Derivatives Trading Strategy

- Investors “Buy” futures in the market, called long position. Buyers believe that futures price will increase, then buyers get profit and vice versa.
- Investors “Sell” futures in the market, called short position: Investors believe that futures price will decrease, then investors get profit and vice versa.
- If you expect that market trends will increase, open long position
- If you expect that market trends will decrease, open short position
- When market trends follow with investor‘s expectation, then you can offset position or wait till the contract has expired

       Offset position

- If you open long position, you have to close position by short close
- If you open short position, you have to close position by long close
** Close contract have to be the same series**

              What’s Stop Order?

        A Stop Order is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. Investors generally use stop order to limit a loss or to protect a profit.

              Condition of stop order

       1. Stop Series: Stop series contract can be the same or different from the contract that investors want to buy or sell.

       2. Stop Condition: There are 6 types of stop condition as follows:

- Bid ≤ Stop Price       - Bid ≥ Stop Price
- Offer ≤ Stop Price    - Offer ≥ Stop Price
- Last ≤ Stop Price     - Last ≥ Stop Price

       3. Stop Price: When the stop price is reached, the stop price will be automatically sent into the trading system, there are 2 types of stop order as follows:

- Stop Market Order: The stop market order will become a market price when the stop price is triggered. Investors do not designate the price.
- Stop Limit Order: The stop limit order will be executed when the last price or best bid or best ask reaches the designated stop price. However, the stop limit order will not become a market when the stop price is triggered but will become a limit order to buy/sell at the designated limit price.

Recommendation for new investors:

- Begin to use stop conditions: Last ≥ Stop Price and Last ≤ Stop Price
- Set stop series to be the same as buy/sell futures contract

Example 1: Stop market order to stop loss

Investors open long Gold Futures (GFM11) at the price 24,100 Baht, 5 contracts. And if the price is below 23,000 Baht, he wants to close the position with market price in order to stop loss. In this case, investors have to send the stop order as follows:

   1. Set short close the position GFM11 5 contracts, Market Order Type

   2. Stop Series: GFM11

   3. Stop Condition: Last ≤ Stop Price

   4. Stop Price: 22,990 Baht

   5. After the last price is less than 23,000 baht, investor can immediately stop loss

Remarks: Market order type should be used with high liquidity underlying asset. The low liquidity of some underlying asset may affect higher/lower price than usual market price.

 Example 2: Stop Limit Order to stop loss

Investors open short Gold Futures (GFQ11) at the price 23,500 Baht, 20 contracts. And if the price reaches 24,400 Baht, he wants to close the position at the price 24,500 Baht in order to stop loss. In this case, investors have to send the stop order as follows:

   1. Set long close the position GFQ11, 20 contract, Limit Order Type with the price 24,500 Baht

   2. Stop Series: GFQ11

   3. Stop Condition: Last ≥ Stop Price

   4. Stop Price: 24,400 Baht

   5. If the last price is higher than or equal to 24, 400 baht, the long position will be automatically sent to the system at the price 24,500 Baht, 20 Contract

              What’s Combination Order?

       Combination Order is the simultaneous purchase and/or sale of two different series with the same underlying executed as a single transaction. For example, S50Z11H11

              What is the difference between placing a combination order (short S50Z11H11) and 2 separate buy/sell outright orders (long S50Z11 and short S50H11)

       There are 2 distinct differences between these 2 types of order as follows

- Order Matching : When placing 2 separate outright orders, only 1 order maybe matched while the other is not whereas when an order is placed as a combination order, both series will have to meet the require conditions or they will not be matched. For example, when placing a long S50Z11 and a short S50H11, there is a chance that only the long S50Z11 will be matched while the short S50H11 is not. However, if a short S50Z11H11 combination order is placed, both series will have to be matched or not at all.

- Order Placement: When placing 2 separate outright orders, both futures price must be specified. However for combination order, the quotation price will be the difference between the 2 series. For example, when placing long S50Z11 and short S50H11 orders, prices such as 484.5 and 486.50 will have to be specified respectively. However, when placing a short S50Z11H11, the quotation price will be – 3.70 as picture below:

- When the order has already been matched, there will be the separate series in your portfolio and the cost of 2 series is the difference between the specified prices (Far Series – Near Series) as picture below:

              What is the difference between a buy combination order and a sell combination order?

              For example, a buy combination orders of S50U11Z11 means long in S50Z11 and short in S50U11.
              For example, a sell combination order of S50U11Z11 means short in S50Z11 and long in S50U11.

              Combination Strategy

- Sell Combination will get the profit when spread is more narrow, then investor should sell wide spread and then buy in the narrow spread.
- Buy Combination will get the profit when spread is more wide, then investor should buy narrow spread and then sell in the wide spread.