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Duration: 8:47

Level: Beginner

Suppose one morning that an investor has a hunch about the price of gold. He suspects its price will close the day sharply higher than its current trading price. The investor can now buy a short-term Event Contract at a fixed cost that would provide a known payout should his view turn out to be … Continue reading Trading Event Contracts Using EventTrader

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Study Notes:

Suppose one morning that an investor has a hunch about the price of gold. He suspects its price will close the day sharply higher than its current trading price. The investor can now buy a short-term Event Contract at a fixed cost that would provide a known payout should his view turn out to be correct. Event Contracts allow investors to participate in certain futures markets at a lower risk and enable them to express a view on where markets will close.

The CME Group is making live prices available for participants wanting to buy contracts based on a specific question regarding the price of an underlying futures contract.

Such Event Contracts are limited risk, since investors can only buy them restricting the potential loss per contract to the price paid.  

Such Event Contracts have a maximum value at settlement of $20, yielding a profit of $20 minus the premium paid for the contract and since the question can have only two possible outcomes (yes or no), have a maximum potential loss of the premium paid should they settle at zero.

The CME Group is making available same day contracts on prices of gold, silver and copper, S&P 500, Dow industrials, Russell 2000 and Nasdaq composite indices, EUR/$ currency pair, crude oil and natural gas. Trading starts at 5pm CT the day prior and closes each day at the same time the futures contract settles.

How does it work?

Interactive Brokers’ clients can use their existing credentials to log into eventttrader.interactivebrokers.com. These markets require investors to request Event Contracts trading permissions within Client Portal.  Investors can access the Event Contracts site from Client Portal, Mobile TWS as well as Trader Workstation.

EXAMPLE

Let’s assume the price of gold is trading at $1674 per ounce, but an investor believes it will close the day more than $6 an ounce higher. The investor might look at the Event Contract for gold at a settlement price of $1680, where the question is Will the Price of Gold Settle Above $1680 Today?

Event Contracts have a maximum value of $20 and together the ‘Yes’ and ‘No’ prices should sum to $20.

However, due to the spread entered by the market maker, the combined values of both Yes and No prices likely exceeds $20 to compensate for their risk.  Displayed percentages will also likely exceed 100% for the same reason. Yes price might be $4 reflecting 20% probability of being profitable. The No contract could be $16.75 reflecting a 84% chance of being profitable. If an investor buys a Yes Event Contract and the price settles above $1680, that contract becomes worth $20 and the investor makes $16, since its cost was $4 to buy it. If the futures market settles at $1680 or below, the Yes contract settles at $0 and the investor loses his $4 stake.

However, if an investor believed that gold, currently trading at $1674, would remain below $1680 that day, they might buy the No contract at $16.75. In other words, contracts can only be purchased at the outset. However, long Yes or No contracts can be sold to close the position throughout the trading day through settlement for a gain or a loss. Let’s say the price of gold rose after an investor purchased a Yes contract paying $4 for the $1680 Event Contract. Since the chance of closing above $1680 is now higher, the contract could probably be sold for $10, making the buyer $6 and closing out their position prior to the end of the day.

WEBSITE VIEW

The display at eventttrader.interactivebrokers.com is straight forward. By default, the investor can see All Markets on the home page. Each market is represented by a tile using the Event whose price is closest to the current futures price. This event has the highest probability of paying out.

On the landing page the investor will also see how much time is left until the contracts close for the day. Once the Contracts have closed for the day they will no longer be visible on the site until the next trading day.

Use the tabs to view specific markets such as Equity, Foreign Exchange, Energy or Metals markets in isolation.  [Note – just highlight the menu without clicking on each – it will mess with the flow if you do.]

But by drilling down into a specific tile, you will see Event Contracts with surrounding prices representing higher or lower probabilities of paying out for that specific product. Selecting the Dow Jones Industrial Average contract, for example, from the main page, displays the market as the main display. To the upper right of the quote, the investor may click the Green Buy Yes button or the Red Buy No button.

To the left information on the underlying instrument is displayed. The investor can see the current price, opening price, closing price if applicable, high, low, volume, average volume, as well as historic and implied volatility.

Directly below alternative payouts are listed. Notice that the Event Contract for the same futures contract is replicated with different settlement prices. ‘Yes’ contracts with higher settlement prices will be less expensive alternatives since the probability of expiring with a profit is lower. Conversely, ‘No’ contracts at those same higher settlement prices will be more expensive since the probability of expiring with a profit is higher.

At the bottom of the page, you will see a Contract Definition laying out the expiration date and close of trading, along with the minimum price increment. In this case, that’s 25-cents.

 

To buy an Event Contract the Investor should click on either yes or no of the desired closing level to bring up an order ticket. The order ticket will show the offer. The investor can choose to enter a limit price less than the prevailing ask price or submit a market order.  Select the volume of contracts they would like to purchase by either typing in the amount or clicking on one of the size boxes below.  The investor can also choose between a day order or immediate or cancel. When ready click Preview to create an order ticket.

The order ticket allows the Investor to review the order prior to sending. They can review several items including  the contract, action, side, price, time in force, and available funds. When satisfied with the order the investor clicks Transmit Buy Order.

Details of open positions and pending orders are shown in the area above, along with a data matrix including quantity, average price, market value, and unrealized P&L.

Remember, opening positions in Event Contracts may only be purchased, but that ‘yes’ or ‘no’ contracts are available, which is like buying a call or a put. Investors owning either ‘yes’ or ‘no’ contracts may close them by going to the Portfolio screen and clicking on the Position tab. Once in the position tab they should hover their mouse over the position they wish to close and click on the 3 dots to the right to bring up the blue close button.  The investor clicks the close button to bring up an order ticket and selects either a market order or limit price, the quantity they would like to close out, and whether it is a day or immediate or cancel order. When finished , the investor clicks Preview to review the trade and when they are ready to submit the order the investor clicks Transmit Close Order.

Reference https//www.cmegroup.com/activetrader/event-contracts.html


Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Supporting documentation for any claims and statistical information will be provided upon request.

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

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