About CCX

The Chicago Climate Exchange (CCX) is North America’s only, and the world’s first, greenhouse gas (GHG) emission registry, reduction and trading system for all six greenhouse gases (GHGs). CCX is a self-regulatory, rules based exchange designed and governed by CCX Members. Members make a voluntary but legally binding commitment to reduce GHG emissions. By the end of Phase I (December, 2006) all Members will have reduced direct emissions 4% below a baseline period of 1998-2001.Phase II, which extends the CCX reduction program through 2010, will require all Members to reduce GHG emissions 6% below baseline.

The goals of CCX are:

• To facilitate the transaction of greenhouse gas emissions allowance trading with price transparency, design excellence and environmental integrity
• To build the skills and institutions needed to cost-effectively manage greenhouse gas emissions
• To facilitate capacity-building in both public and private sector to facilitate greenhouse gas mitigation
• To strengthen the intellectual framework required for cost effective and valid greenhouse gas reduction
• To help inform the public debate on managing the risk of global climate change

CCX Derived from Feasibility and Design Research Supported by Millennium Grants from the Joyce Foundation

The development of CCX was initiated through a feasibility study that was funded by the Chicago-based Joyce Foundation in 2000, a leading public policy philanthropy. The grant was administered by Northwestern University’s Kellogg Graduate School of Management and conducted by Environmental Financial Products (EFP). The predecessor to CCX, EFP specialized in developing and trading new environmental, financial and commodity markets. It also designed risk management and hybrid financial instruments that enhance the interrelationships between the capital, commodity and environmental markets. EFP’s principals acted both as agents and advisors in a variety of environmental trades and capital markets transactions. They also authored numerous articles in academic and general interest publications.

The study concluded that a North American private sector pilot greenhouse gas trading market was feasible. A subsequent grant in August, 2001 funded the initiation of research on market implementation. The research included:

• Preparation of an initial market architecture.
• Formation of a high-level advisory board.
• Recruitment of industry to contribute to development of market rules.

The Chicago Climate Exchange

The Arithmetic of Futures Trading and Leverage

To say that gains and losses in futures trading are the result of price changes is an accurate explanation but by no means a complete explanation. Perhaps more so than in any other form of speculation or investment, price changes in futures trading are highly leveraged. An understanding of this leverage—and how it can work to either your advantage or disadvantage—is absolutely essential to an understanding of futures trading.

As mentioned in the introduction, only a relatively small amount of money (known as margin) is required in order to buy or sell a futures contract. On a particular day, a margin deposit of only $2,500 might enable you to purchase or sell a futures contract on $100,000 worth of U.S. Treasury Bonds. Or for an initial margin deposit of about $15,000 you might buy or sell a contract covering common stocks currently worth $300,000. Or for around $4,000 you may be able to buy or sell a futures contract on 37,000 pounds of coffee currently worth $40,000. The smaller the margin in relation to the underlying value of the futures contract, the greater the leverage.

If you speculate in futures contracts and the price moves in the direction you anticipated, high leverage can yield large profits in relation to your initial margin deposit. But if prices move in the opposite direction, high leverage can produce large losses in relation to your initial margin deposit. Leverage is a two-edged sword.

For example, assume that in anticipation of rising stock prices you buy one June S&P 500 stock index futures contract at a time when the June index is trading at 1200. Also assume your initial margin requirement is $15,000. Since the value of the futures contract is $250 times the index, each one point change in the index represents a $250 gain or loss.

An increase of five percent in the in dex, from 1200 to 1260, would produce a $15,000 profit (60 X $250). Conversely, a 60 point decline would produce a $15,000 loss. In either case, an increase or decrease of only five percent in the index would, in this example, result in a gain or loss equal to 100 percent of the $15,000 initial margin deposit! That's the arithmetic of leverage.

Said another way, while buying (or selling) a futures contract provides the same dollars and cents profit potential as owning (or selling short) the actual commodity covered by the contract, low margin requirements sharply increase the percentage profit or loss potential.

Futures trading thus requires not only the necessary financial resources but also the necessary financial and emotional temperament. It can be one thing to have the value of your common stock portfolio decline by five percent but quite another, at least emotionally, to have that same five percent stock price decline wipe out 100 percent of your investment in futures contracts.

An absolute requisite for anyone considering trading in futures contracts—whether it's stock indexes or sugar, pork bellies or petroleum—is to clearly understand the concept of leverage. Calculate precisely the gain or loss that would result from any given change in the futures price of the contract you would be trading. If you can't afford the risk, or even if you're uncomfortable with the risk, the only sound advice is don't trade. Futures trading is not for everyone.

Margins

As is apparent from the preceding discussion, the arithmetic of leverage is the arithmetic of margins. An understanding of the different kinds of margins is essential to an understanding of futures trading.

If your previous investment experience has mainly involved common stocks, you know that the term margin—as used in connection with securities—has to do with the cash down payment and money borrowed from a broker to purchase stocks. But used in connection with futures trading, margin has an altogether different meaning and serves an altogether different purpose.

Rather than providing a down payment, the margin required to buy or sell a futures contract is a deposit of good faith money that can be drawn on by your brokerage firm to cover any day-to-day losses that you may incur in the course of futures trading. It is much like money held in an escrow account. When you liquidate a futures position, your margin deposit is refunded to you, plus any undistributed profits or minus any uncollected losses on the trade.

Minimum margin requirements for a particular futures contract at a particular time are set by the exchange on which the contract is traded. They are typically five to 10 percent of the value of the futures contract. Exchanges continuously monitor market conditions and risks and, as necessary, raise or reduce their margin requirements. An increase in market volatility and the range of daily price movements is frequently a reason for raising margins.

Note that the exchanges' minimum margin requirements are exactly that: minimums that exchange-member brokerage firms must charge. Individual firms may have margin requirements higher than the exchange minimums.

There are two margin-related terms you should know: Initial margin and Maintenance margin.

Initial margin (sometimes called original margin) is the sum of money that you must de posit at the outset with the brokerage firm for each futures contract to be bought or sold. On any day that profits accrue to your open positions, the profits will be added to the balance in your margin account. On any day losses accrue, the losses will be deducted from the balance in your brokerage account.

If and when the funds remaining in your account are reduced by losses to below a certain level—known as the maintenance margin level—your broker will require that you deposit additional funds to bring the balance back to the level of the initial margin. Or you may be asked for additional margin if the exchange or your brokerage firm raises its margin requirements. Requests for additional margin are known as margin calls.

Assume, for example, that the initial margin needed to buy or sell a particular futures contract is $2,000 and that the maintenance margin is $1,500. Should losses on open positions reduce the funds remaining in your trading account to $1,400 (an amount less than the maintenance requirement), you will receive a margin call for the $600 needed to restore your account to $2,000.

Before trading in futures contracts, be sure you understand your particular brokerage firm's Margin Agreement and how and when the firm expects margin calls to be met. Some firms may require only that you mail a personal check. Others may insist you wire transfer funds from your bank or provide same-day or next-day delivery of a certified or cashier's check. If margin calls are not met in the prescribed time and form, the brokerage firm can protect itself by liquidating your open positions at the available market price (possibly resulting in an unsecured loss for which you would be liable).

Guide to Understanding Risks

Trading High Priced Stocks

Many people have a hard time sticking to their stop-loss on stocks priced above the $60 to $70 range. These stocks can suddenly move 25 cents or more in a few seconds, triggering and speeding beyond the stop-loss. Because the stock’s price can jump so quickly, the trader thinks that he will take his stop-loss when the price moves back a bit, which never happens. Suddenly, a couple of minutes later, the position has broken past his stop-loss by more than 50 cents, and the trader feels that he cannot take a loss that large. So he waits, and then he is down more than 1 point and he takes the stop-loss at the maximum level of pain. (Of course, after the trader takes the stop at maximum pain, it begins to trade in his desired direction!)

This same trader will stick to his rules more easily on a slower-moving $20 stock. Lower-priced stocks tend not to move so quickly that a trader decides he cannot take a loss that large. A heavy-volume $20 stock moves more slowly and allows the trader to get out of his position closer to the actual stop-loss price.

Stocks that have different average daily volumes also tend to act in their own way. Let’s say we have two stocks, both trading at $30 a share. The first stock has a tight spread and an average daily volume of over 8 million shares a day. The other stock trades an average of 500,000 shares a day with a much wider spread. The movement of these two stocks is completely different. Your ability to keep a tight stop-loss or to exit easily a winning trade greatly varies.

This does not mean that you should only trade liquid stocks that trade more than 8 million shares a day. It means that everyone has a unique personality, and some personalities can trade illiquid stocks better than liquid stocks. But traders without experience cannot exit losing or winning trades in an illiquid stock accurately. New traders should wait to trade illiquid stocks until they have experience with order routing and order fills.

Day Trading articles - Trading High Priced Stocks

Visual Analysis and Portfolio Tracking for Options Trading

Traders looking to implement an options strategy often face a daunting task - first, they must select or develop a strategy based on the current market conditions and factors influencing the stock. Second, they must select from sometimes thousands of available options, each with multiple parameters such as strike price and expiration date. They must then also consider 'what-if' scenarios for their trade to ensure they are protected from volatility and pick the right time to exit their position.

Visual Options Analyzer (VOptions) is an analysis tool for development, testing, and application of options strategies that greatly simplifies the process of analyzing options strategies and tracking positions. It allows traders to test new strategies, manage a growing portfolio, and explore 'what-if' scenarios before executing trades. Traders can choose from 32 built-in strategies or construct their own. The software includes powerful two and three-dimensional charts for analysis, and provides instant download of current and historical stock and options data from the CBOE (Chicago Board Options Exchange).

This white paper will explore how VOptions can be used for more effective options trading. Topics include implementing the 32 strategies built-in to the software, performing options analysis using VOpt"

Using Visual Analysis and Portfolio Tracking tools for Effective Options Trading:

Ratio Put Spread

Description

A Put Ratio Spread is a unique "bearish" strategy. It involves a bearish strategy [Bear Put Spread] along with a bullish strategy [Short Put]. A stock investor who is currently bearish on XYZ could use this strategy to profit from a decline and/or own stock in XYZ at much lower prices.

When to use
Most attractive when XYZ is between the two strike prices (e.g., 55-60). If XYZ is at or below the lower strike (55), spread may not be attractive because XYZ is already too close to point where stock ownership is likely. Alternatively, if XYZ is at or above higher strike (60), spread must often be established for a larger debit. The expiration month selected has a large impact on whether the spread is established for a debit or a credit. The more time until the options' expiration, the smaller the cost of the spread.

Risk/Reward Characteristics
The spread has limited upside risk. If the spread is established for a debit, that is the maximum the investor can lose if XYZ is above $60 at expiration. If done for a credit, there is no upside risk. Because stock ownership is possible, the downside risk can be large if XYZ has a large decline before expiration. Maximum profit potential = strike price differential x number of long Puts - net total $ debit (or plus net total $ credit).


Break-even Point:
If a debit spread, upside break-even point is equal to the strike price of the long Put minus the position's net debit. Downside break-even point is equal to the lower strike price minus (maximum profit potential / # of naked Puts).

Time Decay: Varies. If XYZ is near the strike price of the two written Puts (55), profits from decay accelerate most rapidly over time. If near strike of long Put, impact is negative.

Volatility: An increase in volatility is a negative for this spread. The impact will depend to a large part on both the amount of time left until expiration and the price of XYZ relative to the two strike prices.

Assignment Risk: In that this spread contains written Puts (one covered and one uncovered), the investor must watch XYZ for possible assignment if XYZ is below the lower strike price as expiration approaches.

Options Strategy - Ratio Put Spread

Options Strategies - The Collar

In this second of two articles for investors who are worried about "the frequently fearsome spring months," the focus is on the protective collar strategy. Last month's article explained how "protective puts" can be purchased to insure a stock holding just like homeowner's insurance protects a house.

Many investors like the risk-reducing aspect of the protective put, but they are concerned about the cost. The collar is a two-part option strategy that addresses this concern. The first part of a collar is a protective put. The second part is a covered call. Covered calls are calls that are sold on a share-for-share basis against owned stock. In return for receiving a premium, the seller of a covered call assumes the obligation of selling the stock at the strike price at any time prior to the expiration date.

An example of a covered call is selling one XYZ May 80 Call when 100 shares of XYZ stock are owned. The seller of this call is obligated to sell the stock at $80 at any time prior to the May expiration date if an assignment notice is received. When used as part of a collar, the premium received from selling a covered call is used to reduce the cost of the protective put.

COLLARS: THE TRADE-OFF

The advantage of a collar relative to a protective put is its lower net cost. Part or all of the entire premium received from the covered call is used to pay for the protective put. The disadvantage of a collar is the limit it places on the stock's profit potential. The covered call establishes a ceiling on how much can be made from a price rise in the stock. Graph 2 shows how, with XYZ trading at $72, selling an 80-strike call for $2 and purchasing a 70-strike put for $3 creates a collar that limits the total risk to $3 per share. It also limits profit potential to $7 per share.

LONG STOCK @72, LONG 70 PUT @3, AND SHORT 80 CALL @2

How does an investor looking to reduce risk decide between a protective put and a collar? First, make sure you understand the trade-offs of each strategy, and, second, consider the market forecast that justifies each one.

Protective puts offer relatively high-cost insurance, but they do not limit profit potential if the stock price rises. Protective puts should be purchased when an investor is bullish on a stock but nervous about "something." That "something" could be an upcoming earnings report or a government announcement. Remember the old saying, "cut your losses short and let your profits run"? Protective puts allow investors to stay in the market with limited risk during times that are perceived to be high-risk.

A collar offers relatively low-cost insurance, but a limit is placed on the stock's profit potential. The covered call, remember, is an obligation to sell stock at the strike price. If an investor is unwilling to sell the stock, perhaps for tax reasons or because the long-term forecast is bullish, then the presence of the short call and the existence of the obligation to sell the stock must be addressed. Before a collar is established, then a decision must be made as to when, and at what point, the call will be repurchased to close out the obligation. It is then necessary to have the discipline to follow through on that decision.

Protective puts and collars are insurance strategies with trade-offs. The protective put, for a cost, provides protection and leaves in tact the unlimited profit potential of the stock. In contrast, the collar offers lower-cost protection but involves the obligation to sell the stock and, therefore, limits profit potential. One of these strategies may be appropriate if you think this spring could be one of those fearsome ones.

Options Strategies - The Collar

Day Trading Futures

When day trading futures, you enter and exit all positions in the same day - never carrying a position overnight. Since the overnight moves of the market are difficult to predict, many traders avoid risk by day trading. Ironically, the public believes that day trading is the riskiest way to trade.

THIS IS A MYTH!

Some traders day trading futures, make 1 to 3 trades per day, trying to catch the major intraday moves. Others trade in-and-out very frequently, trying to “scalp” a small profit on each trade. (My style uses a unique blend of these two strategies.)

For those day trading futures, the Emini Stock Index Futures have become the most popular day trading vehicle because of their liquidity, leverage, and the ease of trading them online. You can go short or long with equal ease – unlike stocks where it’s easier to go long than short due to the “up tick” rule.

The time relationship of the eminis (and the “big contracts”) to the cash indices is important to understand. Let’s start from square one.

The S&P 500 stock index (the cash index, symbol SPX) is central to day trading futures. It has an Exchange Traded Fund (the “Spyders,” symbol SPY) that trades like a stock, but without the “up tick” rule. The price of the S&P 500 cash index moves up and down with the 500 stocks that make up the index. The SPYders follow the S&P 500 cash index very closely. You can trade Exchange Traded Funds such as the SPY (and QQQQ for the Nasdaq 100) online from home. But for day traders, they are not as favorable as day trading futures.

The concept of “futures” is a little confusing, but it boils down to this: the financial industry has turned the S&P 500 cash index into a “contract” that trades like a stock. The contract (or futures contract) has a price that goes up and down from one moment to the next. It has a chart that looks just like stock chart, and you can make money with it by buying low and selling high, or vice versa. That’s a complicated as it needs to be for now.

The “big contracts” or SP Maxis were invented first and they’re still around. With the big contracts, a lot of money changes hands. When the price of the SP Maxis moves one point, $250 per contract moves with it. The SP Maxi contracts trade in a literal “pit” where the traders, called “locals,” shout at each other, buying and selling for everyone who wants a piece of the action.

The locals are not public servants, of course, they make money for their own accounts. They have the advantage of being able to read each other’s body language and the tone of the other trader’s voices. They see what the strongest traders in the pit are doing. They have several other advantages too, their costs per trade are tiny compared to the public’s commissions.

The “locals” aren’t born as professional traders though, they learn to trade like everyone else, except they have a huge advantage in learning as well because they learn to scalp first! Their instant access and low commissions make this possible compared to others, but those day trading futures online can take advantage of scalping trades as well.

Scalping is basically limiting your losses to only one or two ticks while taking any profit you get as you get it. It’s easier than going for several points per trade, I’ve been using this strategy day trading futures with much success.

Locals also use the spread (the difference between the bid and ask price), to grab quick profits from orders that come in on either side of the market. This makes scalping easier for them.

In the past, all these advantages made it impossible for a “retail” day trader to be a successful scalper. It was insane to try. And to this day many traders have the idea that scalping is too difficult for the public because you have to compete against traders with an unfair advantage.

But all that has changed now. If you follow some simple, yet important guidelines then you too can be successful scalping and day trading futures online.

They took the concept of the Maxi futures contracts and came up with smaller contracts (the eminis) that move $50.00 per SP point instead of $250.00. This allows all traders, big and small, to trade the stock index futures.

But even more radically, they set it up so that the smaller contracts (the eminis) are traded only through computers. This was revolutionary, they bypassed the pit, taking away the advantage of the “locals,” and leveling the playing field in a way that has never been done before. And to level the field even more, retail commission costs fell like a rock. Today, any trader day trading futures with a small account can pay $4.80 per round turn (entering and exiting a trade).

This means that scalping is open to the day trading public for the first time in history. But most people who are day trading futures don’t even realize where the new advantage really is.

Scalping is one of the keys to making a living day trading futures as I do, because I follow a simple rule: "Every trade starts out as a scalp until proven otherwise" .

The SP emini futures became more and more popular and more liquid, breaking a lot of records along the way.

The SP Maxis futures and the SP emini futures are both derived from the S&P 500 index (symbol SPX), which, as I said, has an ETF that trades like a stock (symbol SPY).

So the question is - which of these is the leader and which are followers?

Today the emini futures track the Maxi contracts almost tick for tick, with the emini’s beginning to lead the Maxi’s at times, and also “overshooting” the Maxis at emotional extremes, such as the at the top of an intraday rally.

Both the SP eminis and the SP Maxis (the futures) lead the S&P 500 cash index by a variable amount of time, often in the range of a fraction of a second. Some people call this “the tail wagging the dog,” because the futures are derivatives of the stock indices, but call it what you want, the futures are leading the way.

The fact that the futures lead the markets makes their chart patterns more “pure” and reliable for support and resistance trading. This makes a huge difference to me.

I use the stock index futures (the eminis and Maxis) for calculating daily support and resistance areas, which are the basis of my own trading style – a style of trading that has paid my bills and built my financial security for about 20 years now.

Mike Reed is author of TradeStalker's RBI Trader's Updates. He has been trading the Market for 23 years. His support and resistance numbers have been published on the internet since 1996. Mike's nightly support and resistance zones are specific and incredibly accurate. He offers an unlimited free trial of his nightly TradeStalker RBI Trader's Updates.

Day Trading Futures: "Day Trading Futures"

Pit Psychology

Less quantifiable than a high volume and liquid market are the psychological issues unique to the trading pit and how these are to be replicated on a screen-based trade system. Many traders, experienced with both the pit structure as well as GLOBEX, assert that on the floor there is information meaningful to the negotiation process which cannot be found on GLOBEX. One example is noise or information trading. This refers to the increased noise in an extremely active market. Traders sometimes choose which pit and its respective contract to risk their money in by the noise associated with it. On a screen based system such as GLOBEX there is no way to hear price movement. There is no replication of the hundreds of shouting voices, waving hands, or stamping feet that one commonly sees on the trading floor. Thus, it can be argued that this lack of auditory and visual stimuli on GLOBEX may preclude some involvement by traders seeking profit.

Electronic futures markets versus floor trading: Implications for interface design

Scalper Systems - Trading Software and Systems - Systems - Stock

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Scalper Systems - Trading Software and Systems - Systems - Stock