, AFP

    An advertisement in Washington DC protests the passage of the Trans-Pacific Partnership Sydney (AFP) – With the end game in sight to what could be the w…


  42. This fascinating project reveals why time feels like it flies

    This fascinating project reveals why time feels like it flies


    businessinsider.com / CLAIRE WARNER, Bustle

    Have you ever wondered, why does time fly? We’ve all noticed how summer vacations in our childhoods seemed to last an eternity — in fact, the days crawl…


  43. Hologram Performance by Chief Keef Is Shut Down by Police

    Hologram Performance by Chief Keef Is Shut Down by Police


    nytimes.com / JOE COSCARELLI

    A performance by the Chicago rapper Chief Keef — or rather, his likeness, beamed live via hologram from California — was shut down by the police on Satu…


  44. How to learn from financial history

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    businessinsider.com / Desi Allevato, CFA Institute

    What does it mean to learn from history and can it make you a better investment professional? Economic and financial history have been experiencing a “r…


  45. Calling Obama ‘Our Son,’ Kenyans Nod Knowingly at His Critique

    Calling Obama ‘Our Son,’ Kenyans Nod Knowingly at His Critique


    nytimes.com / MARC SANTORA

    NAIROBI, Kenya — Shaking off the morning chill, they walked down dirt pathways and past burning piles of trash. It would cost 10 shillings — about a dim…


  46. Varoufakis reveals cloak and dagger ‘Plan B’ for Greece, awaits treason charges

    Varoufakis reveals cloak and dagger 'Plan B' for Greece, awaits treason charges


    telegraph.co.uk / Ambrose Evans-Pritchard

    Former Greek finance minister Yanis Varoufakis claims he was authorised by Alexis Tsipras to look into a parallel payment system A secret cell at the Gr…


  47. Revenue Recession: Investors Are Paying Too Much For Growth, Barclays Says

    Revenue Recession: Investors Are Paying Too Much For Growth, Barclays Says


    zerohedge.com

    The myopia displayed by corporate America in terms of inflating short-term earnings at the expense of balance sheet leverage and long-term growth is now…


  48. People Offer Better Ideas When They Can’t See What Others Suggest

    People Offer Better Ideas When They Can’t See What Others Suggest


    hbr.org / by Andrew Stephen and Peter Pal Zubcsek

    Companies from BMW to Kraft have invested a good deal in soliciting “open innovation” ideas from consumers, but the results have been underwhelming: Of …


  49. US Recession Imminent – World Trade Slumps By Most Since Financial Crisis

    US Recession Imminent - World Trade Slumps By Most Since Financial Crisis


    zerohedge.com

    As goes the world, so goes America (according to 30 years of historical data) , and so when world trade volumes drop over 2% (the biggest drop since 200…


  50. Alaska hit by quake of magnitude 6.9: USGS


    reuters.com

    SINGAPORE (Reuters) – An earthquake of 6.9 magnitude struck off the thinly-populated community of Nikolski in the U.S. state of Alaska on Monday, the U….


  51. The dark clouds of peace

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    economist.com

    Built to foster friendship, the euro is manufacturing misery instead UNRAVELLING the tangled logic of Greece’s bail-out talks, Charlemagne has learned, …


  52. China Stocks Suffer Sharpest Daily Fall Since 2007

    China Stocks Suffer Sharpest Daily Fall Since 2007


    wsj.com / Chao Deng

    China stocks suffered their sharpest daily percentage decline since 2007, as worries mount that authorities are pulling back on its measures to prop up …


  53. China stocks tumble, suffer biggest one-day loss in eight years


    reuters.com

    SHANGHAI (Reuters) – Chinese shares tumbled more than 8 percent on Monday amid renewed fears about the outlook for the world’s No. 2 economy, reviving t…


  54. Rogue Dairy Queen to corporate: Shove off with your Grill and Chill! We’re selling the old favorites you won’t

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    salon.com / Dave Kolpack, Associated Press

    A Minnesota Dairy Queen dares go its own way, and sells Chipper sandwiches and products discontinued by corporate The Dairy Queen in downtown Moorhead h…


  55. Chinese Stocks Decline for Second Day Amid Signs of Weak Growth


    bloomberg.com / by Kyoungwha Kim

    China’s stocks fell for a second day, led by technology and industrial companies. The Shanghai Composite Index retreated 1.5 percent at 9:34 a.m. local …


  56. Mumbai Is Overflowing with Garbage

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    bloomberg.com / by Bhuma ShrivastavaAnto Antony

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    wsj.com / Fiona Law

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    salon.com / Valerie Tarico, AlterNet

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  59. Jonathan Tepper on Twitter


    twitter.com

    Today’s markets, although I think buybacks and M are more likely. pic.twitter.com/jxjDd0g72i


  60. Are You Playing Defense in This Market? The Mother In Law Indicator

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    valuewalk.com / Posted By: Jae Jun

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    ft.com

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    project-syndicate.org / Jeffrey D. Sachs

    Germany’s demands have brought Greece to the point of near-collapse, with potentially disastrous consequences for Greece, Europe, and Germany’s global r…


  63. Merlin shares tumble on profit warning

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    ft.com / John Aglionby

    Shares in Merlin Entertainment fell 8 per cent on Monday after the attractions operator warned that its profit would be hit by last month’s …


  64. Biotech high flyers face gravity test

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    ft.com / Eric Platt and Kadhim Shubber in New York

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  65. It’s not who he is, it’s who he hates: The secret to Donald Trump’s toxic appeal

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    salon.com / Elias Isquith

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  66. Good morning!

    Our Futures worse than they look because Dollar was smacked down to 96.50, down 1% from Friday's close so weak Dollar giving a lot of support to our otherwise weak markets.  

    China back to catastrophe, /NKD back to 20,275, Dow 17,505, /ES 2,076, /NQ 4,551 and Russell 1,223 so let's watch 17,500, 2,075, 4,550 and 1,222.50 as shorting lines to see if they hold but I doubt they will if the Dollar gets back to 97.

    Oil $47.96 is holding up well considering China, gold $1,102.20 so-so with the Dollar down so far, silver $14.72, copper $2.37, nat gas $2.76 and gasoline $1.8314.  

    Europe only down 1%, which is pretty good since they are still looking at our terrible finish on Friday as well as China's collapse.  If they start falling, we will too.


  67. $47.50 on oil is a good spot to play for a bounce.  Tight stops though as Brent id down even lower.  Charts looking very ugly:

    Indexes broke lower, as expected but don't be greedy on profit-taking as 17,425 should be bouncy as well as 2,065, 4,525 and 1,215.  If those start breaking, we could go to 17,300, 2,050, 4,500 and 1,200.

    Good thing we just talked about trading Futures to protect yourself, right? cheeky


  68. right! tks


  69. Phil- what do you expect now that we tested 17400 on YM and are back up over 17425? Do we recover from here and bounce as you mentioned earlier or do we break lower and try to get below 17400 now? 


  70. Ok Phl, now than we "know" what the Fed will do from now to 2017   is something useful to do in REITs ?