Futures and options: What pros know, and you should too

Rostro’s Saul Knapp explains how these long-standing financial instruments are evolving from institutional tools into opportunities for a new generation of traders in the second episode.

Transcript

SPEAKER_00 0:00

Anyone can trade futures if you open an account with uh an FCM, which is a futures commission merchant, so you get your account and you have access to all the world's major exchanges. If there's nothing going on, it's a quiet market, just let it be. Wait for your opportunities, wait for the market to come to you with an opportunity rather than looking for it. You wouldn't be able to just go to a futures clearing member and open a small account. You need uh quite a hefty sum of money. That's where if you open an account with someone like us, we can provide you the access to these markets and we've done all the hard work in between, the setups, and then make it available to retail traders. So it's the big barrier to entry was originally market data, the exchanges charge. This could be quite costly for a retail investor, as well, with the setup we've done, the market data charge is taken away.

SPEAKER_01 0:50

Hello and welcome to Money Reimagined, Investing for the Next Generation, the podcast where we explore how the next generation is reshaping finance, technology, and also investing. I'm Lochland Kitchen, and today we're discussing futures and options, what the pros know and what you probably should know as well. It's a topic that's often misunderstood, and it's sometimes more complicated than it should be, futures and options. But these are instruments and they're used every single day by institutions to manage risk, to generate income, and to navigate global markets, yet they're rarely explained in plain English. So that's what we hope to do today. Joining me to discuss this is Sol Knapp. He is the MD of Futures and Options at Rostro. It's a financial services group redefining access to investing from the traditional markets that we know to digital assets and also beyond. Sol, thanks very much for coming in for episode two of the podcast. Brilliant. Thanks for having me, Loklan. Great to have you here and share on all your experience because we've all always heard about these terms futures and options and they've come up at dinner parties. So I've I've got a few questions for you about this. But for people on that, they may have heard it before, you know, buying and selling and trading and futures and options. What exactly are they? But more importantly, why do they matter in modern investing?

SPEAKER_00 2:11

I mean, future and options have been around for hundreds and hundreds of years, back to the day of rice farmers and you know, even before that, you know, we can trace it back for many, many hundreds of years ago. Uh, most people use future and options as a hedging mechanism or a way to get exposure to financial instruments, and they're also used for speculation, you know, between anywhere from a hedge fund to a proprietary trader to a single individual.

SPEAKER_01 2:35

How were they done previously when you you mentioned those going back hundreds of years? It's kind of easy to understand now how it's done with people trading on their computers, but how was it done, you know, a few decades ago pre-the-internet?

SPEAKER_00 2:48

Well, even a few decades ago, so I started on the LifeFloor, which is the London International Financial Futures Exchange back in 1992, so over 30 years ago. And this was all done via open outcry. So in big trading pits with hundreds and hundreds of people, all with funny coloured jackets and crazy hand signals. Uh, this was done to discover price in the pit at the time, whatever the price was at the time. Um, it was all manually done, written down by hand on with paper and pen. This was manually input into a real basic computer system or a matching system, and it was very basic. It was uh the most basic you could possibly get.

SPEAKER_01 3:25

Yeah, things have certainly changed uh in that front. But many of these tools, like futures and options, they're associated with professional traders or institutions. So we know that people in the industry, the pros are all using them, but what can an everyday sort of home day trader learn from them as well?

SPEAKER_00 3:43

I mean, there is a lot of home day traders trading futures and options. I used to be a proprietary trader for 20 years, uh sitting at home or sitting in an office trading futures. There used to be big groups of proprietary traders or prop trading groups. So anyone can trade futures. If you open an account with uh an FCM, which is a futures commission merchant, uh you get your account and you have access to all the world's major exchanges. So when you look at primarily what is the difference between a future and an option? So a future is the uh right to buy an asset or the right to sell an asset at a fixed price at in a fixed time. An option is the option to do that. So it's almost like an insurance policy.

SPEAKER_01 4:21

So so it's the idea that you're hedging on that stock may go up and down, and you want to have the opportunity to buy should that price fluctuate?

SPEAKER_00 4:28

Exactly. And with an option, you can decide if you want to take that option to take the delivery of the future or the underlying or pay your premium and sort of leave it.

SPEAKER_01 4:37

But you mentioned you work in those early days when you had the you know the bright jackets on and you were there in the 90s. What would you say to your younger self now if you could go back to those early couple of years in trading and maybe do a few things differently?

SPEAKER_00 4:49

I would have probably learned a lot more about what I was actually trading. I knew the products I was trading, but they were just numbers to me at the time. Um now of 30 years later, I know what drives the markets, what the underlying instruments do, you know, more about the fundamentals of the markets and understanding. So yeah, I would I'd go back and be armed with a bit more knowledge before I started to trade.

SPEAKER_01 5:11

And and how hard is it in those early days, particularly, I and I imagine particularly more so when you're in those trading pits, to not let emotion come into your decision process.

SPEAKER_00 5:20

Yeah, emotion is the enemy of any trader. You can't be emotional when you trade, you can't trade because you need to earn the money you need to trade because it's an investment, it's something you want to do. If um emotion gets the better of you, all your discipline, your systems go out the window.

SPEAKER_01 5:37

So for people that are looking at, I guess, futures and options, sometimes people might see this as a bit too complex or risky compared to just buying um a company in the SP 500 and putting your money in. But you've said before that they're foundational, you know, they're not just advanced. What kind of do you mean by that when it comes to futures and options?

SPEAKER_00 5:56

Well, future is probably one of the most basic trading instruments you can you can use. Um the thing that confuses people is the word future, it's got a delivery date in the future, but you don't have to take delivery of the underlying instrument, you can roll it into the next contract or you can buy further dated futures. Options, on the other hand, are a little bit more complex. The basics of options, put uh calls and puts are quite simple, but there's a lot more in the background. So um, futures I would say are very alike to a CFD or buying a share. Options are a little bit more uh a little bit more complicated.

SPEAKER_01 6:30

Yeah, and when it comes to that complexity, I guess it also comes that down to derivatives and derivatives training. I remember when a friend of mine studied um actuaries. He went to a university to be an actuary. I said, What is that? And he said, Oh, it's like a form of diversified calculus and we use it to trade derivatives of shares. And I was like, okay, so someone's a bit smarter than me. But when you look at derivatives, they're used in really strategic ways, particularly for trading. Uh, they're used for hedging. Now, obviously generating income and managing risk. But, you know, for someone who's not really used to finance, how do you use derivatives in a really smart way?

SPEAKER_00 7:07

I mean, derivatives, as you say, can be used for hedging, etc. So an airline might fix their fuel costs for next year, knowing that they've got a budget to stick to and projections, so they might hedge their fuel costs so they don't get any unwanted surprises if uh if there's a big spike up higher in oil or uh gasoline or jet fuel. Um, you can also use these uh speculatively, so uh a day trader can just speculate on day trading, finish the day with no position, or you can run the position overnight, you can run it until the expiry. But speculation is probably the big majority of what the future contracts that are traded. I think probably 90% of futures contracts don't go to delivery.

SPEAKER_01 7:45

And are there particular industries or sectors that people tend to invest in futures or options more? Do they look at things like oil prices or gold prices? Are commodities too are they more common for futures and options?

SPEAKER_00 7:56

Yeah, I mean a lot of a lot of proprietary traders will trade interest rate futures. The world I come from, normally commodities, so oil, gas, gold, soybeans, wheat, cocoa, coffee, sugar. So nearly every commodity you can trade as a future.

SPEAKER_01 8:11

We're seeing a bit of a rise, particularly with uh Gen Zs and millennial investors. Um, maybe it's because they're more comfortable with the technology and trading from the beach on a laptop or whatever it is, but they're looking to explore futures and options. What do you think is driving that trend with the next generation?

SPEAKER_00 8:27

I think, as you say, you've got all youngsters and Gen Zs now, everybody has an iPad, a laptop from a young age. Uh, they've always connected to the internet, whether it be social media. Um, but there is just a big influx and interest in trading. And I think it because being a trader, a day trader gives you a lot of freedom. You can do it from anywhere, you can do it from home, you can do it from a beach in in the Seychelles, you can do it anywhere. So I think uh it's very attractive to people because you you're your own boss, you make your own decisions, and you can, as I said, do it from anywhere you like.

SPEAKER_01 8:57

Yeah, and and I have a theory that I think it's because the the Gen Z that are coming through also aren't used to really having any money, like cash money. And I think that maybe their mindset towards digital assets and tokens, probably a bit different to I think about my granddad and everything. You had to put you know the cash in the safe at night at the end of every Friday.

SPEAKER_00 9:16

Well, it used to be cash is king. Cash is king, yeah. You went to buy a car, you got a discount for cash. You could buy anything with cash, but nowadays nowhere really accepts cash.

SPEAKER_01 9:25

Walk us through some of the more practical examples for people that are just starting out or they want to learn a bit more. Say, practical examples about commodities or even crypto futures or indices. How do investors actually use each of them?

SPEAKER_00 9:39

So, I mean, investors would a lot of the time they're hedging against other products. Um, you can do arbitrage between different products, which is uh a known strategy. You can trade the same products on different exchanges. So you could trade oil on COMEX against oil on ice, and you try and take away the uh the difference, the difference, the price price differential between the two exchanges.

SPEAKER_01 10:00

It's not always as easy as it sounds, but um that sounds like something a bit more experienced traders would probably look to get into.

SPEAKER_00 10:07

Yeah, it's a bit more complex, but day trading a lot of people like to trade indices like the Nasdaq, the Dow Jones, the SP. These products are are quite volatile, there's a lot of movement, so there's where there's movement and a lot of volatility, there's opportunity. And is crypto a popular one?

SPEAKER_01 10:21

Because crypto is probably the most volatile of all of them. Is that why crypto futures tend to be an attractive option?

SPEAKER_00 10:26

I mean, they definitely are an attractive option. Um, you know, most people buy and hold Bitcoin or um cryptocurrencies, is where on the futures markets a lot of people play different strategies, they'll trade the futures against products on Binance and other exchanges, you know, the uh CFDs, etc. But I think um futures for Bitcoin and uh cryptocurrencies aren't as popular as a lot of the other products.

SPEAKER_01 10:51

So, Soul, why is that? Why are people still leaning back towards the more you know traditional commodities as opposed to using crypto?

SPEAKER_00 10:59

I think it's the offering on exchanges. There's not as many crypto products, mainly Bitcoin, Ethereum. Um, if you go to the likes of Binance, the other exchanges, or the crypto-specific exchanges, obviously there's an array of cryptos you can trade there. I think because futures trading is uh in a centralized place, it's uh the specifications on the exchange, it's a lot safer to trade on a regulated exchange than it is to trade on a non-regulated exchange.

SPEAKER_01 11:25

Yeah, for people that are looking to really kind of get into this, um, what percentage of people do you think are actually getting into trading both cryptos and futures, or do you think that it's more an untapped resource for a lot of investors that are starting out?

SPEAKER_00 11:38

I think it is probably an untapped resource. I mean, I get a lot of people ask me on a on a daily basis about getting involved in futures and options.

SPEAKER_01 11:46

And and that I do you feel pressured when you're like you're at the dinner party and you explain what you do, and people say, Oh, I've got a bit of spare cash. Should I do futures and options?

SPEAKER_00 11:54

Yeah, it happens every time. And I try and explain to people that you know, if you've got a little bit of spare cash, it's it's not guaranteed to make you money, it's not guaranteed to make you rich, but doing it the right way, there's a right way and a wrong way to do it. You know, you have to be disciplined, non-emotional, and have a plan.

SPEAKER_01 12:11

Yeah, I guess understand your own uh propensity to risk. Exactly. Your personality type. Uh looking at leverages and also volatility being involved, um, you mentioned that about personalities and the discipline and the lack of emotion that's required. How do personal traders, I guess, and from your experience as well, how do you manage that between the opportunity and the risk and keeping those emotions in place?

SPEAKER_00 12:35

Is the hardest part is the hardest part to manage as a trader is yourself. Uh the markets will do what they do, they'll go up and down, they'll, you know, they'll do what they do anyway, whether you're involved or you're not involved. It's about having a plan, sticking to a system that you works for you. It might be completely different for somebody else. Your own risk tolerance and setting your own rules. And if you have a set of rules, you have to stick to them. Emotional trading, I would say, nearly always costs you money.

SPEAKER_01 13:00

What are some of the rules you like to stick by?

SPEAKER_00 13:02

I always have a stop loss in mind or a stop per trade so that I'll have a maximum loss on each trade. I don't trade or wouldn't trade if there's nothing going on. It's a quiet market, just let it be. Wait for your opportunities, wait for the market to come to you of an opportunity rather than looking for it.

SPEAKER_01 13:18

And is that still why most people are happier to have their funds being managed by someone else? Because I guess if you're managing someone else's money, one, the emotion is taken out of it, but you know the propensity to risk, you're going to minimize that so much because you're dealing with someone else's uh someone else's investments.

SPEAKER_00 13:34

Yeah, and a lot of like pension funds and sort of uh ETFs and stuff, people there a lot of these are baskets of funds, baskets of futures, baskets of shares. So there's a lot of diversification as well. You're not concentrated to just one asset.

SPEAKER_01 13:46

So those simple rules are almost knowing you get out points. Yeah, definitely, always. And and probably understanding your own uh your own your own propensity. How comfortable are you with losing money? Um, education is one thing when it comes to learning about this that just comes up again and again and again. What do you think new investors, if they want to start out, and I guess that can often be the hardest thing, that first trade you're looking to do, what do you think they should learn about even putting their first trade or placing a trade in derivatives for the very first time?

SPEAKER_00 14:18

Well, I think research. Research the product you want to trade. If it's gold, find out you know what drives gold, what things affect gold, what affects the gold price, what news will affect it. Um you can't just go in and start clicking away and think you're gonna make money because you're not, you're gonna you're gonna cause yourself a world of pain.

SPEAKER_01 14:36

So research. We'll we'll take gold for an example because gold's at record highs. Um it's everyone's talking about gold. They're they're going up. I mean, we're in to buy, we're talking about people that are always rushing on the weekends to get to the gold markets. For someone who is thinking, right, I've got my set amount of money, I don't want to invest it in gold. What should they be doing? Should they be researching you know the performance of gold? Should they sit and wait for a month to look for any fluctuations? What would your be advice for someone that's maybe making their first purchase?

SPEAKER_00 15:04

I think it depends how you want to trade. Like a lot of people would rather sit on a physical asset and hold physical gold, which um I can never argue with. It's uh it's a good strategy. I think you've got to look at what drives the market is supply and demand. At the moment, especially in say silver markets, we've got a huge, huge dislocation from the real markets, the physical markets. There's a big shortage of silver, and it's used in many, many things, a lot of electrical components, solar panels, electric cars, and uh there's a shortage of physical silver literally around. You you can't get hold of it. So all the exchanges and all the people trading on it, CFDs, etc., futures, the uh there's not enough physical metal to deliver into these products.

SPEAKER_01 15:44

Yeah, but I think I think that's a really good point, Saul, because we look at gold and you talk about emotions. There is still a romance towards gold, yeah. But that people tend to think that that is the you know the peak. But then you look at silver and people think, well, why would that be worth as much? But then you realise how far it comes down to that research. What is it used for? Where is the need? And is there probably also a few kind of people that are are hedging that idea of, oh, well, I can't get gold, it's too high at the moment, so I might take in some silver as well.

SPEAKER_00 16:13

Yeah, it's all supply and demand. The more, the more people want something, the more it's in demand, the higher the price goes. And uh, we've seen that with silver in the last six to eight weeks.

SPEAKER_01 16:22

Uh, you're working with Rostro, and Rostro offer real futures access on the MT5, uh, which is a big deal for retail investors. What is the MT5 for people who don't know?

SPEAKER_00 16:32

So MT5 is MetaTrader 5. It's uh a very well-known platform, mostly offered by CFD brokers. It's um it's huge, there's many, many, many users of MT5. So it predominantly is a CFD platform, but we've created uh our own our own bridge, the bridge between MT5 and uh the exchange. So people can trade on MC5 and trade real futures, not a CFD, it's a real future. It's a real futures market, yeah. That goes straight to the exchange.

SPEAKER_01 17:00

And I guess that's what with part of your work at Rostro, you're actually doing to kind of bridge that gap uh between having to work with institutional markets but being an everyday trader yourself.

SPEAKER_00 17:11

Yeah, and we do all the hard work and the heavy lifting, so all the setups done our side. You wouldn't be able to just go to a futures clearing member and open a small account. You need uh quite a hefty sum of money as well. If you open an account with someone like us, we can provide you the access to these markets, and we've done all the hard work in between and all the setups, and then make it available to retail traders. So it's the big barrier to entry was originally market data, the exchanges charge. This could be quite costly for a retail investor as well. With the setup we've done, the market data charge is uh is is taken away.

SPEAKER_01 17:44

And I guess that that data once you've read it and you've analysed it for an everyday trader, there's an air of confidence again in your own investing because you've done that back-end research and had someone like Rostro provide it for you.

SPEAKER_00 17:56

Yeah, we've done so much research on this. We've we we put out a lot of stuff for our clients, we help our clients the whole way. We've got um a good team of uh support guys who can help. You know, we're we're there to hold your hand the whole way, really.

SPEAKER_01 18:10

Yeah, I and I think that that comes down to that confidence of again, it must be just putting that first investment in for a lot of people, is probably the biggest challenge of all.

SPEAKER_00 18:19

Yeah, and it's it's trusting your broker, trusting that your money's safe, and trusting that you're you know you're getting a fair deal when an exchange traded product is uh transparent and everybody knows that it's uh the real product underneath.

SPEAKER_01 18:32

So you were mentioning about futures and options. Um, are there any markets or countries, I guess cultures, where futures and options tend to be a much more comfortable investment than others?

SPEAKER_00 18:42

I think it's always been the case that futures and options were mainly traded from Europeans, uh, the UK, the US. But we are getting a lot more interest now and a lot more people from Africa, from the Middle East. Um it seems to be there's just a big interest coming now because I think what the markets are doing, like the gold markets, people looking for alternative places to hedge or to trade. So I think exchange traded futures and options are becoming quite big everywhere. It's almost like a resurgence of what it used to be.

SPEAKER_01 19:10

Yeah, so it's more kind of a I guess Western Europe and the USA, but uh probably if you're seeing more people get involved with it, that's also going to make uh I guess when it comes down to the um the brokerage rates and the fees far more competitive for many people.

SPEAKER_00 19:23

Yeah, definitely. So the more people trading, the cheaper these costs become, the more accessible they become. And it it just goes on from there, really.

unknown 19:30

Yeah.

SPEAKER_01 19:32

Uh going forward and trying to look, if you can, I know you're in futures, but predicting over the next couple of years. So where do you see the futures and options space sort of heading? And how is all your data and all your work with Rostro, how is that helping keep investors ready for the next evolution?

SPEAKER_00 19:49

Well, I think if you go back sort of 20 years ago when CFD brokers first started popping up, um, a lot of the volume went away from the exchanges from futures and options and went on to CFDs. Fast forward now 20 years, and you've got the likes of the CME Exchange, the biggest exchange in the world, yeah, and they have a big sort of push on attracting retail clients. So they've chopped down the contract sizes of a lot of products, so you can trade micro gold, micro Dow, Micro FX futures. So these are all aimed at a smaller investor and make it easier for a smaller investor to get exposure to these products.

SPEAKER_01 20:23

And so many traders, you know, are all over the world. But for anyone who might be in Dubai or particularly in the UAE, what do you think are some of the advantages of being based here and becoming an everyday trader?

SPEAKER_00 20:33

I think you've got so many people here who are doing this, and you've got many, many brokers here. You have a big choice of brokers to choose from. There's a lot of information out here, there's a lot of really good people. So I think you know, you've got being here reminds me of being in London, sort of 30 years ago.

SPEAKER_01 20:49

Okay. Not London today, London 30 years ago. Yeah, 30 years ago. Back when you had the uh the colour jackets on and you were in the pit. Yeah, when it was slightly different. So you were mentioning MT5. Uh, for people that are looking to get into trading, what are some of the other software platforms that you recommend you work with Rostro?

SPEAKER_00 21:06

So I've used the main two platforms for uh trading future and options is CQG and trading technologies. Uh CQG is the main one that we offer. CQG have been around for 40 plus years. Um they're an institutional great platform and they also have a retail style platform. They connect to 45 exchanges worldwide, and their support is amazing. So it's it's a system that we would recommend using.

SPEAKER_01 21:32

45 markets.

SPEAKER_00 21:33

And and that's just an application that people just download on their phone and they they work with? Yeah, it's it's a desktop version, or there's a full install on your PC, but there's also a mobile trader as well that you can use on your phone. And that's the best way to monitor all of your transactions. Yeah, totally. It's got all the risk parts built into it as well. It's it's an amazing system.

SPEAKER_01 21:50

Yeah, for for futures and options, you you've really cleared it up for us all because I think for many people it might be something they've just seen in the uh the Wall Street movies, and you know, they've seen all the hype that goes. Around. But it doesn't necessarily have to be something that is only for institutional traders. It really is a product. It is probably an untapped resource for many everyday traders.

SPEAKER_00 22:09

Yeah, definitely. And now, like as I said, the exchanges are offering smaller contracts. So like 10% of the size of the normal contract. It's really attractive to retail investors now.

SPEAKER_01 22:18

Yeah, so again, the more people that take it up, the more competitive it is. Totally. Yeah, for markets. Well, Saul, thank you very much for coming in and having a chat on the podcast. Thank you for having me. It's been a pleasure to learn more about it. Thank you. Thank you. My thanks again to Saul for coming in and breaking down what some people think is a complex topic into such a clear and practical way. Futures and options aren't just advanced trading tools, they're foundational instruments that help investors understand risk, structure, and really how global markets work and make it easily accessible to anyone. If you'd like to learn more about Rostro and how it is redefining access to global markets, you can visit their website, that's rostro.com. Or to find out any more about this podcast or any of the podcasts with Golf News, you can go to our website, which is golfnews.com forward slash podcasts. I'm Lachlan Kitchen. Thank you very much for joining me on this second episode of Money Reimagined. On the next episode, we're going to talk about digital assets as we look to go beyond the hype. We'll see you then.