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Welcome to the
Futures Trading Kit
A guide for you in the trading of futures
and options of futures contracts
 Who is Ira Epstein?

 
 Learn More
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INTRODUCTION

Knowledge is important to trading. The more you educate

yourself, the more trading knowledge you have.
The purpose of this trading kit is to provide information about futures trading and the futures markets, as well as to
introduce you to basic charting concepts. Our goal is to educate you about trading. We aim to inform, teach, and make
you aware of the the many services we make available to our customers and to highlight the features and differences
between the services we provide versus others.

Over the past 40-years Ira Epstein has developed a reputation for providing clients with easy to use technology and
teaching good old fashioned trading know-how. No matter how technology changes, there is no replacement for having
"been there and done that".

Be it education, market information or trading platforms, we provide solutions.

HISTORY OF THE FUTURES MARKETS

The modern futures industry stems back to 1848 when the

Chicago Board of Trade was first formed.
While the Chicago Board of Trade (CBOT) was founded to help manage risk in grain prices, the futures markets have
evolved over the years and now include many different commodities and trading derivatives.
Exchanges can be simply defined as meeting places for buyers and sellers of various commodities, where factors of
supply and demand determine prices. Although far from simple, today's exchanges still embody many of the same
economic principals from markets past. One important principal is that commodity exchanges provide a forum for
industries to help manage risk and ensure against price adversity. It's on the exchange floors where price discovery
occurs. There are many different participants that help to determine prices. Floor brokers, commercial traders, large
speculators and small traders are just some of those who add liquidity to this dynamic forum, where prices are
determined.

The Exchanges

There are several principle exchanges in North America where futures are traded. With trading globalization now taking place, many
fully electronic markets are replacing the well established open outcry markets. The largest exchanges in the United States currently
are The Chicago Mercantile Exchange and The Chicago Board of Trade. Smaller exchanges are The New York Board of Trade and
New York Mercantile Exchange (NYMEX). Overseas markets are now invading the U.S. shores. Upstarts such as Eurex are expected
to make important inroads over time.

What's Traded

The primary markets that the U.S. Exchanges focus on in no specific order are: Grains, Meats, Metals, Stock Indexes, Interest Rates,
Currencies, Softs and Energies. Throughout the history of commodity trading, exchanges have added and deleted a multitude of
different commodities. Some commodity contracts survive, maturing to become popular trading vehicles while others fail, often
because of poor trading interest. New contracts are introduced as industries or technology change and new needs for risk
dissemination develop.

Computerization
The face of the futures industry has quickly transformed from one of paper and open outcry to one where things are fully
computerized or close to it. As technology evolves, many aspects of the industry will change, as many already have.
Today, floor execution is often handled through computers. The majority of orders are now placed via computer, instead
of using a telephone to call orders into trade desks at different exchanges.

How does computerized trading affect you?

At first, many in the Futures Industry did not believe the marketplace was large enough to offer trading benefits via computerized
trading. Of course, most of the back office work had been done on computers, but Internet trading in itself is relatively new, less than a
few decades old.

Each year more complete electronic markets are evolving. We estimate that within a few more years, the vast amount of trading by our
clients will be accomplished in 100% full electronic markets. Today, however, open pit trading still occurs in select options markets.
Eventually, these open pit markets will be converted to fully electronic markets. The days of the floor broker will eventually become a
thing of the past.

The benefits of trading on these electronic markets are obvious. Lower trading costs and, in our opinion, a more efficient market.
That’s a hard combination to beat.

Speculation
The simple fact is that most traders who participate in futures or options on futures trading have little interest in hedging
price risk or taking delivery of a futures contract. In fact, it has been estimated that about 98% of all futures contracts
traded are settled prior to maturity. As a trader in futures or options on futures contracts, you will most likely fall into the
category of being a speculator. Simply put, you'll be defined as a person trying to seek profit by anticipating changes in
price action. The futures markets were originally founded to help facilitate the transfer of risk, but it is the speculator, in
large part, who provides liquidity to the marketplace that makes this whole process possible. By trading a market for a
potential return, the effect is adding liquidity to the market.

Before speculating in the futures markets, we think it is imperative to have a working knowledge of the concepts and
mechanics of futures trading. Our goal in this presentation is to expose you to some of the more obvious points that
traders familiar with the marketplace already know.

Our hope is that by reviewing this trading kit, speculators garner knowledge for their future trading endeavors. This
presentation attempts to cover many concepts that are best understood before one starts trading. Once you are
comfortable, you might then consider establishing a relationship with a broker to help further your learning process. Many
of the factors you should become familiar with before choosing a broker are reviewed in the next section.
GETTING STARTED TRADING

Find a broker who is compatible with YOUR needs - not the

other way around.
Before you start trading, shop around to find a broker who is compatible with your trading needs. Understand the different
levels of service available through brokerages and the products they offer. Most likely you will either elect to have a Self
Directed, Broker Assisted or a Managed Account. Know not only the commission rates you will be paying, but exactly
what you are paying for and the level of service your brokerage provides with that specific commission rate. We strongly
believe that traders new to the futures market should first experience trading via a Broker Assisted account before
engaging in Self Directed Internet Trading. In our opinion, quality service is equally as important as commission rates.

When establishing a relationship with a brokerage or advisory service, we have found it important that you make sure that
they are registered with the National Futures Association (NFA). Again, do your homework and make sure your broker
has a good reputation and little in the way of problems with the NFA or the Commodity Future Trading Commission
(CFTC). Be cautious about brokerages that are overzealous about trading markets which you are not comfortable with.
Seek out a brokerage firm that fits your trading needs and is well balanced in terms of commissions, execution and
services provided.

Not All Brokerages Offer the Same Level of Research

Discounted rates often bring with them access to either no research at all or “bare bones” research. Some firms produce little if any
research. Linn & Associates prides itself on offering its customers access to a substantial amount of FREE in-house research while
providing access to third party research as well.

Research must be easy to access, updated frequently and pertinent. Be it grains, metals, stock indices or whatever, having access to
good market research is important as it is another trading tool in your and your broker’s trading arsenal.
How Research is accessed is important. Be it through a website, e-mails, on your smartphone, viewed through charting or trading
software you should be able to access and use the research in a manner that is the most convenient for you. Do not underplay the
importance of how research is accessed.

In terms of customer service, we've found that practically everyone needs at some point to speak with a broker or service
representative. You need people to get back to you during trading hours.

At Linn & Associates, all accounts have access to multi levels of market Research covering:

Stock Indices, Currencies, Interest Rates, Metal Markets, Grains, Meats, Energies, Coffee, Cocoa, Sugar, Orange Juice, Fibers,
Options on Futures, Weather and more, including trading strategies.

Broker Assisted Account

The Ira Epstein Division of Linn & Associates, LLC. maintains a group of experienced professional brokers that devote their full
workday to servicing their customers. Our brokers work with clients as sophisticated as institutional hedgers to those totally new to the
futures markets. Our staff consists of brokers that specialize in futures, options and spread strategies.

Each of our brokers use cutting edge technology to keep their customers updated. You can receive:

 Linn & Associates's proprietary in-house market information

 Intraday Market information Reports
 Your broker's interpretation of key market reports
 Specific trade recommendations with entry and exit points
 P&S Statements e-mailed to you daily

Brokerage Assisted Commissions

At the Ira Epstein Division of Linn & Associates, LLC. we keep Broker-Assisted commissions low. Our brokers, depending on your
needs, will tailor brokerage rates to fit your needs.
If you’ve traded elsewhere, the odds are that you’ll be surprised at how low our brokerage rates can be.

Self-Directed Account
The Low Comission Myth

Lower commissions imply greater profit

Low comissions are a trading factor, but not the whole story. A low rate without “appropriate trading tools” can eliminate commission
savings.

With our technology advances, you have numerous ways to:

 Place orders
 View market news
 Have access to proprietary market research
 Be able to watch videos covering a multitude of commodity markets
 Have access to updated commodity related weather maps
 Ability to place trade orders in numerous ways
 View your account information
 Receive notification of filled orders

We provide you with access to software as well as the ability to place an order by phone.

Our software is available in two versions - HTML Browser Based and Java based.

More About our Software

QT Market Center - Access on Your Smartphone
QT Market Center is our HTML charting and order entry application. HTML software works on both Apple and PC based computers,
tablets and smartphones. There’s no download, no flash, and no software updates to worry about. Simply open a webpage and the full
application opens. Multiple windows, Fixed and Custom Quote Pages, News, Linn & Associates Market Research, access to Ira
Epstein’s Market Research including his videos, Weather Maps, Order Entry and more. Best of all, for those that want to open a
simple application to view quotes, charts and the like, this is your solution. Our HTML software even allows for multiple screens to be
open at once. It will even work in many cases for customers who have firewall issues at their place of work which prevent them from
using our Java software.

Click here to learn more about QT Market Center.

Linn-IraCharts - Built for Power

If you’re looking at using a large amount of chart studies and having almost an unlimited amount of windows open at a time, our
Linn-IraCharts is the best choice. This is for the more sophisticated charting software user. Some version of Linn-IraCharts allow for
clicking on a point on a chart and placing a trade, seeing your trade balance move tick by tick and viewing of Price Ladders. Option
Studies and Trading: Both our HTML and Java based software allow for option trading. The Java based Linn-IraCharts is more
sophisticated in that it has more features than our HTML QT Market Center. Depending on your needs and the version of this software
you chose, you can see all of the popular “Greeks” volatilities and option models including: Black 76, Black-Scholes, Whaley,
Binomial and Trinomial in Linn-IraCharts with price ladder of options in both our chart versions.

Click here to learn more about Linn-IraCharts.

Our staff and management care about our clients. Just because you pay a low commission does not mean you should
receive a low level of service. Our representatives are available to answer your questions daily from 8:00 AM to 5:00 PM
CST. Contact us at: 1-866-973-2077

MARKET OVERVIEW
You may have heard that commodity trading is a "zero sum
game." In effect it is. For every buyer there must be a seller.
Here's a simple example to help you better understand this concept. Let’s assume you buy a futures contract or options
on futures contract and it goes up in value, covering all of your trading costs. In theory, you would be making a profit. The
other side of the trade, the Sell Side, if held by the same trader for the same period of time, would have a loss. It’s that
simple.

Unlike the stock market, where a company can issue shares of stock, which are traded between buyers and sellers, it
takes a totally new buyer and seller to create a futures contract. There is no limit to the amount of contracts that can be
created, while in the stock market, the underlying corporation must issue shares of stock for more to exist.

Traders often ask why would anyone take the other side of a particular trade. The most obvious reason is that those
trading think the market will move in “their” direction.

In today’s computerized marketplace, the “other side” of your trade could come from a number of different market
participants. Hedgers, large institutional firms, commodity funds or other speculators are just a few examples of who might
be on the other side of your trade.

The key to remember is that for every purchase there is an equal sale. There cannot be more contracts bought than sold
at any given moment. Hence the term, “zero sum.”

Leverage
Futures markets present highly leveraged trading opportunities. This can be both a blessing and a curse. If you are on the
“right side” of a trade, high leverage can provide an immense return for dollars invested. There may not be any other
investment, including stocks, real estate, business ventures, collectibles, etc., that can provide the leverage and liquidity
of the futures markets.
On the other hand, when a market moves against you, the high leverage in futures trading can play an important role in
expediting and increasing your loss. You can alter the leverage by keeping excess funds in your account and by not using
all the funds in your account as leverage. In this way, the dollar impact remains the same but the percent of account value
is reduced.

To find out how much leverage futures trading provides, first multiply the current price times the size of the futures
contract. This will determine the full value of the futures contract. Next, look up what your brokerage firm's margin
requirement is. Divide the margin into the contract value and you’ll see what leverage you are obtaining. Typically, it’s
94% or more... interest free!

Leverage Example

Let’s assume that the price of Gold in New York is trading at $850 an ounce. A futures contract represents 100 ounces.

Multiply $850 X 100= $85,000

Let's assume for this example that the margin for Gold is $4,500.

Dividing $4,500 into $85,000 = .052 which is 5.2%

In this example, only 5.2% of the full contract value is required for margin purposes. This means that a bit over 94% leverage is being
utilized to hold a futures contract for 100 ounces of Gold.

Margins
Margin, as it applies to futures contracts, should be thought of as simply a “Good Faith Deposit.” It doesn’t matter if you’re
playing from the Long Side (Buying), or Short Side (Selling).

Margins are initially set by the exchange where the contract in question is traded. Brokerage firms can and do at times
add to the margin levels set by the exchanges, making margins higher, but never lower than exchange minimum levels.
Margins are subject to change and can do so at anytime without advance notice. It is imperative that you communicate
regularly with your brokerage firm about margin changes. Most brokerage firms today have areas on their trading
platforms or a website where margins are posted on a daily basis.

Click Here to View the Ira Epstein Division of Linn & Associates, LLC. Margin Schedule

Intraday Margins

Some firms like The Ira Epstein Division of Linn & Associates, LLC. offer intraday margins that are typically 50% of the stated
margin for those wishing to buy and sell within the current trading day. This is often called “Day Trading Margin.” This offers
additional margin leverage to clients. However, this is but an intraday margin and does not apply to positions carried overnight.
Simply put, when a new trade is made using intraday margins and that position is carried into the next trade session, the "full" margin
must be met.

Avoiding Margin Calls

The best way to avoid having a margin call is to adequately fund your account so that you are trading your market position, as you
plan, instead of trading against the margin money in your account. What we mean by this is really quite simple. Don’t let lack of
margin keep you from trading the strategy of your choice. If you have to make a “winning trade” to hold onto a position, the odds are
you won’t. Take the pressure off yourself. Trade the market with sufficient capital.

Margin Factors You Should Consider

Some important factors you should consider when reviewing the margin policies of your brokerage firm:

1. What are the current margin requirements of your brokerage firm?

2. How do they compare with exchange minimums?
3. How flexible are your brokerage firm's intra-day margin requirements for Day Trading?
4. What is your brokerage firm’s time requirement to meet Margin Calls?
5. What methods does your brokerage firm provide to meet Margin Calls?
 6. Does your brokerage firm accept bank wires and/or personal checks?
7. What are your brokerage firm's policies on checks written, but not yet cleared by your bank?

Initial vs. Maintenance Margin

The margin deposit that you first post to initiate a trade is called “Initial Margin.” Exchanges set the minimum level of Initial
Margin, the "good faith deposit" needed to hold a futures contract.

“Maintenance Margin” is part of the Initial Margin requirement. Maintenance Margin on average is approximately 70% of
the Initial Margin requirement. A Margin Call occurs when the cash value of your account falls below the Maintenance
Margin requirement.

Once your account balance falls below the Maintenance Requirement, you are required to immediately add funds to bring
the account balance back up to the Initial Margin level or to immediately liquidate the position or positions down, so that
your account is no longer on a Margin Call.

Example:

1. Let’s assume you open a trading account and fund it with $1000, which in reality is grossly under
funded, but adequate for purposes of this example.
2. You decide to purchase one Soybean Contract.
3. For this example the Initial Margin is $1000.
4. Maintenance Margin is $700
5. You are prepared to risk $500 on the trade.
Should the value of your account fall below $700, you would be on a Margin Call. In other words, the only cushion you
would have had initially would have been $300. Given your $500 risk tolerance, this is much to narrow to effectively trade
your strategy.
The above example shows why we believe an account needs to be adequately funded to ensure that our clients can trade
according to their trading strategy, not according to the margin required to hold a contract.

How to Meet a Margin Call

To meet a Margin Call, traders can either promptly add funds to their trading account, liquidate the whole position, or if
multiple positions are “open,” reduce the number of “open” contract positions down to satisfy the current margin
requirement. Traders can also liquidate the account down to the point where they have no open positions. Regardless of
your method of trading, you need to abide by your broker's margin policies and stay abreast of changing margin
conditions.

It is important to keep in mind that liquidating a position down does not release you from your financial responsibility
should your account lose more than the funds in it. You are responsible for any deficits that may occur in your account
and are required to immediately pay off all such deficits.

Slippage
Slippage is a trading term referring to the price differential between the executed price received by a trader versus what
the trader expected to receive. Slippage can occur in thin markets, fast markets or extremely volatile markets on Stop or
Market Orders, but not on Limit Orders to buy or sell.

Slippage on Stop Orders

Slippage on a Stop Order can occur when a fill on your order comes back higher or lower than the price stated on your
Stop Order. Stop Orders are "trigger orders" that become Market Orders once your stop price has been met. Your fill may
not be at the same price as the original Stop Order, especially if the market is very volatile or is gapping higher or lower
into the next session's opening price range.

Slippage on Market Orders

The price you see on a screen or get from your broker is constantly changing when the market is open. Sometimes these
changes occur within nano-seconds. When you place a market order, because of the time it takes to get into a trading pit
or electronic database, the fill you receive may not be at the price you saw when you entered your Market Order. This too
is considered slippage.

Liquidity, Open Interest and Volume

Liquidity

Liquidity is a term used to depict how actively a particular futures contract is traded. Not all Futures Contracts or Options on Futures
Contracts have large market participation.

Open Interest

This term is used to describe how many open contracts of a Futures or Options on Futures Contract are outstanding. The more
contracts that are “open,” generally speaking, leads to more market participants taking positions, which often leads to more trading
volume.

Volume

This is the amount of contracts traded in a Futures or Option on Futures Contract in a given trading session. The exchanges publish
these figures at a minimum, daily, with some exchanges reporting volume by each separate trade made throughout the day. IraCharts,
The Ira Epstein Division of Linn & Associates charting software provides both end of day and intraday Volume and Open Interest
figures whenever exchanges make them available.

As stated above, the relationship that Open Interest and Volume have to pricing is very important. Corresponding changes
in prices can at times be directly related to changes in Volume and Open Interest. We refer to this relationship as Market
Sentiment.
Market Sentiment
Market Sentiment in the futures market can be defined as the overall attitude of participants towards a particular futures contract or
sector of a futures market. It’s crowd psychology as revealed through price movement in the futures contract or sector being traded. A
review of how markets may respond to changes in Price, Volume and Open Interest is shown below. This is not an exact science. The
relationships described below are what many technicians expect from changes in Price, Volume and Open Interest when they act in
harmony.

Prices Volume Open Interest Market Indication

Up Up Up Bullish
Down Up Up Bearish
Down Down Down Moderately Bullish
Up Down Down Moderately Bearish

Commodity Prices
Commodities prices are quoted many different ways. They vary from Bushels in Grains; Ounces in Metals; Pounds in
Meats; Cents for Currencies, and Percentages for Interest Rate Contracts.

When first learning how prices are quoted, you may find it helpful to concentrate on just a few markets at first, getting an
understanding of how price action is quoted. No matter how the price is quoted, a minimum market fluctuation is called a
“tick.”
The size of ticks can and do vary from one futures contract to another. Become familiar with how each futures contract is
quoted and what each minimum tick is worth. A link to this is provided on our website.

Trading Months

Futures contracts are traded in specific delivery months, selected by the exchanges. The months offered for trading often
correlate with seasonal tendencies for marketing, producing or hedging of that particular futures contract. The front month,
the most current contract month offered by the exchanges, is typically where the most trading volume occurs. As a rule of
thumb, the further forward in time you go from the current contract month, the more illiquid those contracts become.

At times, exchanges expand or contract the number of trading months, as user demand dictates. The symbols used for
delivery months are unique to commodities. Click here to view a listing of each Futures Contract's Trading Months and
symbols. These symbols correspond to the contract symbol that you use to view or interact with that particular contract in
your charting software or elsewhere.

It is imperative that speculative traders concentrate their trading on those contract months that have liquid trading volume.
Positions can be executed in delivery periods that are months or years away from the lead-trading month. However,
liquidity is often sacrificed when trading contracts are way out in the future.

Limit Move
Daily price limitations or “limits” are set by exchanges on many futures contracts. This maximum sustained move is, in
effect, a circuit breaker for those markets that have moved excessively in one day. Limit Moves are different for each
futures contract. A few futures contracts do not have a daily price limit.

Once a limit move has been made, trading beyond that limit price cannot occur during that day. Trades at or under that
price limit can occur until that "circuit breaker" is removed, as discussed below.

There are substantial differences in how various exchanges employ limits. Some exchanges might employ limits on all
traded months, while others place limits on all months except the current delivery or “spot” month. Some contracts such
as the S&P 500 Stock Index Future have a progressive “circuit breaker” type of limit. This is triggered when the Index has
moved a certain percentage of the previous session's closing price. Unlike a true limit move, where trading cannot occur
beyond the limit price, circuit breaker levels postpone trading for a period of time, sometimes no more than 15 minutes.
They then reopen where trading can occur beyond the limit price and a new circuit breaker level becomes effective. In
stock indexes you can have multiple circuit breakers within a trading day.

In those markets where a price limit occurs, it is feasible that traders might not be able to liquidate a trade for that trading
session or beyond. Some exchanges have mechanisms in place to increase the amount of a limit move if a trade has
locked limit for several consecutive days

Spreads
A simple definition of a “Spread Trade” is one that involves one long contract and one short contract. You cannot be long
and short on the same futures contract in the same month, as that would offset the trade. However you can be long and
short in the same futures contract as long as the contract month you buy is different from the contract month you sell.

Some consider a spread to exist between futures markets that have relationships. This is best illustrated by showing below a partial list
of some of the more popular related spreads.

Popular Related Spreads

Wheat/Corn
Corn/Oats
Bean/Meal
Popular Related Spreads
Live Cattle/Feeder Cattle
Live Cattle/Live Hogs
Gold/Silver
Crude Oil/Heating Oil
Heating Oil/Gasoline
Ten-Year Note/Five-Year Note
Eurocurrency/British Pound
Canadian Dollar/Swiss Franc
Soybeans Old Crop/Soybeans New Crop
Wheat Old Crop/Wheat New Crop
Corn Old Crop/Corn New Crop
Exchanges can and do recognize “related” spreads by often posting a lower margin for them. In most cases, lower
margins do exist for a spread trade in the same futures contract using different trading months.

When establishing a spread position, traders often look at the price relationship or “price difference” between two
contracts, rather than individual price levels. If a trader believes that a price differential is too close together, he looks for a
spread to “widen.” Conversely, if he believes a price differential is too far apart, he looks for it to “narrow.”

Related Spread Example

1. If Wheat prices are $3.00/Bushel and Corn is at $2.50/Bushel, the spread differential between Wheat over Corn is 50 cents.
2. If you believe this spread price is too narrow you would Buy Wheat/Sell Corn, looking for the relationship to widen. (In other
words, you want Wheat prices to go up faster than Corn prices, or Corn prices to go down faster than Wheat prices.
3. Let's assume that when the position is closed out, Wheat is at $3.75/Bushel and Corn at $2.75/Bushel. The Spread price $1.00.
4. If you purchased the Spread at 50 cents and covered at $1.00 you would theoretically be profitable 50 cents or $2,500, less
your brokerage costs.

It is important to note that in many agricultural markets, different contract months of the same market often relate to
different growing or production cycles. Characteristics that apply to “old crop,” last year’s grain production, may be vastly
different from that of the “new crop,” this year’s grain production. Before engaging in spread trading, try to understand the
unique characteristics and relationships that different months and different related futures contracts have to one another.

Seasonal Patterns
When seasonal supply and demand factors influence price action in a consistent manner, distinct price patterns can
develop. Seasonal Patterns influenced by fundamental factors through time and repetition can present traders with a
means to approach trading. Mathematical probabilities of how often and when a market might move can be formulated
using seasonal studies. You could research trade history over years to see if there are any recognizable patterns.
Fortunately, there are services available which already have done the leg work in recognizing many of these patterns.

In our opinion, some of the best seasonal information comes from the Moore Research Center, Inc.
 For more detailed seasonal patterns from the Moore Research Center, please visit their website at www.mrci.com

Another good source of seasonal information comes from exchanges. Contact them through their websites. More likely
than not, you will find some seasonal information and other valuable information. Many good texts have also been written
on this subject. Some brokerage firms will supply seasonal charts for you to reference. We recommend using these charts
as reference tools to see if trades “fit” with normal seasonal patterns.

Given all the percentages and hypothetical results, it is still very important to see how a particular market is trading
currently as it pertains to its seasonality before attempting a trade. Just because a market has moved up 90% in a specific
time frame does not mean it will do so this year. Remember, past performance does not guarantee future results.
Fundamental and technical analysis should be applied together. If a trade seems to fit seasonally, and the fundamental
story and technical picture are in agreement, then start formulating a game plan for entry into the market. By now, we
hope you have a better understanding of fundamental and seasonal analysis.

TEN TRADING RULES

Discipline is key to managing your losses and building your

success.
There are many different rules that traders can abide by when trading in the futures markets. We have compiled
a list of what we believe are some of the most important rules.
1. Try not to pick tops and bottoms with futures. Let the markets tell you when a trend has changed. Good
money can often be lost trying to predict trend changes. Wait for patterns and indicators to confirm a reversal
before entering the market.

2. Try not to stay with losing positions beyond a predetermined level of risk that you are comfortable with.
Learn to recognize mistakes and accept losses. Acknowledging that a trade is going wrong and executing a
strategy to stop it from losing further, traders learn how to cope with losing trades.

3. Knowing where to exit losing trades is important, but equally important is knowing where to add on or take
profits. Try taking partial profits in attempt to lower risk, while preserving a core position for potentially larger
moves.

4. Don't add on to losing positions unless a specific accumulation strategy is part of your overall strategy. In
trending markets, new long positions should be added on at higher prices, and when selling short, new short
positions should be executed at lower prices. "Doing more of what is working and less of what is not" is an
adage to adhere to in trending markets.
5. Don't over trade and don't try to capture every market movement. Outline a game plan for each trade and
place orders accordingly. Strive to find good trading opportunities, not every opportunity. If a market does not
perform [based on your outlook, be done with it and move on.

6. Try not to enter large, exposed positions ahead of significant market reports, attempting to predict their
results. Traders don't often predict the exact outcome of a report.

7. When day trading, day trade. Don't turn a trade that you entered into for day trading purposes into a position
trade.

8. When analyzing markets for new entry points, try to stick with markets whose fundamental and technical
pictures are in agreement with each other. When possible, apply seasonal studies for more confirmation.

9. Traders might consider buying inexpensive options instead of futures when looking for a trend reversal.
When buying option premium, look for low volatility and historically high or low futures prices. By
committing small dollars, option traders who buy Puts or Calls can potentially speculate in many different
sectors with limited risk. If an option performs well, consider a more aggressive approach by adding on more
options or trading futures in place of option contracts, once the market has confirmed its new direction.

10. Avoid thinly traded markets with poor daily volume and little open interest. If a market's normal price
fluctuations are beyond your risk comfort level, stay away from it! There are many liquid markets to choose
from where risks may be more compatible with your trading style.

CHART PATTERNS

14 Typical Chart Patterns

Below are 14 of the most common chart patterns. There are others of course, but these are ones most typically
seen. They should in no way be a replacement for knowing how to analyze a chart. You can download this set
of chart patterns as a PDF here.
Trading Range
Up Channel
Fan Lines
Saucer
Ascending Triangle
Descending Triangle
Bullish Flag
Bearish Flag
Head and Shoulders
Rising Wedge
Double Top
Double Bottom
Bullish Pennant
 Bearish Pennant

Download these chart patterns as a PDF

MONEY MANAGEMENT

No matter how good a particular futures or option strategy

might be, if good sound money management principals are
not applied, the probability of continued success usually
diminishes.
Money management is one of the most overlooked factors in futures trading. One explanation for this may be that some
traders believe that the capital used in futures trading is total risk capital and is therefore often treated much too loosely.
While it can be true that futures capital is normally used for speculation purposes, traders should not approach trading in
an overzealous, risk all manner. In fact, just the opposite philosophy is one of the elements necessary to become
successful. Futures trading can become a very costly lesson if you do not approach it with some type of discipline. Even
with discipline, you can lose, but with consistent money management, the odds of catastrophic loss can become smaller.

Dollar Risk Levels

Traders have to be realistic. Looking at a chart, "seeing" a trend and trying to play it often proves difficult when one is
working with a fixed amount of funds. As few of us have unlimited funds, funds should be a "filter" used to filter out both
trades and risk associated with trades. In other words, set parameters.
We like the idea of setting up Dollar Risk Parameters and establishing a label for each parameter. An example might be
as follows.

Definitions of Initial Dollar Risk as taught in Ira Epstein's Charting Course

Low-Risk Definition:

A Low Risk Trade is defined as one having an approximate initial dollar risk of $0 to $150.

Medium-Risk Trades Are Broken Down Into 3 Categories:

Lower-Medium Risk:

A Lower-Medium Risk Trade is defined as one having an approximate initial dollar risk of $151 to $250.

Medium-Risk Trade

Medium-Risk Trade is defined as one having an approximate initial dollar risk of $250 to $350.

Higher-Medium Risk Trade

A Higher-Medium Risk Trade is defined as one having an approximate initial dollar risk of $351 to $500.

High-Risk Trades

High-Risk Trade is defined as one having an approximate initial dollar risk of $500 to $600.

Dollar-risks should be calculated with no allowance for slippage of fills, gaps in the market, commissions and fees.
We have found that one of the "keys" in trading is realistic money management. What most don't do is use money
management as they would other trading strategies. Money management should be included and have equal importance
if not seniority over all other trading tools.

Develop a Game Plan

We believe traders should implement a specific game plan before entering a trade. Some of the key factors when
developing a game plan are reviewed below.

1. What type of risk are you willing to take on in a particular market? What is a reasonable stop out point
when you believe a trade is going wrong?
2. What profit objective do you wish to obtain. At what levels do you wish to exit winning trades and do
you take partial or full profits?
3. What are the risk characteristics of the market you intend on trading?
4. Does the plan have fluidity? If events change, will the plan change with it?
In summary, the game plan should include a strategy as to when to exit a losing trade and when to take profits. This can
be done by placing orders above and below a market. For long futures, traders can place limit orders above the market for
potential profits, and stop orders below to help limit losses. The reverse is true of short positions. We recommend this type
of approach.

TECHNICAL ANALYSIS

Technical Analysis is every bit as much an art as it is a

science.
Multitudes of books and theories have been produced concerning technical analysis. Condensing what literally could
encompass an entire trading course by itself is not the intent of this trading kit. Rather, we will present an overview of what
we believe to be some of the most important aspects of technical analysis, including a brief overview of the way many
approach this art.

In short, technical analysis is the study of price action using mathematical indicators and chart patterns to help determine
future price action. Most “trading systems” have some basis in technical analysis. That is what is most important to keep
in mind.

First and Foremost

Technical Analysis is every bit as much an art as it is a science. No system is ever going to be foolproof or work 100% of
the time. Some systems are totally objective, while others need considerable input. No matter how you approach technical
analysis, market forces outside your recognition can and will challenge your fortitude and trading style. Our
recommendation is to start out simple, building a trading style over time. You might wish to experiment with different
trading styles until you become somewhat comfortable with your own analysis. This will become an evolving process as
you come to conclusions about what makes sense to you. As time goes by and your system develops, it will become
important that you stay true to your system.

At this time, let’s display some of the most recognizable Chart Patterns.

Charts
Bar Charts
When conducting technical analysis, most utilize the more popular and readily available type of chart, a Bar Chart. Bar Charts are
made up of vertical lines, Daily Bars measuring the high and low for a particular time period. Daily bars often show marks for the
opening price on the left and marks on the right, which depict closing prices. For longer-term studies, weekly or monthly charts using
bars showing monthly or weekly time frames can be used. For shorter term, or day trading, many use 5 or 10 minute bars. Day traders
occasionally use a 30 minute or hourly bar. When position trading, you’ll discover that Daily Bar Charts are most commonly used.

Candlestick Charts
Japanese Candlestick Charts have their own unique characteristics and uses. They (Candlestick Charts) reflect the high and low of a
period on a vertical line, the basis for what becomes the “candle”. The opening and closing prices make up the “body” of the line.
When the close is higher than the open, the body is widened and left clear or open. When the close is lower than the opening, the body
is widened and darkened. Different patterns exclusive to candlestick charts are formed, based on the relation of the opening to closing
prices. Many analysts believe this is the key to Candlestick Charts.

Point and Figure Charts

Point and Figure Charts utilize (X) and (O) to depict prices. These Xs and Os are marked on a vertical axis with a specific price
measure. Xs represent rising prices, Os represent declining prices. Time is not measured on a horizontal axis. Prices move horizontally
only when a market reverses by a set measure. If a market moves incrementally up for 3 days, with no measurable correction, prices
are plotted on one ascending X line. Not until a price correction of one predetermined unit occurs, is an O line formed. Trend lines and
patterns similar to bar charts can be formed when using Point and Figure Charts.

Technical Indicators
Moving Averages

Simple or arithmetic averages are the result of adding together a sum of prices, be it the high, low or close of a time
period (usually a day), and dividing the sum of a number of time frames (days) together with periods you wish to average.
To make it move, hence the word “moving average,” a current price is added and the oldest is dropped.

Weighted averages place more emphasis on recent prices. Triangular averages tend to weigh the middle prices more
than old or new data. Exponential averages use a smoothing constant to help factor in old price data before the period
being averaged. Some common periods used for moving averages are 3, 9 and 18 day studies or 5, 10 and 20 day
studies. We have found that combinations of two or more averages with at least one short term and one long term
average seems to work well.

Trading signals are generated when one over average crosses another, or when prices move above or below an average.
The basic concept behind moving averages is this: When prices are rising, an Uptrend is at hand. Therefore longer-term
moving averages should be below the current price action. Conversely, when prices are declining, a Downtrend is at
hand. Therefore longer-term moving averages should be above the current price action.

Standard Deviation / Bollinger Bands

Standard Deviation Trading Bands are most often plotted using two standard deviations of price change above or below a desired
moving average. Standard Deviation Bands normally use triangular averages, while Bollinger Bands normally use Simple Moving
Averages. Different look back periods and smoothing period lengths can be used to develop bands that normally “display” price
variations.

Statistically speaking, for a Standard Normal Distribution, there is a 68% probability that prices will lie within one Standard Deviation
on either side of the mean. To achieve a 95% probability, analysts typically use two Standard Deviations on either side of the mean.
These points represent support and resistance.

Window Envelopes
These indicators are developed as a set percentage above or below a Normal or Exponential Moving Average. Most commonly
referred to as Window Envelopes, different percentages above or below the arithmetic mean can be utilized to help custom fit price
bands for different markets. Unlike Bollinger Bands, which adjust to changing volatility by expanding and contracting using
algorithms, Window Envelops stay at a constant percentage above or below the arithmetic mean unless the user custom fits them.

MACD
Developed by Gerald Appel, this indicator displays two distinct lines. These two lines are: The MACD line and the Signal line. The
MACD line is the difference between two Exponential Moving Averages. The Signal Line is a smoothed Exponential Moving
Average of the MACD. As confusing as this first one sounds, this indicator can be useful to verify if a market is still trending or near a
trend reversal point. Buy signals are generated when the Signal Line crosses up through the MACD Line, while sell signals are
generated when the Signal Line crosses down through the MACD Line.

Stochastics
Developed by George Lane, this reversal indicator is based on a scale of 100 using two moving lines, which make up the oscillators.
Each line is given a specific name. One is labeled the K line and one the D line. Inherent in the mathematical formula of this system is
the creation of a fast and slow moving line. The K line moves faster than the D line. When the faster K line crosses the D line, a signal
is generated. If a crossover down occurs from a level of 80% or greater, a Sell Signal is developed. When a crossover up occurs at
20% or lower, a Buy Signal is generated. This indicator is most useful to tell you if the market is getting stronger, weaker, overbought
or oversold.

Relative Strength Index - RSI

Developed by Welles Wilder, this momentum oscillator is used to help measure the velocity of a directional price move. Similar to
Stochastics, when the RSI is above 80% a market is considered overbought. When the RSI is below 20% the market is considered
oversold.

Because only a single line is used to depict the formula's results, crossovers do not occur. The variables of the RSI can be changed to
measure highs, lows or closes. Commonly used look back periods are 9 and 14 days.

Learn more about technical indicators by downloading our Guide to Technical Indicators Volumes I & II.

Click here to download Volume I

Click here to download Volume II

The 3 Step Approach to Technical Analysis

Once you have an idea as to how to utilize technical indicators, it is time to apply them to charts. We suggest a simple 3
Step Approach.

1. Look at charts and develop an opinion about market direction through trend analysis.
2. Recognize chart patterns to help determine price objectives and risk factors.
3. Apply key technical indicators to help confirm market opinion.

Summary

There is no one technical indicator that is consistently better than another. At any given point in time one indicator may
produce spectacular results while another may falter. The key is to recognize what market conditions best utilize what
specific indicators. Is the market trending, moving sideways or breaking out? Is the market volatile or is it consolidating? Is
the market showing a characteristic that helps define what indicator best applies to it?
Like an artist using several different colors to form a picture, technicians often use several different indicators to form their
picture. As with too much paint, too many indicators can “muddy up” a chart picture. Try not to overanalyze what
potentially could be a good trading idea.

No system is or will be 100% perfect. However, we believe you will become consistent with your price analysis if you
approach technical analysis with a methodical approach like the one we outlined above, which includes:

1. Trend Analysis
2. Chart Pattern Recognition
3. Applying “Proper” Technical Indicators

FUNDAMENTAL ANALYSIS

Supply and demand breathe life into a market.

We define Fundamental Analysis as the study of supply and demand factors affecting futures market prices. This is one of
the principal theories for determining futures market pricing, and goes to the very root of futures trading. The study of
supply and demand factors dates back as long as goods have been produced. Many of the same economic principals that
helped determine commodity prices in the past hold true in today’s marketplace.

The basic principals behind fundamental analysis are:

A decrease in supply normally puts upward pressure on prices and an increase in supply puts downward pressure on
prices.

As demand increases for a particular commodity, higher prices can develop while lower prices often develop when
demand diminishes.

When using fundamental analysis in futures trading, it is important to have an idea of what factors are affecting both the
supply and demand side of the equation. There are many different factors that affect each commodity differently.
Some of the basic principles affecting supply are:

1. The number of producers or suppliers of a commodity

2. The outlook producers have on future prices affecting the overall amount of production
3. Technological advances increasing production and reducing costs
4. The amount of resources available to help produce a commodity
5. The amount of inventory available from previous production periods
6. The amount of available substitutes for a commodity
7. The amount of potential imports for a commodity
8. The value of the currency in which a commodity is priced

Some of the basic principals affecting demand are:

1. Use as a consumer good or as a component of other finished goods

2. Consumer expectations about future commodity prices affecting purchasing decisions today
3. Consumer preference for the commodity
4. The amount of exports or overseas demand for a commodity
5. The amount of disposable income consumers have at their disposal
6. The political environment and trading policies of foreign countries

There are also many overlapping principals that affect both supply and demand such as: currency exchange rates,
interest rates, transportation rates, governmental policies, politics, tariffs, war and what’s “hot” according to public opinion.

Much information is available today through the Internet, TV, radio, your brokerage firm, and trade publications – and
each of these outlets could dispense fundamental information that might be affecting commodity prices. It is important not
to focus on just one particular source of information, but rather to attempt to look at a broad spectrum of news services
and sources. The key factor for many traders is knowing what information is really helping shape prices and what
information is nonessential. Overall, the challenge of fundamental analysis is gathering discernible information quickly,
and then acting upon it before prices have already moved.
Below is a list of specific fundamental factors that can help determine price action. This list is ever changing. We have
broken this list down into sectors and listed some of the more popular commodities (futures contracts). Fundamental
factors impacting prices is continually changing for each different commodity, so try to keep abreast of current information
and know what factors are helping shape prices.

Grains
Corn, Wheat, Soybeans, Oats, Bean Oil, Soymeal

1. USDA Reports: Supply and Demand, Monthly Production, Prospective Plantings, Crop Progress Reports, Quarterly Stocks
Report, NOPA Crush Report
2. Domestic and World Wide Weather Patterns
3. Feed Requirements of Livestock and Size of Herds (Nearly 50% of US Corn is used for Feed)
4. Domestic needs for Food, Seed and Industrial Use
5. Foreign Demand and U.S. Export Activity
6. Farm Credit Programs, World Economies, Trade Status, Politics, Aid Packages and Tariffs
7. Domestic and World consumptive habits 8. Seasonal Supply and Demand characteristics

Meats
Live Hogs, Pork Bellies, Live Cattle, Feeder Cattle

1. USDA Reports: Cattle on Feed, Hog and Pig Reports, Cold Storage
2. Cash values of Cattle and Hogs
3. Cut out values of Beef and Pork
4. Daily Slaughter Counts and Interior Hog Runs
5. Overseas Supply and Demand and consumptive habits
6. Price of Feed and Cost of Transportation
7. Seasonal Weather and Livestock feeding patterns

Softs
Cocoa, Cotton, Coffee, Sugar, Orange Juice

1. Weather Patterns in key production areas

2. Crop Conditions and Size of Production for various growing regions
3. USDA Reports: Monthly Production, Cold Storage
4. Foreign Demand and Consumer Preferences
5. Cartel Policies, Export Tariffs, Commodity Subsidies
6. Seasonal Cycles

Energies
Crude Oil, Heating Oil, Unld. Gasoline, Natural Gas

1. API weekly Stocks Report, AGA weekly Stocks and DOE weekly Stock Figures
2. Seasonal Demand and changing Weather Patterns
3. Natural or man made Disasters, Distribution Problems and Transportation Costs
4. International Conflicts, Wars, Governmental Policies, Embargoes, Taxes and Tariffs
5. OPEC Meetings and Policy Accords
6. New Technologies and Costs of Alternative Energy Sources.
7. Supply of Natural Resources, New Discoveries and Refinery Production

Metals
Silver, Gold, Copper, Platinum, Palladium

1. US Interest Rates and Disposable Income

2. Warehouse Stock Reports Lease Rates and Cost of Production Surveys
3. Gold/Silver historical relationships
4. World Economies: Those in need of selling and those in need of importing
5. Government Reports: Industrial Production and Housing Starts
6. Price of key foreign currencies
7. Terrorism

Stock Indexes
S&P 500, Dow Jones Index, Nasdaq, Nikkei, Kansas City Value Line, New York Futures Index

1. Gov. Reports: Unemployment, CPI, PPI, GNP, Durable Goods, Factory Orders
2. Individual Stock and Sector performances, Sales and Earnings
3. Consumer Confidence, Spending Habits and Disposable Income
4. International and Domestic Conflicts, Trade Policies
5. U.S. Interest Rates, Corporate Debt, Foreign Debt, Inflation
6. Demand for US goods abroad, exchange rates and US Dollar value
7. World Economies and Foreign Stock Performances

Currencies
Dollar Index, British Pound, Japanese Yen, Swiss Franc, Deutsche Mark, Canadian Dollar, Euro, Mexican Peso

1. 1. Government Reports: Trade Inventories, Money Supply, CPI, PPI, GNP Etc.
2. 2. Foreign Country Debt and Balance of Payments
3. 3. Inter-Bank (Cash) Market price movement, Exchange Rates
4. 4. Government Policies: Intervention, G-7 meetings

Interest Rates
Treasury Bonds, Treasury Notes, Municipal Bonds, Eurodollars

1. Government Reports: Unemployment Reports, CPI, PPI, Retail Sales, Home Starts
2. US Monetary Policy: Federal Reserve Rate Cuts or Hikes, Money Supply
3. US Fiscal Policy: Government Spending, Taxes
4. US Balance of Trade: Imports and Exports with foreign countries
5. Foreign Countries Trade Policies, Money policies and Debt structure.
6. US Corporate Earnings and Debt
7. Consumer Confidence, Consumer Debt and Disposable Income
8. US Banks Lending Policies: Expansionary or Contractionary

The above lists are not complete. Instead, we have listed those factors that we at The Ira Epstein Division of Linn &
Associaties, LLC. believe to be some of the key fundamental factors traders should take into consideration. These lists
should be continuously expanded and modified over time. It is not necessary to memorize all of the sources of
fundamental news, but you should try to keep abreast of when reports affecting your commodities of interest are due. You
may or may not wish to take market positions going into these reports, which can often affect the markets.

The U.S. Government is one of the largest sources of fundamental information affecting commodity prices. For agricultural
commodities, the United States Department of Agriculture (USDA) is responsible for the majority of reports. Every week,
the USDA releases some type of estimate on the status of a commodity, supply and demand, available stocks or
projected production. Many private services produce similar estimates which can impact commodity prices. Most of this
information is available to you through the Internet, news wire services or your broker. As stated above, traders should get
to know when these reports are released and it is our recommendation that you obtain a calendar indicating the same.
The Ira Epstein Division of Linn & Associates, LLC. should be able to provide this for you in most cases. Your broker
should send a calendar of these reports to you.

Cause and Effect

The US government also releases a wide array of financial reports each month. Many of these reports can and do
influence financial future prices. Traders should be cognizant of the release dates.

Some reports impact prices more than others, and as the economic picture changes, it is not uncommon for the
importance of one report to take precedence over another. For example, when the Federal Reserve (FED) is active in
monetary policy, the Federal Open Market Committee (FOMC) action on interest rates can be widely anticipated. When
the Fed is inactive, FOMC meetings receive little attention from traders. To give you an idea of how Interest Rate Futures
react to various reports, please click on the link to the Cause and Effect Report.
 Click here to view the Cause and Effect Report

Summary

Fundamental information can be instrumental in forming market opinions and should be used as a tool in conjunction with
Technical Analysis and Seasonal Studies to help formulate trading decisions. In futures trading, there always seems to be
two trains of thought at work: Technical and Fundamental Analysis. Pure technicians rarely pay attention to fundamental
news, since they believe prices have already discounted all that is currently known. We believe that it is prudent to know
what fundamental factors are helping shape prices, and particularly what reports might affect your trading decisions.

PIVOT POINTS

Pivot Points for the Day Trader

Pivot Points are one of our favorite day trading indicators, especially when the Slow Stochastic Indicator is tied
to it. The idea is to catch turning points on breaks on rallies when using these indicators to day trade.

A Pivot Point is a technical analysis indicator used to help determine the overall trend of the market. It can be
and is often used with different time frames on chart. Some use a 5, 10, or 15-minute time frame for day trade
points. The center line, or the Pivot Point as it is called on a chart is the average of the high, low and closing
prices from the previous trading day. On the next day, trading above the pivot point is thought to indicate
ongoing bullish sentiment, while trading below the pivot point indicates bearish sentiment. It is common to
have two support zones under the Pivot Point and two resistance points above it. Traders often sell above the
Pivot Point and buy under it.

In this video series, Ira teaches you how to understand the Pivot Point formula, how to use Pivot Points, and
how to incorporate momentum indicators into your use of Pivot Points.
Click here to view the Pivot Points Video Series

INTRODUCTION TO OPTIONS
Trading Options on Futures can be an exciting investment
opportunity.
Investors frequently focus on buying options because of their unique ability to generate unlimited gains while offering a
limited risk. While this sounds attractive on the surface, options trading can be a risky endeavor. Options are by nature, a
“wasting asset,” and are not ideal investments for all types of investors. Let's review some of the concepts you should
understand before investing in options.

Calls

A Call Option is the right to be long on the underlying futures contract. Buyers of Call Options want option values to
appreciate as underlying futures prices increase.

Puts

A Put Option is the right to be short on the underlying futures contract. Buyers of Put Options want their option values to
go up as the underlying futures prices go down.

Premium

The actual price of an option is called premium. Buyers of Puts and Calls normally want premium values to increase, while
sellers of premiums, referred to as “writers,” want premiums to decrease. Premiums are determined based on the current
relationship of the option to the underlying futures contract. The elements that make up premium values are: Time, Price,
Interest Rates and Volatility.

Strike Prices
A Strike Price is the specific price that an option buyer has the right to be long or short in the underlying futures contract,
depending on whether the option is a Put or a Call. The exchanges list their options strike prices based upon the price of
the underlying futures contract, liquidity and time to expiration. How quickly an option price moves is based largely on how
close the strike price is to the underlying futures contract.

In the Money Options

Call Options with a strike price lower than the current underlying futures price are said to be “in the money.” Put Options
that have a strike price higher than the current underlying futures price are also said to be “in the money.”

At the Money Options

This event takes place when Put or Call Strike prices are trading equivalent to the underlying futures price.

Out of the Money Option Price

Call strike prices higher than the current underlying futures prices are said to be “out of the money.” Put strike prices lower
than the current underlying futures price are said to be “out of the money.”

As a General Rule

 “In the Money” options can be expensive.

 “At the Money” options are often more moderately priced.
 “Out of the Money” options are generally less expensive.

Expiration Date

This is the last day that an option trades. Options typically expire prior to the underlying futures contract expiration date.
Expiration dates vary greatly, in some instances occurring several weeks to a month prior to the last trading day of the
underlying futures contract and in other cases, the option and futures contract expire on the same day. We make an
Option Expiration Calendar available under the Research and News Section of The Ira Epstein Division of The Linn Group
Inc. website.

It is imperative to know when option expirations occur as pricing, in part, is based on this date. As a trader, you should
know this date before entering a trade. If an option expires worthless, it can no longer be offset or exercised.

Buying and Selling Long Options

Most traders who buy options intend to sell or liquidate them at some point in the future. Traders rarely convert options
into futures contracts. Rather, they hope to profit by liquidating their long option position when the option premium reaches
a level higher than where it was originally purchased.

Liquidating long options simply means selling them for a particular price value. This value can be higher or lower than
where the option was originally purchased. Traders can and do use different order strategies when buying or selling long
option positions. Orders such as market orders, limits or stops can be used.

Exercising Options

Exercising a “call” means electing to be long on the underlying futures contract at the specific, predetermined strike price.
Exercising a put means electing to be short on the underlying futures contract at a specific predetermined strike price. If
an option is in the money at the close of its expiration date, it can be automatically exercised if you have not previously
liquidated. However, there is a caveat. An option that is exercised becomes a futures position with a new margin
requirement. Outright long options should rarely be exercised for reasons we will discuss shortly.

Time Value / Intrinsic Value

Option premiums are made up in part of Time and Intrinsic value. Intrinsic value is the amount of premium, if any, that an
option is in the money. “At the money” and “out of the money” options, as the very names imply, have no intrinsic value.

Example
December Crude Oil futures are trading at $25.00 a barrel.

A December $24.50 Call is trading for 120 points or $1200.

The option contains 50 points ($500) of intrinsic value and 70 points ($700) of time value. You elect to by it.

All things being equal, you decide the next day to exercise your call option. When you do so, you assume a long futures
position at $24.50, in effect giving up 70 points, or $700 worth of time value. This example shows why we don’t always
believe it’s prudent to exercise options, as time value in effect can be thrown away.

Delta

Delta is the percentage change an option makes according to the change in price of the underlying futures contract. Delta
is one of the most important concepts to understand when trading options. The Delta reading represents a percentage of
each point the underlying futures contract moves. If the Delta is 80 and the market moves 10 points, the options should
move 8 points.

As a General Rule

 “Deep in the money” options typically convey higher delta values of 80% to 90%
 “At the money” options usually reflect Delta near 50%
 “Out of the money” options tend to show lower delta values like 20%-30%
 Delta values typically decline as strike prices get further away from underlying futures prices

Delta = the change in option price divided by the change in futures price

Gamma

Gamma is the percentage change of the Delta, based on the change in price of underlying futures contract. Some traders
often think of this in terms of how fast the Delta changes. It can be said that the gamma is “the delta of the delta.”
 Gamma = The percentage rate of change in the delta. It is mathematically derived by dividing the change in Delta by the
change in the option price.

Theta

This is a measurement of the rate of decline of time premium resulting from the passage of time.

Theta = The ratio of the change in an option price to the decrease in time to expiration

Implied Volatility

Volatility studies can help option traders make decisions based on historically high or low volatility levels. Implied volatility
is a study based on the “mathematical mean price” of an option over time. Calculated as a percentage using current
option prices, implied volatility can help you determine if option prices are historically high or low. When implied volatility is
low as compared to the mean, option premiums might be expected to increase, presenting potential buying opportunities.
When option volatility is high, premiums may be overvalued, presenting potential selling opportunities. Studies such as the
popular Black-Scholes pricing models, developed by Fischer Black and Myron Scholes, can help in determining what the
theoretical fair value for an option might be.

Selling Option Premium

Option traders who initiate sales of option premium confront a different set of issues compared to option buyers. Option
buying is a limited risk proposition. Option selling can carry unlimited risk. Option sellers normally want options to expire
worthless, because they have sold premium and are hoping to collect it. Option selling usuallyrequires a margin deposit
similar to that of futures contracts.

Margins for option selling are calculated by your brokerage firm and the exchangethat the option is traded on. Selling or
“writing” option premium can be accomplishedon its own or as part of an option strategy.
Those who typically sell Calls, with no other strategy in mind are Bearish on the underlying futures market, expecting to
earn that premium.

Those who typically sell Puts, with no other strategy in mind are Bullish on the underlying futures market, expecting to
earn that premium.

Breakeven Price

Traders should add the option strike price, the premium paid, and the transaction costs, to calculate the minimum price
that the underlying futures contract must be at or above on expiration day.

The formula

Option Strike Price + Premium Paid + Commissions = Breakeven

Keep in mind, that at any time before option expiration, if the premium trades higher than what you paid plus the
commission costs, you have a profitable trade at that moment. An option does not have to be “in the money” to be
profitable.

Example

 Assume December Gold Futures are trading at $400/oz. The contract is for 100 ounces. A $1 move in gold equates to $100.
 You decide to purchase a December Call 420 Strike Price for $250 premium plus $50 in commissions. Total cost $300.
 Your breakeven futures price at expiration is $423, based on the above formula.

420 Call + $250 Premium + $50 Commission = $423 Breakeven Price

Suppose you buy the option on June 1st and December Gold futures rallied from $400 to $415 on August 1st. In theory, the option
would be still out of the money, since it is a 420 call. However, it’s very likely your option would be profitable because the underlying
futures price moved $15 in a short period of time. This $15 move equates to $1500 in the Futures contract.
Assuming the options’ Delta is approximately 30, it is very probable that the option would have captured nearly 30% of this $15
move, or $500.

Let’s review:

You paid $250 +$50 in commission.

You sell the call for $750 (after the $15 move).
You would have profited by $450, after commissions.

In this example, Gold did not hit your breakeven level, but you still could have profited.

What Options Should I Buy?

Many traders purchase options because of their limited risk characteristics. While this is not necessarily wrong, the reality
is that most options expire worthless.

For purposes of discussion, let's keep it simple and say that you like the idea of having the defined risk that option
purchases offer. The question becomes: What should be done next?

The first thing you should do is form a market opinion based on as much sound technical and fundamental information as
you can gather. Once you have formed a conclusion, determine how much time you think you need for this strategy to
work. You should next determine the strike price you should buy.

It is our opinion that when an option has normal to low volatility, you should purchase options with a 3 to 6 month time
window. Options with an 8 to 12 month window can be looked at, but when purchasing this much time, liquidity is often
compromised. Slightly out of the money options have the strike prices that most consider and trade the most. It is our
belief that by concentrating on where the premium is actively traded, the potential to buy and sell at a fair and reasonable
price presents itself more frequently.

Putting it All Together

Now that a lot of option terminology has been introduced, it is our hope that you have a better understanding of the many
variables involved in this type of investment. Options can and do provide an alternative means of participation in the
futures markets, when used under the right circumstances. Traders not comfortable with the risks associated with futures
might want to give serious consideration to options as an alternative. When formulating option strategies you might want
to consider the following checklist:

1. Are you Bullish or Bearish regarding the underlying futures market?

2. Are you comfortable with the risk/reward parameters and amount of money you are placing at risk?
3. Are market conditions appropriate for your option strategy?
4. What is the volatility of the option and the underlying futures contract?
5. What is the Delta of your option and how fast can it move?
6. Once you have answered items 1-5, do you think your strategy still makes sense?

The above checklist contains just some of the questions you should consider before investing in options. Of primary
importance is your understanding of the risks involved in your particular option strategy. If you don’t fully understand the
risks, don’t invest. As you know, it’s quite simple when one purchases outright Calls or Puts, risk level is fixed.

Option buying can be rewarding when options are purchased before a significant move takes place in the underlying
futures. However, if a market turns stagnant and time begins to expire, those who purchased options will often experience
decay in the premium they paid. Under these circumstances, option sellers become the beneficiaries of this erosion in
price and time.

CHARTING COURSE

Ira Epstein's Charting Course

Learn a simple, yet highly disciplined technical approach to the Futures Markets. Ira's approach is easy to learn
and will keep you consistent. All video lessons are taught by Ira. The course is online and instantly available.

With your purchase of the course you will receive free access to our Charting Software, Linn-IraCharts or QT
Market Center. You will also receive a trial to Ira's Market Research which includes his daily commentary and
trade recommendations.
Click here to learn more about Ira's Charting Course

A Closer Look

The five foundational skills every trader should know

Swinglines
Years ago, Ira developed the Swingline indicator to teach his son to easily identify and read trends in the
market. Now you can learn this same technique right from Ira and apply it to your own charts. Never miss out
on correctly identifying trend in a market.

Moving Averages

Moving Averages are a keystone of what Ira teaches. In the course, Ira teaches you what a moving average is,
how to plot it on your charts and most importantly how to use it in combination with other indicators and
signals to make informed decisions. His course covers both short term and longer term moving averages.

Slow Stochastics
Slow Stochastics is the tool Ira uses to measure market momentum. Ira has developed his own system for
interpreting Slow Stochastics and applying them to technical analysis. Learn from him how to use Slow
Stochastics when you are planning your trades.

Bollinger Bands

If you're not using Bollinger Bands in your technical analysis, you may not be predicting support and resistance
levels as well as you can. Ira learned how to use Bollinger Bands from the creator himself, John Bollinger, and
now you can learn them directly from Ira. They are considered an integral part of technical analysis that every
trader should know.

Window Envelopes
Support and resistance levels can be predicted using a number of chart tools. Window Envelopes are a tool that
helps you to execute a market exit strategy. Ira teaches you how to work with them, what they imply and how
to place them on your charts. With some practice you too can master this aggressive trading tool. Provided in
Ira's Research are technical numbers that Ira updates daily which you can plug into your own charts and use
Window Envelopes.

Click here to learn more about Ira's Charting Course

EXCHANGE BROCHURES

Further Learning
Visit the CME Group's educational section of their website to view all sorts of different free learning materials about
trading futures and options. Please note you are leaving our website to access these materials, as they are hosted by and
are proprietary to the CME Group.

View the CME Group Education Catalog