Futures Trading Blog

Praveen Ortec asked:


Futures trading are the trading of futures contracts, which gives the holder the ability to buy underlying products for a predetermined price after a definite period of time. These contracts are created mostly for hedging the price uncertainty at the time of product delivery. Futures trading differ from spot trading, in which the trades are completed on the spot. The delivery time of the product is mostly 3 months or 6 months. Futures contracts can be grouped into two broad categories as commodity futures and financial futures.

The trading futures contracts begun in 17th or 18th century in Japan and Holland for agricultural products like rice and wheat. But the first organized futures trading started in Chicago, United states in 1840. In 1848, the first centralized futures trading market came in to being in Chicago called Board of Trade of the City of Chicago, which allowed both spot trading and futures contract trading. The Board of Trade of the City of Chicago later modified its name as Chicago Mercantile Exchange (CME).

In 19th century the products available for futures trading are common agricultural commodities like wheat, rice, oats etc; also some live stocks and meats. Most of these products are traded across US, from western agricultural lands to eastern populated lands. Later more products such as gold, silver, crude oil, natural gas, heating gas, etc were also become available for trading. With the development of the market the products increased to stock futures and stock index futures. In 1971, with the ending of currency gold standards, CME introduced financial futures for the first time, which soon became the most traded futures item. In 1987 electronic trading of futures started and futures contracts become available to everyone around the world.

All futures contracts are guaranteed by clearing houses and have unalterable contract specifications including delivery time and price of the underlying product. Although both names, futures contracts and forward contracts, are used alternatively, they differ in the trading style. Forward contracts are traded OTC (over the counter) though broker-dealer interactions, which involve price bargaining. But futures contracts are traded by open outcry of screen in public domain or simply through centralized futures markets. Remember unlike options, in futures trading it is mandatory to own/deliver the underlying product at the end of the contract period.

As discussed earlier, there are a variety of products available for futures trading, which are named after the underlying product they have. The most common type of futures is the commodity futures for agricultural, metal, energy, meat and live stock commodities. The financial futures or money futures are the futures contracts which have bonds, treasury notes, and other interest-based assets as underlying product. Stock futures have individual stocks are underlying product, where as stock index futures are meant for hedging stock market fluctuations as a whole. Like wise, currency futures are for individual currencies and index futures are for one group/whole market currencies. Although not a future contract, futures options are also a familiar product which gives the holder the option to buy a contract for a specified price at a specific time.



STEEL

Larry Haywood asked:


In the world of finances, futures and options are classed as “derivatives”. They are financial instruments whose prices are calculated by the price of another underlying asset or security. Generally, futures and options are used to guard against risk and for speculative roles. Whenever an investor from Europe purchases shares of an American company on the NYSE, for instance, he is exposed to some stock price fluctuations and currency exchange rate risks. To minimize his overall degree of risk, the investor can purchase currency options to make certain the exchange rate is fixed when he sells off the stock and converts the American dollars back into euros. We will now take a better look at how futures and options work.

Futures

A future is merely an agreement to purchase or sell an asset for a preset price at a specified date in the future. A future’s fundamental asset can be, amongst a lot of other things, an agricultural commodity, individual shares, stock market indices, bonds, and interest rates. A future contract will have fixed delivery dates, traded units, and other clearly defined terms and conditions.

For illustrative purposes, let’s imagine that you’ll “open” a futures position by either purchasing or trading an equity futures contract where the underlying asset are shares. Whenever you’re anticipating the price of the stock to go upwards in the near future, you will purchase a futures contract that will oblige you to receive a specified number of shares at a preset price on a certain date in the future. This is known as a long futures position. If, on the other hand, you’re anticipating the price of the stock to go downwards in the near future, you’ll sell a futures contract that will oblige you to deliver a specified number of shares at a preset price on a certain date in the future. This is known as a short futures position.

Like any other kind of investment, futures contracts carry a risk - that market prices may not go in the direction you thought they would. Nevertheless, they enable you to profit both in a rising and a descending market. When you invest in shares, you typically profit from purchasing low and selling high. But with a short futures position, you can still make money even if the stock price drops.

Options

An option gives its holder the right to purchase (call option) or sell (put option) an underlying asset at a planned price before or on a particular date in the future. But unlike a futures contract, the holder of an option is not obligated to take any action. If the holder decides not to exercise the option, all he stands to lose is the premium he gave for it.

Imagine you currently have a number of shares of a specified company’s stock and you plan on selling them in a month. If you anticipate the share price to drop in this one-month time period, you could purchase a put option that will give you the right to sell your shares at a preset price at any time within the next thirty days.

Whenever your expectations turn out to be right, you’ll be able to sell your shares at a price that is more than the market value.

Options could be utilized as an insurance mechanism against future dips in the price of an underlying asset. The purchasing of options arrives with limited risk as the holder of the option only stands to lose the option premium if his anticipations of market movements do not happen. Additionally, they allow you to take part in market price movements without actually having to take on the underlying asset.

Hopefully, this brief article has served to shed some light on what futures and options are and how they function. The examples preceding were very simplified and were only meant to show the basic concepts of derivative trading. In reality, trading with derivatives is a good deal more complex and warrants additional reading. You need to be extremely acquainted with the different types of products to be successful and fruitful in your positions.



GUFFEY

greenfrog112 asked:


Let’s say I am trading crude oil futures, and I accidentally held a contract past expiration. What would happen? I can’t actually take delivery of 1,000 barrels of oil!

Conversely, what would happen if I held a sort contract passed expiration? I don’t have 1,000 barrels of oil to deliver!

Would these situation be settled in cash? What exactly would happen?

Thanks!

LAMARCHE

Andy West asked:


A futures trading course can be highly beneficial to investors and traders wanting to begin immersion in futures contracts. Futures trading is a market exchange that is deeply rooted in American economic history and has evolved into the cash commodity trade that it is today. Futures contracts have a finite lifetime and are primarily used for hedging price fluctuations and taking advantage of price movements. The futures contract itself is as tradable as the goods that are provided within the contract.

Future trading began in the mid-1800 when Chicago wheat merchants sold their wheat to dealers who shipped it around the country. At this time, it was a dealer’s market. Merchants did not have adequate equipment, facilities, or procedures for effective handling of the wheat and were at the mercy of the dealer. Over time, a central place was established where merchants and dealers could exchange their wheat for cash. This is where the futures contract began. Merchants and dealers would enter into a contract for future sales. These contracts suited both parties, and it was not long after that the contracts themselves began being traded.

Hedgers and speculators are the two groups of future traders. Hedgers use futures contracts to protect the possibility of losses. Hedgers are usually businesses or individuals. Speculators are independent floor traders and investors. These brokers handle the companies or individuals behind the goods. Both hedgers and speculators incur some risks when entering into a futures contract. Futures contracts have finite lives, unlike stock. These contracts are primarily used for hedging price fluctuations and movements. However, knowledgeable investors can exploit mispricing and cash in considerably.

Unlike stocks, futures pricing is extremely unstable. This is why it is extremely important for futures traders to do their homework, and not expect effortless results. Traders should be aware of signals and market news. A futures trading course can significantly prepare a prospective trader for the ups, downs, and signals of futures trading. Supply and demand are the biggest indicators in the commodity trade. This type of information can be gathered from news organizations, press releases, research facilities, and trade organizations. Investors should also be aware of political events, psychological factors, and natural disasters. All of these variables significantly contribute to the supply and demand of the commodity market.

Futures traders can help minimize their losses by pursuing several opportunities. A buyer can take a short futures position and hope the futures prices will go down. Alternatively, investors can place a limit or stop-loss order and only buy or sell if the desired price is reached. The Commodity Exchange Act also places in some protections for traders. This is governed by the Commodity Futures Trading Commission, which is an independent agency of the United States government.

Due to the volatile nature of futures trading, a futures trading course can offer investors many resources to help them invest with confidence. These courses are offered by companies who have been in the business for many years and are eager to help. With unique software and perfected methodologies, an investment in a futures trading course is an advisable option. After completion of a futures trading course, there are further opportunities for continued education.

A futures trading course can be extremely beneficial to both seasoned investors and new investors. As the market is always changing, methodology and signals adhere to the evolution. These courses can help maximize profits and reduce risks by providing the latest information and most relevant tips and techniques. With research and know how, investors can turn a great profit by buying and selling in futures trades.



TODHUNTER