Trading University. Course Syllabus Futures and Futures Options

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1 Dr. Scott Brown Course Description Trading University Course Syllabus Futures and Futures Options Curriculum The objective of this course is to equip students with the fundamental concepts and tools underlying futures and futures option trading. The topics of this course include (1) fundamental analysis of the futures market; (2) technical analysis of the futures market; (3) contrarian versus momentum contract selection and trade management; and (4) futures option trading to reduce the cost and risk of futures trading. IMPORTANT NOTE: I have included academic articles posted on SSRN.com. The econometrics and mathematical theory are beyond the training of a non-finance Ph.D. Hence you can restrict your reading the abstract, introduction, literature review, and conclusion if you find yourself lost in the sections that develop and test hypotheses. These articles required thousands of hours of work from top academics and results should not be disregarded lightly. Anybody who tells you generically that academically qualified financial economists don t know what they are talking about should be held in great suspicion as to their motives with you and your money. If you can grasp the gist of the findings in the article you will be on the forefront of financial knowledge covered by that article. It s all about getting your neurons to connect through daily reading. Over months and years you will be astounded at the knowledge you will glean from this course. Course Materials REQUIRED: Brown, Your Future in Futures, 1 PDF/1MP4, (Included In Tuition). Brown, Futures, 16 PDF/ MP4 (Included in Tuition) Brown, Futures Options, 10 PPT/ MP4 (Included in Tuition) RECOMMENDED: Headset Track n Trade Live Futures Premium Bundle Course Requirements ONLINE CLASS: M 1:00 2:00 a.m. Eastern, Weekly online live interaction directly with Dr. Brown. Classes are recorded for replay. Student Support (In Lieu of Office Hours) 1

2 Student support is offered through Course Website Course information (syllabus, PDF chapters, PPT lecture notes, MP4 streaming video lectures, and MP3 expert interview audios, etc.) will be posted on Please check it regularly using your username and password you received upon enrollment. Learning Assistance Linda Gilbertie is the Executive Director for the course. She will assist you via through the website Course Outline (Schedule of topics and assignments is subject to revision.) Part A. Week 1 Week 2 Week 3 Week 4 Electronic Futures Trading, Futures Basics The Best Business On Earth! A potential path to kick your boss to the curb. How futures markets work. The profit potential of futures trading. This chapter discusses the motivations that traders have. Chapter 1: Your Future in Futures, PDF Introduction to TnT Futures Live, MP4 What Markets Should I Trade? There are only 21 markets that are meaningful to you. Determining which futures groups you can trade. I place special emphasis on discussing why you need master just a few markets. Chapter 2: Your Future in Futures, PDF Getting Started on TnT Futures Live, MP4 How Much Can You Afford To Trade? Most beginning traders fail and why you won t. Organize your family finances to trade successfully. Why you re your own worst enemy and how to get out of the way of yourself. Chapter 3: Your Future in Futures, PDF TnT Futures Live Platform Tabs, MP4 Forecasting the Markets with Fundamental Analysis!! Supply and demand influences prices. Weekly and monthly charts are vital to your trading. Fundamental analysis isn t enough to trade profitably. Special 2

3 Week 5 Week 6 Week 7 Week 8 Week 9 Week 10 emphasis on trend following. Chapter 4: Your Future in Futures, PDF Introduction to Technical Tools, MP4 Beating the Markets with Technical Analysis! The only thing that matters is price. Price charts are treasure maps to your trading. The Bulls n Bears trend following system is a simple yet powerful fortune building tool. Chapter 5: Your Future in Futures, PDF The Elliot Wave, MP4 The Monte-Carlo Simulation Edge! A brief history of Monte-Carlo Simulation. Las Vegas casino math helps futures traders. Account volatility, expected return, and confidence. This is a synopsis of back-testing. Chapter 6: Your Future in Futures, PDF The Fibonacci Ruler, MP4 Mechanical Trading On Autopilot! How the first mechanical trading program came to be. Mechanical trading can augment your system trading. Performance windows to watch. This is a discussion of mechanical trading. Chapter 7: Your Future in Futures, PDF The Andrews Pitchfork, MP4 Futures Options! The curious idea that is an option. Puts and calls are not the same as long and short options. Basic option strategies you need to know. This is a basic introduction to options. Chapter 8: Your Future in Futures, PDF The Gann Fan, MP4 Healthy Investing Psychology Goes Beyond Greed and Fear! The new field of behavioral finance. Investor psychology. Common trader cognitive dissonances and how to avoid them. This chapter discusses how you can be your own worst enemy. Chapter 9: Your Future in Futures, PDF Technical Tools Review & Examples, PPT, MP4 Putting It All Together! 3

4 Part B. Week 11 Week 12 Week 13 Week 14 Week 15 What s really important. What s not important. How to give yourself the best odds of financial freedom trading futures as a business. This is a wrap of the basics of trading futures. Chapter 10: Your Future in Futures, PDF 10X8 Mac, PPT, MP4 Futures Options Introduction to Futures Options Commodity option calls and puts, extrinsic versus intrinsic value, time decay, volatility, and demand. Why the only thing that matters is whether you make money. Brown, Futures Chapter 1, PDF Introduction to Futures Options, PPT, MP4 Differences Between Futures and Stock Options Four primary distinctions between options on stock and options on commodities: (1) Underlying asset (2) Mechanics of the option markets (3) Tax treatment of gains and losses (4) Regulating bodies & trading tools Brown, Futures Chapter 2, PDF Differences Between Futures and Stock Options, PPT, MP4 Long Futures Option Strategies I Futures option markets are very different than stock options. Futures options are VERY expensive. Futures option expirations are much shorter. This discussion focuses on how this impacts long futures option strategies. Brown, Futures Chapter 3, PDF Long Futures Option Strategies I, PPT, MP4 Long Futures Option Strategies II Futures option markets are very different than stock options. Futures options are VERY expensive. Futures option expirations are much shorter. Discussion centers on how risk is limited but reward is theoretically unlimited. Brown, Futures Chapter 4, PDF Long Futures Option Strategies II, PPT, MP4 Short Futures Option Strategies Short option traders face limited profit potential and unlimited risk. Nonetheless short options are important parts of strategies you must master. Discussion of how selling options provides traders with long term advantages over buyers. Brown, Futures Chapter 5, PDF Short Futures Option Strategies, PPT, MP4 4

5 Week 16 Week 17 Week 18 Week 19 Week 20 Week 21 Futures Option Credit Spreads I A credit spread involves the sale of a close to the money option with the purchase of a farther out of the money option. Credits spreads can be directional or neutral. This chapter introduces you to credit spreads. Brown, Futures Chapter 6, PDF Futures Option Credit Spreads I, PPT, MP4 Futures Option Credit Spreads II Credit spreads are the best futures option strategy. This strategy falls mostly into the income category, but has hedging and speculation features as well. Discussion also involves creating a cushion for directional error. Brown, Futures Chapter 7, PDF Futures Option Credit Spreads II, PPT, MP4 Bull and Bear Spreads In this chapter you learn about the Bull Call Spread Strike at which the spread pays for itself is lower. And you ll master the Bear Put Spread Strike at which the spread pays for itself is higher. Brown, Futures Chapter 8, PDF Bull and Bear Spreads, PPT, MP4 Futures Option (Ratio) Backspreads Ratio spreads come in various forms such as the less commonly used back spread. This spread involves the sale of a close-to-the-money option and the purchase of 2 options of the same type with distant strike prices. Brown, Futures Chapter 9, PDF Futures Option Backspreads, PPT, MP4 Limited Risk Range Spreads A trader simultaneously buys high and low strikes and sells two calls at the strike at the mid-point between the two long calls. This is the butterfly spread. Also discussed are the iron butterfly and the reverse butterfly spreads. Brown, Futures Chapter 10, PDF Limited Risk Range Spreads, PPT, MP4 Implied Volatility Skew Ratio Spreads BE WARNED, THIS IS A HIGHLY SPECULATIVE PLAY THAT ENTAILS UNLIMITED RISK, SO IT IS NOT TO BE TAKEN LIGHTLY AND MAY NOT BE SUITABLE FOR EVERYONE. 5

6 Week 22 Week 23 Week 24 Week 25 Week 26 Part C. Week 27 The Williams AD indicator, Technical Indicators Implied Volatility Skew Ratio Spreads, PPT, MP4 Synthetic Long Futures Options Synthetic options allow traders to easily adjust their trade should the market go against their original assessment. A synthetic option is a financial instrument that is artificially created. Bollinger Bands, Technical Indicators Synthetic Long Futures Options, PPT, MP4 Understanding Futures Margin This chapter discuses how short option margin is calculated by an equation developed by the CME using software called SPAN, Standard Portfolio Analysis of Risk. Percent Bollinger, Technical Indicators Understanding Futures Margin, PPT, MP4 The Market Makers Perspective The Market Maker helps facilitate the execution of a trade by providing a bid/ask market for a futures or option contract for any interested investor. This chapter examines the dynamics of the market maker. Commodity Channel Index (CCI), Technical Indicators The Market Maker s Perspective, PPT, MP4 General Futures Market Considerations This chapter discusses how the odds can be adjusted to the futures option trader s advantage by trading extremes using volatility fluctuations, and avoiding plays on economic or agricultural reports. Directional Movement Index (DMI), Technical Indicators General Futures Market Considerations, PPT, MP4 Futures Trading Myths The truth is, trading is tough. Few people have found a way to consistently make money trading futures, and those who have didn t always have it so easy. Some of the most famous traders in the industry wiped out their accounts countless times. Moving Averages, Technical Indicators Futures Trading Myths, PPT, MP4 Money Management Introduction to Money Management: Trading Rules 6

7 Overview of rules common and critical to trading. Once a set of rules is established a system of daily actions must be followed. Then money management comes into play. Banks Lash Out, WSJ Online, Feb 28 th Ch. 1 Introduction to Money Management: Trading Rules, PPT, MP4 Week 28 The Risk to Reward Ratio Risk to reward ratios are easy to calculate when you know what the risk and what the reward is. This chapter explores the topic of risk and reward in terms of carefully and correctly quantifying it. Weighing Risk vs. Reward, WSJ Online, Apr Ch. 2 The Risk to Reward Ratio, PPT, MP4 Week 29 System Evaluation Trading systems must be evaluated based on statistical distribution of returns. The best way is to use the student t distribution. This chapter describes system evaluation based on the law of large numbers. The fast and the furious, The Economist, Feb 25 th Ch. 3 System Evaluation, PPT, MP4 Week 30 Statistical Sampling The first question foremost on a competent trader s mind is whether or not the sample of system returns is representative of future performance. This chapter examines sampling theory that offers traders answers. Asset Allocation in the Presence of Sampling Error, SSRN.com, May 2 nd Ch. 4 Statistical Sampling, PPT, MP4 Week 31 Deadly Shortcuts and Biases Trading success is literally all in your mind. This chapter discusses the whacky ways traders become their own worst enemy in the market. Everything from judgmental shortcuts to just trying to be right is covered. Doubling: Nick Leeson's Trading Strategy, SSRN.com, 2000 Ch. 5 Deadly Shortcuts and Biases, PPT, MP4 Week 32 Developing Low Risk Strategies As traders improve they are able to make more money with less risk. This chapter details the process of developing ideas that seem to be low risk into the process of actual trading. 7

8 A Profitable Trading and Risk Management Strategy, SSRN.com, 2000 Ch. 6 Developing Low Risk Strategies, PPT, MP4 Week 33 Trade Size This chapter introduces you to the concept of modulating trade size. There are three key components. This is an extremely important component to your trading whether or not you use a system. The Determinants of Average Trade Size, SSRN.com, Jan 1998 Ch. 7 Trade Size, PPT, MP4 Week 34 Core Money Management Models This chapter introduces you to the core models of money management; units per fixed amount of money, units risk per equal leverage, percent of margin, percent of volatility, and percent of risk. Momentum, SSRN.com, Oct Ch. 8 Core Money Management Models, PPT, MP4 Week 35 Additional Money Management Models This chapter discusses such money management algorithms as group control, portfolio heat by legendary futures trader Ed Seykota, asset allocation, and professional considerations. Modern Portfolio Theory, 1950 to Date, SSRN.com, Feb 1998 Ch. 9 Additional Money Management Models, PPT, MP4 Week 36 Money Management Models Compared Money management models are comparable but not simply on one dimension of returns. Each model has strengths and weaknesses that traders must pay close attention to. Strategic Asset Allocation in Money Management, SSRN.com, May Ch. 10 Money Management Models Compared, PPT, MP4 Week 37 Setting Money Management Objectives A trader must have a clear concept of where he or she is going through very clear objectives. This chapter discusses how to set those objectives and how to ensure that each is incorporated into your money management system. Investor Objective and Financial Contracting, SSRN.com, Oct 25, 2010 Ch. 11 Setting Money Management Objectives, PPT, MP4 Week 38 Scaling The concept of scaling in and scaling out has been discussed in such books as 8

9 You can t lose trading commodities, by Robert F. Wiest. This chapter critically evaluates scaling in the light of money management. Scale Effects in Mutual Fund Performance, SSRN.com, Mar 17, 2007 Ch. 12 Scaling, PPT, MP4 Week 39 Fixed Ratio Money Management The role and impact of diversification were first formally explained in the early 1950s by Harry Markowitz. Based on his work, we will examine how diversification works. Contrarian Strategies and Cross-Autocorrelations, SSRN.com, Oct 1998 Ch. 13 Fixed Ratio Money Management, PPT, MP4 Week 40 Avoiding Ruin Through Money Management This chapter discusses how to employ money management in layers. Layering an account allows the trader to sequester capital and strategies for other sections of the margin account. Insider Trading and Share Repurchases, SSRN.com, Oct Ch. 14 Avoiding Ruin Through Money Management, PPT, MP4 Week 41 Bad Money Management There are money management models that are simply bad. These include martingale models, optimal f, the Kelly criterion, and just plain winging it. This chapter walks you through the strategies you must avoid. A Prospect-Theory Approach to the Kelly Criterion, SSRN.com, Sep Ch. 15 Bad Money Management, PPT, MP4 Week 42 Putting It All Together: An Interview With Eusebio Nanni Eusebio Nanni started as a software developer for interbank foreign exchange trading desks in Europe with some of the largest banks in the world. In this interview he details his road to success as a professional currency day trader. Empirical Investigation of an Equity Pairs Strategy, SSRN.com, Feb 29, 2012 Ch. 16 Putting It All Together, PPT, MP4 Week 43 Money Management Software: TnT Autopilot Gecko Software produces the only platform that Dr. Brown endorses. The Autopilot plug-in allows traders to automate very sophisticated money management models. Value Line and I/B/E/S Earnings Forecasts, SSRN.com, Nov Ch. 17 Money Management Software: TnT Autopilot, PPT, MP4 Week 44 Money Management Q&A 9

10 Eusebio Nanni started as a software developer for interbank foreign exchange trading desks in Europe with some of the largest banks in the world. In this interview he details his road to success as a professional currency day trader. Value Line and I/B/E/S Earnings Forecasts, SSRN.com, Nov Ch. 18 Money Management Q&A, PPT, MP4 Week 45 Evaluating Yourself Critically The primary reason for investor success is proper calibration of individual skills, strengths, and recognition of weaknesses with regard to markets and strategies. This chapter explores that process. Investor Psychology and Asset Pricing, SSRN.com, Feb Ch. 19 Evaluating Yourself Critically, PPT, MP4 10

The Neutral Market Strategy

The Neutral Market Strategy GOAL To make a profit selling options in a sideways-moving market. SUMMARY Experts estimate that markets typically trend roughly 30% of the time. The remaining 70% of the time