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Event Contracts - New Way to trade the CME Futures markets: Trade your opinion


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Event Contracts - New Way to trade the CME Futures markets: Trade your opinion

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 trendisyourfriend 
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Has anyone started to trade this way? If yes, what's your take?

https://eventtrader.interactivebrokers.com/en/home.php

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if correct you get a pay out of max 20.00 per contract . minus what the contract cost plus commission and exchange fees . i would say if the product is onetime framing in one direct and the pay out is grater than the cost of the contract and the fees you make the bet in that direction there should be a edge .

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 trendisyourfriend 
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I know @FuturesTrader71 did a webinar on these trading events but can't locate his webinar. It would be cool if he could provide a link to it and tell us what he thinks about this new way to speculate.

One question i have is how do they determine the probability of each side Yes or No.

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 bobwest 
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trendisyourfriend View Post
Has anyone started to trade this way? If yes, what's your take?

https://eventtrader.interactivebrokers.com/en/home.php

Thanks @trendisyourfriend. I was not aware of this and I had to look these things up. They are relatively new CME "event contracts" and are listed on the CME and probably are available through many of the usual futures brokers.

Without having looked at it too closely, this seems to me to be similar, if not the same, as binary options: you bet (that's the operative word) that x instrument will be higher/lower than some level, and it's 100% win or lose: you lose everything if you're wrong, or you profit if you're right. This has been largely a non-US type of trading, and I'm not completely sure that it is the same, but it sounds like it well enough. Here's a description of binary options for background: https://www.investopedia.com/terms/b/binary-option.asp .

While I wasn't noticing, CME has added a new type of "event contracts" to its exchange-listed instruments, as the link to Interactive Brokers that @trendisyourfriend provided indicates:

Quoting 
Event contracts let you express your view on whether the price of key futures markets will move up or down by the end of each day's trading session. You can select from CME listed event contracts in the Equity Index, Energy, Metals and Foreign currency futures markets, and to trade, just choose YES or NO on an event contract.

It is not only IB that has these. I found a lot of stuff directly from CME promoting them -- type this search string into Google and you will get an eyeful: "what are cme event contracts". Among the hits is a press release from September 19, 2022 (so this is not really new, although it did go under my radar for some months) from CME featuring quotes from CME, IB, CQG, NinjaTrader, Dorman, and Ironbeam praising the product. https://www.cmegroup.com/media-room/press-releases/2022/9/19/cme_group_announceslaunchofeventcontractsfortradingglobalbenchma.html

I am sure many other brokers will follow, or have followed by now. (After all, there are commissions to be made.) Check with your broker to see if they offer it. Since it's a CME product, chances are that they do, or that they soon will (or that they have since September 2022 while I was sleeping. )

--------------------

Should you trade these? I am generally of the stuffy, go-slow, conservative, don't take unnecessary chances persuasion (which is funny because as a trader I am a scalper and regard a long-term holding time as about 3 minutes -- but who has to be consistent anyway?), and so I have always regarded binary options as a type of gambling. I dug this up from @Big Mike on the topic:

Big Mike View Post
Stay away from anything and everything to do with binary options. Unless you are just gambling or having fun.

Mike

As I have said, I am not really that well-acquainted with binary options, and I was not at all acquainted with these new (actually, not so new) contracts, so they may not be the same. But they do sound similar.

But, all that aside, is there some value to them? As always, CME emphasizes control of risk, which is the usual non-speculative rationale for anything in futures trading. There is also the extreme risk-taking speculative alternative of just making a flat-out casino bet on what the number will be, which is somewhat like what it sounds to me. But this is not entirely unlike normal futures trading in a sense, just more all-or-nothing. Instead of, for example, taking a long and riding it to a good profit, you not only have to be right about the direction, but also the final level. If you were right to be long but were just a little off on the final level, you can lose 100%.

So this is not my cup of tea. But it would be interesting to see other views. Maybe there are legitimate uses for these contracts. If so, I am sure that traders will find them.

Bob.

--------------------

Edit: I just saw this video from Tradovate on event contracts, which ends with "Why Bet, when you can trade instead?" The emphasis in the video (just 1 minute 22 seconds, worth viewing) is explicitly "Why bet when you can trade instead," but is perhaps more like, "Why trade when you can bet instead". It's all about "playing" the market with low-cost bets. Roll them bones, man. But that's just me, again, being a curmudgeon about such things . Here's the Tradovate video. It does explain things nicely:


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 trendisyourfriend 
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Found the webinar i was looking for:

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trendisyourfriend View Post
Has anyone started to trade this way? If yes, what's your take?

https://eventtrader.interactivebrokers.com/en/home.php

Hi @trendisyourfriend,

Thanks for starting this thread on these new contracts.

I have amended the thread title to add "Event Contracts," to make it easier for someone to find it if using the Search function and looking for "event contracts."

So it went from "New Way to trade the CME Futures markets: Trade your opinion" to "Event Contracts - New Way to trade the CME Futures markets: Trade your opinion."

Bob.

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Does anyone know how the prices of the event contracts are set, and who is taking the other side of the trade?

To me it feels like you always have to deal with a market maker, and pay a very wide bid/offer spread.

The economics of any one trade can look very attractive: fixed risk known at the outset and if you are right you make a multiple of your risk. However, as a practical matter one is not going to just do one trade and walk away. Therefore, you have to think about the attractiveness of the proposition over 100 or 1000 trades. You will be wrong sometimes, or maybe a lot. The purchases with the biggest payouts will be the ones where you are wrong the most often. You’ll probably be right very often on the purchases with the smallest payouts.

My contention is that there is a market maker selling you these contracts at a price different from “fair value” and their bid/offer spread really affects your economics over a large number of trades. In other words if the price they are charging you reflects a risk/reward of 1:1, the real odds of the trade closing in the money are well less than 50%.

An options expert can correct my simple view, but I believe fair value for an event contract means the “above” price plus the “below” price equals the payout. In other words if you buy an above and a below at the same time your net economics are guaranteed to be zero before transactions fees. To the extent this is not the case, this defines the vig you need to make back before you can even think about being profitable.

Does anybody know more about this? Where am I wrong?

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 trendisyourfriend 
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You pay the commission and price needs to go 1 tick above/below the target. That's what you pay. You don't need to think about who's the counter party or spread.


Laconic View Post
Does anyone know how the prices of the event contracts are set, and who is taking the other side of the trade?

To me it feels like you always have to deal with a market maker, and pay a very wide bid/offer spread.

The economics of any one trade can look very attractive: fixed risk known at the outset and if you are right you make a multiple of your risk. However, as a practical matter one is not going to just do one trade and walk away. Therefore, you have to think about the attractiveness of the proposition over 100 or 1000 trades. You will be wrong sometimes, or maybe a lot. The purchases with the biggest payouts will be the ones where you are wrong the most often. You’ll probably be right very often on the purchases with the smallest payouts.

My contention is that there is a market maker selling you these contracts at a price different from “fair value” and their bid/offer spread really affects your economics over a large number of trades. In other words if the price they are charging you reflects a risk/reward of 1:1, the real odds of the trade closing in the money are well less than 50%.

An options expert can correct my simple view, but I believe fair value for an event contract means the “above” price plus the “below” price equals the payout. In other words if you buy an above and a below at the same time your net economics are guaranteed to be zero before transactions fees. To the extent this is not the case, this defines the vig you need to make back before you can even think about being profitable.

Does anybody know more about this? Where am I wrong?


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trendisyourfriend View Post
You pay the commission and price needs to go 1 tick above/below the target. That's what you pay. You don't need to think about who's the counter party or spread.

I disagree strongly. If that’s all you look at you are playing into their hands. CME is not offering these contracts as a public service.

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 SMCJB 
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From the other CME Event/Binary Contracts thread.


SMCJB View Post
That's it, although it's worse than that because of commissions.

Scenario 1
Market is $9.75/$10. Commissions are 70c side (50c Exchange +20c FCM), Rather than let the position expire (and hopefully get your $20) you plan to sell at $19.75 to lock in your profits.
If you are right, you buy at $10, sell at $19.75 and pay $1.50 in commissions to make $8.25.
If you are wrong, you buy at $10, sell at $0 and pay $0.75 in commissions to lose $10.75.
So you need to win 62.02% of the time to breakeven on a 50:50 bet!

Scenario 2
Same as Scenario 1, except that you don't sell at $19.75, making the extra 25c and saving you the commission if you are right.
If you are right, you buy at $10, sell at $20 and pay $0.75 in commissions to make $9.25.
If you are wrong, you buy at $10, sell at $0 and pay $0.75 in commissions to lose $10.75.
So you need to win 57.5% of the time to breakeven on a 50:50 bet!

In these two scenario's I definitely want to be the house. I want the other side of those bets. Unfortunately the other side of those bets isn't the seller it's the CME!


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