Futures Options – Opening New Markets
Futures options are similar to futures themselves in that both give the holder the right to buy or sell the underlying commodity for a specific price on a specific day. Beyond this there are some significant difference between the two and how they are traded.
Rights and Requirements
The main difference between futures options and futures has to do with rights and requirements. Futures options give the holder the right to buy or sell (depending on the option) the underlying commodity for a specific price on a specific date while futures obligate the purchase or sale. While there are investment strategies for futures that eliminate the need for an investor to accept delivery of 10 tons of pork bellies, the basic concept is the same; futures require the buyer to take delivery (in one form or another) of the commodity in question.
Futures Options Contracts
Futures options markets trade options contracts, which specify the underlying asset, the expiration date, and the strike price. Those involved in day trading can trade options contracts to make a profit on the difference between the buying price and the selling price when the options are sold before expiration, or to make a profit from the underlying asset when they are exercised.
As with futures contracts, futures options contracts are traded by day traders and longer term traders in futures markets, and also by non traders with an interest in the underlying commodity. When traded for the underlying commodity, options contracts work the same way as futures contracts, but only give the right to buy or sell the underlying commodity rather than the obligation. For example, a farmer will sell options on his cattle if he thinks prices are going to drop before he takes them to market; conversely, a meat processing company will buy futures on cattle if they believe that prices will rise. Both are non-traders but they have interests in the commodity. The final part of the equation is the investor who attempts to make a profit by successfully trading these commodities.
Futures or Cash Settlement
Futures options are settled in either cash or a futures contract in the underlying security when they are exercised. In-the-money, cash-settled futures options are valued using the trading price of the underlying security at expiration, and the profit is placed into the trader’s account. In-the-money, futures settled options are converted into the appropriate futures contract, which the trader can then buy or sell to realize the profit or hold the purchase and simply continue commodity trading.
Because futures options contracts only give the holder the right to purchase, successful traders don’t have to purchase losing positions. If an investor is holding a position that has not prospered according to the contract, he or she can just walk away from the agreement and let it expire. This is the benefit of futures options over standard futures contracts; the ability to walk away from a losing position leaves the investor with a reduced exposure. Conversely, an investor that is holding a contract when the buyer does not exercise his or her position has profited by receiving the premium for selling that position. Such a strategy is helpful during negative periods in the market because it allows for profit taking in a less risky manner.
Conclusion
Futures options, although they are quite similar to standard futures contracts, still possess features that make them very desirable for successful trading. This type of trading can open new markets for investors looking to make money.
Author: Stephen Bigalow
Article Source: EzineArticles.com
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Simulated Futures – Perfect for Beginners
Are you interested in making money with futures trading? If you are, you are definitely not alone. Commodity trading is reaching an all-time high in popularity. Although many individuals are able to make a profit with futures trading, there are also those who end up losing money. To help ensure that you make money, as a beginner, not lose it, you will want to make sure that you know exactly what you are doing. You can not only do this by thoroughly researching futures trading and the futures market, but you can also do it by participating in a simulated futures programs.
As a beginner, you may be wondering exactly what a simulated futures program is. In short, a simulated futures program is a program that allows you to practice futures trading, but without risking any “real,” money. Simulate futures programs are available through many futures brokers. Many futures brokers allow their prospective clients to use their simulated futures program free for a short period of time, typically around thirty days. If, after that point, you still think that you need more practice, you should be able to continue on with your futures simulated program, but for a small fee.
Although it is nice to know how you can participate in a simulated futures program and have a generalized idea of what one is, you may be looking for more information, particularly why it is good for beginners, like you. As it was previously mentioned, a simulated futures program is a practice program that those just getting started in futures trading are advised to use. While each simulated futures program may very, often depending on the futures broker offering the program, many programs function in similar ways. For starters, you are given a test account, with “fake,” money that you can use like “real,” money to make trades.
When using a simulated futures program, you will have access to the same information and the same tools as a real, paying trader would. This is where the practice comes in. This practice and its value are immeasurable. With simulated trading, you are able to see which trades or moves of yours were good or bad. For instance, if you were to make money or a wise trade, you would likely remember your actions and keep them in mind for future use. The same can also be said for losing money or making bad trades. The information that you learn in a simulated futures program may help you become a successful futures trader.
Although many simulated futures program participates receive valuable hands-on information, which makes it easier for them to be successful when they start trading, there are others who realize that futures trading may not be for them. That is another reason why simulated futures programs are ideal for beginners. Unfortunately, many beginners learn about the ability to make money with the trading of commodities and they automatically assume that they can do the same, but futures trading isn’t right for everyone. That is why, if you are just getting started in futures trading or just learned about it, you may want to first try a simulated futures program.
Author: Ulysses Faust
Article Source: EzineArticles.com
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Real Time Futures – Why It Should Impact Your Futures Broker Decision
Are you interested in trading futures? If you are, you may also be interested in using the services of a futures trading broker, as they provide you with the knowledge and assistance needed to be a successful futures trader. The good news is that you have a number of different futures brokers to choose from. The bad news is that you have so many brokers to choose from that you may have a difficult time making a decision.
The first step in choosing a futures broker is to actually find one or a number of them. If you are looking for a local futures broker, you can use your local phone book. For a larger number of futures brokers, you may want to think about using the internet, particularly online business directories or standard internet searches. Once you have the contact information for a futures broker or their website address, you can begin to further investigate or research them.
When it comes to further researching a futures broker, there are a number of obvious things that you will want to look for. For instance, you will want to do business with a futures broker that is affordable, as well as one that has a good reputation. One point that you may not necessarily think about is real time futures. Of course, it isnt necessary, but you may want to think about doing business with a futures broker that relies on real time futures. Real time futures is often considered a tool; a tool that you, as an investor, can benefit from.
When looking for a futures broker that uses real time futures, you will need to examine the services provided. Real time futures often involves having the futures market, as well as current commodity prices, and futures investing news updated, in real time format. Many futures brokers who use real time futures operate online, as it is easier to keep their information updated and in real time format. In most cases, you can look at the online website of a futures broker and see, right away, if they have real time futures information.
As a reminder, real time futures isnt necessarily required, but it is something that you may want to closely examine. If you are able to find a futures broker, particularly one that uses real time futures, you are advised to thoroughly examine their online website. You will want to look for trader accounts that you can open, as well as their costs. If you have any questions or concerns, most futures brokers are available to offer you assistance or answer any of your questions.
Author: Ulysses Faust
Article Source: EzineArticles.com
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What You Need To Know When Trading Derivatives And Futures
The Derivatives and Futures Market is the most potentially profitable market in the world. But it can be the most distructive one too!
Derivatives
A derivative is a financial term for a specific type of investment from which the price over a certain time is derived from the performance of the underlying asset such as commodities, shares or bonds, interest rates, exchange rates or indices like stock market index or consumer price index.
This performance can determine both the amount and the timing of the payoffs. The diverse range of potential underlying assets and payoff alternatives leads to a huge range of derivatives contracts available to be traded in the market. The main types of derivatives are Futures, Forwards, Options and Swaps.
Futures
A futures contract is a standardized contract, traded on a futures exchange
to buy or sell a certain underlying asset. at a certain date in the future, at a pre-set price.
The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price. The futures price, normally, converges towards the settlement price on the delivery date.
A futures contract gives the holder the right and the obligation to buy or sell, which differs from an options contract, which gives the buyer the right, but not the obligation, and the option writer (seller) the obligation, but not the right.
In other words, the owner of an options contract can exercise (to buy or sell) on or prior to the pre-determined settlement/expiration date. Both parties of a “futures contract” must exercise the contract (buy or sell) on the settlement date.
To exit the commitment, the holder of a futures position has to sell his long position or buy back his short position effectively closing out the futures position and its contract obligations.
Futures contracts, or simply futures, are exchange traded derivatives. The exchange acts as the counterparty on all contracts and sets margin requirement etc.
Forwards
A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. Therefore, the trade date and delivery date are separated. It is used to control and hedge risk.
One party agrees to buy, the other to sell, for a forward price agreed in advance. In a forward transaction, no actual cash changes hands. If the transaction is collaterised, exchange of margin will take place according to a pre-agreed rule. Otherwise no asset of any kind actually changes hands, until the contract has matured.
The forward price of such a contract is commonly contrasted with the spot price which is the price at which the asset changes hands ( on the spot date, usually the next business day ). The difference between the spot and the forward price is the forward premium or forward discount.
A standardized forward contract that is traded on an exchange is called a futures contract.
Futures vs. Forwards
While futures and forward contracts are both a contract to trade on a future date, key differences include:
Futures are always traded on an exchange, whereas forwards always trade over-the-counter.
Futures are highly standardized, whereas each forward is unique.
The price at which the contract is finally settled is different:.
Futures are settled at the settlement price fixed on the last trading date of the contract (i.e. at the end)
Forwards are settled at the forward price agreed on the trade date (i.e. at the start)
The credit risk of futures is much lower than that of forwards:
Traders are not subject to credit risk due to the role played by the clearing house. The profit or loss on a futures position is exchanged in cash every day. After this the credit exposure is again zero.
The profit or loss on a forward contract is only realised at the time of settlement, so the credit exposure can keep increasing
In case of physical delivery, the forward contract specifies to whom to make the delivery. The counterparty on a futures contract is chosen randomly by the exchange.
In a forward there are no cash flows until delivery, whereas in futures there are margin requirements and periodic margin calls.
Options
An option is a contract whereby one party (the holder or buyer) has the right but not the obligation to exercise a feature of the option contract ( e.g. stocks ) on or before a future date called the exercise or expiry date.
Since the option gives the buyer a right and the seller an obligation, the buyer has received something of value. The amount the buyer pays the seller for the option is called the option premium.
Most often the term “option” refers to a type of derivative which gives the holder of the option the right but not the obligation to purchase (a “call option”) or sell (a “put option”) a specified amount of a security within a specified time span. (Specific features of options on securities differ by the type of the underlying financial instrument involved)
Swaps
A swap is a derivative where two counterparties exchange one stream of cash flows against another stream. These streams are called the legs of the swap. The cash flows are calculated over a notional principal amount. Swaps are often used to hedge certain risks, for instance interest rate risk. Another use is speculation.
Swaps are over-the-counter (OTC) derivatives. This means that they are negotiated outside exchanges. They cannot be bought and sold like securities or future contracts, but are all unique. As each swap is a unique contract, the only way to get out of it is by either mutually agreeing to tear it up, or by reassigning the swap to a third party. This latter option is only possible with the consent of the counterparty.
Author: Ricky Schmidt
Article Source: EzineArticles.com
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Understanding Futures Trading
Many people have the notion that commodity futures trading is very difficult to understand. It may only seem difficult when you are new to futures trading, but once you understand the inner workings and get a hang of it, you will be well on your way to success.
People have a common misconception that commodity exchanges determine or establish the prices at which commodity futures are bought and sold. This is not true. Prices are determined by supply and demand conditions. Just keep in mind that if there are more buyers than sellers, prices will be forced up and vice versa.
Buy and sell orders, which originate from all sources and are channeled into the exchange-trading floor for execution, are actually the ones to determine the prices. These buy and sell orders are translated into actual purchases and sales on the trading floor.
The major function of the futures market is the transfer of risk, and increased liquidity between traders with different risk and time preferences, for instance from a hedger to a speculator. Futures trading is a method used to eliminate or minimize risks that occur when the prices in the market fluctuates.
Futures contracts are exchange-traded derivatives. A futures contract is traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set price. Futures contracts are basically for assumption or hedging.
There are two groups of futures traders: the hedgers, who are interested in the underlying commodity and are seeking to hedge out the risk of changes in price; and the speculators, who are interested in making a profit by predicting market moves and buying a commodity “on paper” for which they have no practical use. For example, commodities in the market can be bought today at today’s price, with the speculation of selling them at a higher price in the future.
On the other hand, hedging protects against fluctuations in market prices. This protection is made by allowing the risks of price changes to be transferred to professional risk takers. For instance, a manufacturer can protect itself from price increases in raw materials they need by hedging in the futures market.
Hedging has two types, hedge sale and hedge purchase. A person can buy a commodity and sell futures at the same quantity as protection against fluctuation in prices when he is still holding the stock.
You might think that this is gambling, but the fact is that speculation refers to the condition of a legitimate enterprise based on the current condition of the market trends. However, it is very risky for inexperienced futures traders who try to predict the market and speculate without having enough resources or experience.
Since the prices are distributed via telecommunications network and the internet, it makes online futures trading very convenient and simple for an individual. Nowadays many brokers offer their services for trading commodity futures online. Because more risk is involved in online futures trading than stock trading, you must judge for yourself whether or not it is worth the added risk of trading commodity futures online.
Keep in mind that an investment in futures can result in losses. Past performance results does not necessarily indicate future performance results.
Author: Susan Jan
Article Source: EzineArticles.com
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Which is Harder: To Know the Past or To Predict the Future
Miscellaneous Idea and Concept. Something to think about, not relating to any particular topic, event or person. I would like to begin this quarter review of thoughts on both the past and the future. First it appears to be easier to predict the future than to guesstimate the past. For instance predicting the future seems to be much easier than that of the work of archeologists trying to piece together what happened based on clues and forensics. And to this point I wish to bring to point a few recent works. One is the work done by Stephen Wolfram where he shows how simple programs develop extremely complex results. If we study the concept of the Greek Gods and their roles, we may find that the world as we know it started from extreme simplicity.
Perhaps several programs which have been running and interacting for 5.5 billion years. Now without getting to far out and therefore such comments being dismissed by those of extreme religious convictions of any sect. This comment would not in fact preclude the idea of a god or delete the idea of the Greeks theories and beliefs in multiple gods, but rather open up dialogue past that of absolutes we see in major religions and literal interpretations of those writings. Let us take the simplicity of life at the most basic levels of RNA, DNA, Proteins, etc. The easiest way to study something is from the beginning, thus if we are wondering how the complexity of life (species and niches) actually came about here on this planet it might be easiest to know such an answer by creating life.
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Now this could be artificial life, add on artificial intelligence interacting with human life or other intelligent species of the planet
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It would be smart to figure out more ways to interact with our intelligent species on Earth to communicate. Such as we have done with Chimpanzees through sign language or with Dolphins. But what is most interesting is in our “Politically Correct World” we have not been honest enough with our own human kind and perhaps the notion of working towards a closer world of mankind ought to be figured into the idea. If we create life and watch it evolve we can then understand these theories better of how we describe the past better. Studying and predicting the future is much easier than studying and forensically outlining the past or past events. Surely one can get close looking backwards, but not as close as one who has studied the future based on the current or present, understanding the current perception of the past into the equation. In this regard I would like to point out Isaac Asimov and his trilogy as an example of some of what we are working on today. Also the lifetime journals of Nicola Tesla and his ideas of the automaton, ELF work and other predictions of the future seem to have predicted quite closely our current future.
I like to think that I myself studying different technologies can find clues to the future based on current observations along with those newest innovations and their potential uses. Also if you look at Arthur C Clark and all his ideas, it seems that much of those are now becoming reality all of which seem to be combinations of all past innovations and thoughts. Many of these predictions in the form of fictional work have come true. Geosynchronous Satellite communication (Iridium), cold fusion, modern Alchemy, etc., he once said: “To predict the future we need logic, but we also need faith and imagination, which can sometimes defy logic itself.” Arthur C. Clarke. Nicola Tesla had nearly as much written predictions as Galileo, Einstein, Copernicus, Da Vinci, Newton, etc. And today we have some incredible people in our era watching, inventing, innovating, creating and inventing. Some of these living intellectuals have made some enormous predictions, which if and when they come true will be a wonderful accomplishment for mankind.
As a matter of fact predicting the future with a little knowledge and observation is relatively easy. Having studied the great explorers of the past and famous archeologists like Charles Leaky, it is interesting how much we have learned, but how little there is available in the way of clues. Charles Darwin had lots to say also and many times what we see today along with what we are somewhat sure of in the past, such as the existence of Dinosaurs from fossil records, etc. we have pieced together much of what was, we know what is to a large extent, except for the provided misdirection and secrets due to military, Ally and National Security. We know how people think and what kinds of things they desire in the way of Maslow’s hierarchy of needs and the wants and desires of all human beings, through cultural, parental and societal nurturing and of course those items pre-imprinted in the DNA and organic life programming.
We know that innovation or invention is introduced when the desire for it or the necessity is there. For instance in a war, you have to win or you lose all, so the necessity to out innovate is key. If you need power, water, food, transportation again you will see innovation. If you can make money by entertaining people; you have the need for innovation and a way to use it to make money therefore increased funding to provide it. If there is a business, which needs to be more efficient you will find innovation. For instance; robotics in manufacturing to replace people, advancements in aerodynamics to move people, advancements in medicine to save people. Industry often propels innovations as do smart governments who can see where we are and where we want to be.
Thus if you study where we are, where we are headed you can often predict categories of needed improvements as well as severe pit falls. Thus predicting the future is relatively easy. Both short and long-term future can be predicted as long as your pre-conceived notions are reality based in your current period observations. If you look at the people advising the Presidents Administration you can see we are all in good hands and if you can see the methods to their madness as they advise such administrations you can see the brilliance of their sense of direction as they battle social norms, status quos and dying technologies. It is an art and a science to build for the future without over stepping boundaries of continuity. Incremental Change is best and without disrupting the natural flow of things. Too much disruptive technology is not good. The flow must be obtain to continue to serve free men otherwise you end up turning on the “Lunch Light” for those we are trying to serve. The onward movement of man, requires careful planning as if a three-dimensional chess board;
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We must continue to study the flows and the future, which is much easier than you might think. There are so many factors, such as trade, population migration, population growth, Industry sector rotations, cycles of weather, trading partners, wars, voting trends, infrastructure depreciation, crime, capital flow, stock markets, national security, politics, religious undertones, law, taxation, energy, natural resources, environment, health, language, education, transportation, communication, distribution and currency, just to name a few, which must be studied and must fit together. This is why you need experts and well-rounded individuals with multi-disciplines of as many and more items listed and with such a team of dedicated thinkers all with the common goal the tasks are not really that daunting although to many may appear to be un-doable.
Although since you will be creating the future it may not be as important to know the future, but if you are going where mankind looks to be headed and for the right reasons and you are ready to mitigate the negatives by recognizing them and working to use those potential weaknesses as strengths then you will be able to get to where you are going. Now as far as the past is concerned, it has occurred previously and as we are in a linear time trap in that we cannot fix those issues or even be sure exactly what had happened, we should form a realistic and probable estimation of the past and study the trends, flows, cycles, grids, programs, of the present and most recent past of which we can verify and move to steer the great ship of mankind on the destiny to the future. Just a thought; any comments on any of the subjects mentioned, any other perspectives or points of view, please share them with us.
Author: Lance Winslow
Article Source: EzineArticles.com
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Debunking The Myth of Managed Futures
With the lackluster returns in the equity markets, many investors are looking for alternatives for their investment dollars, one of the sectors attracting a lot of interest is the futures markets or commodity markets.
Many of these new investors in the futures markets are looking for someone experienced. They are looking for someone with an established track record to handle the trading decisions of their personal account. In the world of futures, these money managers are referred to as Commodity Trading Advisors or CTAs. Many investors wrongly assume that they do not qualify to have a CTA manage their personal futures account, I will attempt to clarify some of these misconceptions.
Reasons for this common misconception include: - Investors do not know that managed futures with a documented track record exist for individual investors - Investors assume that they would not qualify because of high initial account sizes - Investors have heard the horror stories of a truck showing up at someones front door with a delivery of 5,000 bushels of Corn
Managed Futures has been an investment class that has historically been available to institutions and high net worth individuals, like everything this is changing. The track records and performance information for managed futures remains difficult to find for the average investor. While individual investors might assume that they would not meet the criteria of participating in a managed futures program, this is not always the case. Many managed futures programs have lower requirements than most would expect bringing managed futures as an asset class to the mainstream investor.
These managed futures programs have documented track records and the managers are required to be registered with both the NFA (National Futures Association) as well as the CFTC (Commodity Futures Trading Commission). All managers are required to provide potential clients with a disclosure document that covers the risks as well as the historical performance for their programs. Client accounts are established with a broker that introduces the account to the Manager.
Many investors wrongly assume that they do not qualify for a managed futures account because they assume that they need to meet high initial account balances in order to participate in these programs, this is just not true. Currently we offer a variety of managed futures programs. You might be surprised to learn that you can open a managed futures account with as little as $35,000.
The different managed futures programs that we offer are programs that have shown consistent positive returns with historically low volatility that are managed by proven Commodity Trading Advisors. While we understand that there are many investors and traders that are looking for triple digit yearly returns, experience has taught us that most investors are not looking for the flash in the pan program that shows high volatility but are more comfortable with a consistent return with lower volatility. One of the benefits of investing with a managed futures program is that the performance of the program does not depend on the direction of anyone particular market. Managed Futures have shown to have a low correlation with stock markets. These programs are not dependent on the market direction to provide returns.
Many have heard the old story of I knew someone that had to take delivery of corn and a truck showed up at his front yard with 5,000 bushels of corn this is just not true. A futures contract represents the obligation to either buy or sell a commodity of a certain class at a certain time in the future (why they are called futures), it is the duty of the Commodity Trading Advisor to remove this risk from their trading program. Traders should remember that over 90% of futures contracts never go to delivery they are offset in the market. The process of delivery usually only happens to a trader that is new and unfamiliar with the markets and is trading alone. Brokers usually help new traders by making sure that these small but very costly mistakes do not occur.
Author: Les Jones
Article Source: EzineArticles.com
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