Futures and Options Trading Analysis for Desklib

The article provides an analysis of Futures and Options Trading conducted on Desklib. It covers technical analysis, CFD, and risks involved in trading. It also explains the justification for each trading transaction and their outcome. The trades were conducted for equity, forex, commodity, and future and options market. The article also highlights the importance of technical and fundamental analysis in trading.

FUTURES AND OPTIONS (FIN60804)
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Introduction
In a trade simulation game such as this one, a demo account is created in http://www.plus500.com.my then
transactions are made for 4 different contracts (Ni, Pan & Poteshman, 2008). The contracts are included from four
different asset class categories; the contract includes open position and then subsequently close positions to realize
profits or loss. Trading in virtual account with virtual money has enabled understanding related to technical analysis
and trading strategy and fundamental analysis has been ignored in totality, this can be used for future trading.
Technical analysis using candlestick patterns has been undertaken. The transactions were conducted to provide a
hedge position against market condition for index, forex, equity futures and commodity. Each transaction has been
analysed with the concept from Contract for Differences (CFD) along with the risks involved (Xing, Zhang & Zhao,
2010). Risks in futures considerations are generally higher compared to equity shares as downsides can be
considerable.
Analysis
Trading in equity, forex, commodity or future and options market requires some knowledge of technical analysis. In
all types of trading, the fundamental underlying factor has to be known and understood, which is of demand and
supply factors (Goyal & Saretto, 2009). Technical analysis encompasses understanding of price and price related
behaviours. A contract for difference (CFD) is a contract between an investor and an investment bank. CFD and
trading in futures seem to be similar product categories. When the contract is drawn to close, the parties to the
contract exchanges difference between the opening and closing price for the specified financial instrument such as
forex, commodity, equity futures and so on. CFDs allow investors to gain economic exposure to a listed company for
a fraction of cost, which is need in buying of shares (Brown, Potoski & Van Slyke, 2008). In these cases investors do
not need to pay stamp duty, but only takes a bet for buying in longer position or selling in short position.
In the current analysis, transactions have been done for the following trades, a depiction of which is given in the
attached figure and the description follows;
Justification for each trading transactions and their outcome has been justified as below;
1. Equity F/O: On 17/10/2018 Buy position of Arcelor Mittal where loss is RM-473.85
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Figure 1: Analysis of Arcelor Mittal Price
Figure 2: Trading Picture of Arcelor Mittal from Plus500
The above trades have been conducted by analysis of past trends prevailing in the market. Analysing the first trade of
Equity F/O of Arcelor Mittal, it was seen that the future contract price of the Company had risen in the past week.
Technical analysis of the future price reflects bullish candlesticks, which then gradually reversal in market trend.
There is a strong support level of the future price at 24.75. The price, at which the contract Buy was undertaken, was
estimated to rise when the contract will be closed towards end of the day. However, the Future price of Arcelor
Mittal closed at a low, which led to the loss. The contract was entered into for 470 shares estimating that the price for
the futures will be 25.30, but the price upon closing came down to 24.98. The position was estimated to yield better
returns however, the downside risks was considerably low when compared against equity markets (Chang, Hsieh &
Lai, 2009). In the equity markets, purchasing 470 shares would have required considerable amounts of funds,
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diversification would have been difficult. In futures market, easily exposure to a large cap well-known company
could be opted for at a nominal rate of 25.19 only. The purchasing of the contract was expected to provide a leverage
position in the market by setting a level price. However, the contract price fluctuations in the futures market led to
the balancing of loss.
2. Equity F/O: On 17/10/2018 Buy Capita where RM-2077.37
Figure 3: Analysis of Capita Price
Figure 4: Capita's Analytical Data from Plus500
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Figure 5: Trading Picture of Capita from Plus500
The next contract for Buy of Capita Futures ended in a loss of RM-2077.37. Analytical detailing from plus500
related to the future revealed that 88% was Buyer of the Contract. Analysing trends of the future it can be seen that
there has been a bullish trend on 16th and 17th and 18th of October, post which the market sentiment deteriorated.
Moreover, the fixed spread was 2.07 with a leverage of 1:10, which was very attractive at a buying position. The
contract included 9000 shares, it was estimated that the price of Capita Futures will close above 130.00. The stock
was gaining and the futures were stable in the past few weeks depicted from the technical analytical graphs (Johnson
& So, 2012). The close position ended with 128.16 due to which the losses incurred.
3. Index F/O: On 17/10/2018 Sell position Germany 30 where profit is RM25,428.83
Figure 6: Analysis of Germany 30 Price in a 1 hour Chart
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Figure 7: Germany 30 Informational Data from Plus500
Figure 8: Trading Picture of Germany 30 from Plus500
Analysis of the second trade of Sell of Germany 30 reveals a profit. The trade has been conducted using 137
contracts where it was estimated that the price of the index at the end of the day would fall below 11720.00.
Technical analysis reveals a support level at 11500 with candlestick reflecting patterns at such levels. The bet was
selling of contract for Germany 30 below the depicted price levels, upon closing of the contract time a profit was
realized as the price of the index fell far below estimated. The decision to purchase Germany 30 futures was
undertaken as it was seen to be a highly volatile stock. Moreover, analysis of the equity market for Germany on
17/10/2018 revealed negative sentiments, where most of the large cap stocks were losing. This led to undertaking a
decision to sell contracts of Germany 30 index futures. Index future for Sell position is taken to be able to hedge
position against the possible losses. The hedge position was assumed taking into consideration the declining price of
the Index.
4. Index F/O: Open transaction on 16/10/2018 and closed on 17/10/2018 UK 100 where loss is RM-28435.26
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Figure 9: Analysis of UK 100 Price in a 1 hour Chart
Figure 10: Trading Picture of UK 100 from Plus500
Another contract in which index future of UK 100 Sell was selected is analysed. The contract ended in a loss of RM-
27775.48. There were 35100 contracts selected for this trade and the contract lasted for a day. Technical analysis
reveals strong support at7000 levels for the index, with candlestick patterns revealing strong trends reflecting
underlying fundamental reasons. The contract required overnight funding. The index future contract was expected to
perform better but it closed at a low. Upon closing of the sell contract at price lower than at which it was expected
led to loss in the contract.
5. Option: On 17/10/2018 Buy Call 2880 Oct USA 500 where loss was RM-7.254.50
Figure 11: Analysis of Call 2800 Oct USA 500 Price in a 1 hour Chart
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Figure 12: Trading Picture of Call 2880 Oct USA 500 from Plus500
In the next trade of Buy Call 2880 Oct USA 500 index a loss of RM-7254.50 has been realized. The index call option
had 1230 options where it was estimated that Call rates will rise at the end of the day. The candlestick patterns show
long candles reflecting a bullish trend. Later the price dropped. This current contract was entered into with the
understanding that the call will rise to 6.50. The index of USA 500 performed overall well that day but there were
certain technical issues of certain large cap stocks that drove down call rates for the index. The Call option was
selected to provide a hedge position.
6. Forex F/O: On 17/10/2018 Buy USD/ZAR where RM8155.14
Figure 13: Analysis of USD/ZAR Price in a 1 hour Chart
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Figure 14: Trading Picture of USD/ZAR from Plus500
In the Forex trade position of USD/ZAR, there was significant amounts of profits earned RM8,155.14. The contract
amount for the futures was $1500,000. Analysis reflects strong bullish trends from long candlesticks. This can be
connected to fundamental analysis as well. In the past few weeks due to trade position of USA, it was significantly
seen to be gaining across currency of South Africa. Due to major trade deficits of South Africa, the currency was
expected to weaken against the USD. Therefore, the forex future was opted as there was tremendous opportunity for
the trade to perform well.
7. Commodity F/O: Open transaction on 16/10/2018 and closed on 17/10/2018 Oil where loss is RM-
101386.02
Figure 15: Analysis of Oil Price in a 1 hour Chart
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Figure 16: Trading Picture of Oil from Plus500
Another trade undertaken was in commodity futures for Buy position. The contract was entered into for 66400
Barrels and there was loss made RM-99285.26. This futures contract was taken in Buy position expecting that oil
future will rise. The contract period was one day, opened one 16/10/2018 and closed on 17/10/2016. With oil prices
souring world over, everyone will be bullish on this contract. However, this contract did not have a favorable
outcome. Technical trends reveal support at 69. 52 levels. There has been a bearish trend in the market.
Commodity F/O: Open transaction on 16/10/2018 and closed on 17/10/2018 Oil where profit/ loss is RM0.00
In the last trade, for commodity Oil Sell, there was no profit or loss made. The Sell contract was entered into for
66400 Barrels. The contract lasted for a day on the 16/10/2018. As the opening and closing rate for the contract
remains the same, there is not much gain realized (Busch, Christensen & Nielsen, 2011).
Conclusion
The above analysis of trade positions reveal that not much profitability has been attained from conducting of the
trades. However, there has been tremendous development of skills related to trading. While trading in the future and
options market it is rather very difficult to ascertain profitability and appropriate technical knowledge has to be
present for the same. Technical analysis was included here and fundamental analysis was excluded as fundamental
analysis requires knowledge related to the industry and prevailing external factors that might affect share price or the
commodity price. Often technical analysis cannot be fully being depended upon due to presence of complex signals
or accuracy, in such cases fundamental analysis plays a major role. All the trades have been conducted taking into
consideration the assumption of presence of technical knowledge and skills in futures market trading. Developing of
such skills will allow greater skill development in future and trading for other investor clients. In such cases it is best
to undertake technical along with fundamental analysis.
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References
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volatility and jumps in foreign exchange, stock, and bond markets. Journal of Econometrics, 160(1), pp.48-57.
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