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Why I Switched to Trading Futures and Futures Options

I run a program for subscribers to present my trades and post trade alerts. Anytime I open a trade, close it, or adjust it, I send out an alert so subscribers can copy trade my trades. Any subscriber can also ask any questions and if they need help I can help them with trades, explain the mechanics of a trade or help them out if any trade goes against them. I traded SPX for years but lately started shifting to trading Futures and Futures Options. Here is why.


When Trading Futures and Futures options, PDT doesn’t apply


I do not day trade but time to time when the markets got volatile, I was forced to adjust an SPX trade a few times in the same day. I trade multiple accounts, some are large enough where day trading wasn’t an issue, but others were small (below $25,000) and that caused those accounts being flagged as “Pattern Day Trader” (PDT). In those accounts, I couldn’t trade freely and I had to be very careful with the trades. Many adjustments couldn’t be done at all, I had to let the trade expire in the money and incur losses.


Trading Futures and Futures options requires less Buying Power


This is the biggest advantage I am seeing so far – futures are cheaper to trade. Not on the fees basis, they are more expensive compared to SPX, but on the margin requirements basis. I can open an option trade and limit the margin requirements to $1,000 while collecting significantly higher credit. I can even sell a single naked put contract which would require $8,000 – $12,000 buying power and collect $3,000 – $5,000 credit. Do the same with SPX and you will need $94,000 Buying Power. Compare the requirements for SPX vs. Futures options below:

Trading Futures vs SPX

And here is a same trade (same delta and expiration) for futures put contract:

Trading Futures vs SPX

As you can see, I can collect about the same credit for the same expiration day, same delta, but with significantly lower BP reduction. This is a big deal. Not because I can recklessly trade more contracts, but because I will have more cash and buying power left to weather volatility and day-to-day market fluctuations. The worst thing in trading options is not to have enough cash when there is a storm or panic out there and you are forced to close a trade for a loss due to a margin call. It happened to me many times that the markets changed, margin maintenance requirements increased and I had to close a trade safely far away from the market so survive the storm for a loss just to release the buying power.


Trading Futures options are safer


If you compare the pictures above, you may notice one more benefit of options against Futures vs. SPX that makes futures safer. The same delta is farther away from the money compared to SPX. The dashed line on both trade tickets represent 1SD (1st Standard Deviation). The SPX is at the 1SD, the futures put option is three strikes lower than that. If we assume that the markets can fluctuate and fall down to 1SD, futures contract can still survive the wave of panic selling. The SPX will be already in the money. Of course, this is not something to bet on every single trade, but it provides better safety down the road.


Trading Futures contracts also require less capital


If you do not want to trade Futures options, you can trade contracts directly. While we can buy a futures contract, we cannot buy SPX. If you want to buy SPX you have to use an ETF that tracks SPX such as SPY. In my opinion, SPX and SPY are less efficient as far as capital requirements. If you decide to day trade futures, you would need $6,000 buying power (not an exact number, but in the vicinity of it). If you hold a Futures contract overnight, the BP will increase to $12,890 (again in the vicinity of it). You will never be able to achieve this with SPY. Try to invest the same amount of SPY shares to gain the same rewards as with Futures and you will need significantly larger capital to open such trade.


Trading Futures contracts are more profitable


Given what I said above about Futures being more efficient, they provide far better return on invested capital. I opened a Futures contract in April 30th. I bought 1 /ESM4 Futures contract at 5,080 per contract (with $12,890 +/- buying power reduction). Today (May 15th, 2024), that contract is worth $12,800.00 of unrealized profit:

Trading Futures contracts

I wouldn’t be able to achieve this holding SPY with only $12,000 buying power. I would need a lot more capital to do it.

Here is the same trade on a chart (with a trailing stop to protect gains should the market reverse and sell off):

Trading Futures contracts


What’s not so good with trading Futures options?


The only thing in my evolution of Futures trading and trading options against Futures contracts is difficulty to adjust complex options strategies. For example, rolling a simply vertical put spread (or call spread) is impossible to do as a single trade. At least Tasty Trade says, they do not support such trade (and I am not sure if this is the same with other brokers or just Tasty). Adjusting a trade, like rolling to further date, needs to be done by legging in and out. That can be sometimes very frustrating.

Another bad thing (ugly) is the fees. Fees when trading options against Futures, are very high, so trading short expiration (like 0 DTE) trades and use delta 10, for example, is impossible to do. The trade will not be profitable. The trade will open for a debit (as a seller, I want a credit).

Other than that, I like the performance of using options against Futures or buying/selling Futures contracts directly, so far.


Do you want to trade Futures with us?


If you want to receive our trade alerts to your email inbox, subscribe to our SPX Alerts (although they are no longer SPX alerts), or if you want me to help you trading your account, shoot me an email. I will be happy to assist you.

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