Pricing a Future

There are a lot of variables to consider when we are talking about pricing a forward/future. For now, we'll simplify the problem and focus on the few key variables: the risk-free interest rate, the time until delivery date, and the underlying price. Since in a forward/future contract, we…

Sound the Retreat

Continuing from the previous post about market makers, let's look at an example. Let's set the scenario. Let's say this mystery contract ticks in nickels (0.05) and I always want an edge of 0.12. Also, I am willing to do 10 lots (contracts) at a time. Finally, our…

Bitcoin Futures Explained

On Dec 9, 2017 CBOE got into the bitcoin world by opening up a market on Bitcoin Futures. CME also plans to get into the cryptocurrency world by also offering futures on Bitcoins. There are a handful of subtle differences between these contracts. As an exercise to better understand the…

Market Maker

There are different types of traders. Some trade stocks, some trade options, some trade futures. Some hold their assets for a long time (think months to years) and some hold their assets for a very short time (think seconds and minutes). There are many, many different types of traders, the…

Tick

Before we move on, we should talk about ticks. This word is probably one of most used in a trading environment. It can mean a lot of different things depending on what financial instrument (or product group) you are talking about. It can be used correctly or incorrectly. It can…

Liquidity

What is liquidity? In a broad sense, liquidity is the degree of ease to which an instrument, asset, or security can be bought or sold. If an asset is not liquid, we say it is illiquid. Let's take a look at an example. Let's compare two scenarios. Alex creates sculptures…

Price Ladders

Remember looking at this bid and offer? Here, there are 400 shares of AAPL bid on the price of 109.11. Likewise, there are 830 shares of AAPL stock offered at a price of 109.13. Now, in the above moment, what we are looking at is the best bid…