What Are Futures?
In the world of finance, there are many uncommon and niche terms used, which are alien to the rest of the world. ‘Futures’ is one of those terms that is used to identify a form of a financial contract. Futures Contract is a standard contract, to buy or sell a certain asset at a certain date in the future, at a specific time. Usually futures contracts are traded on a futures exchange.
The futures contract detail the quality, quantity and the price of the underlying asset. Usually there are many motives for making a futures contract. Since it is a business agreed to be performed in the future at a specific time and for a specific price, the buyer of the underlying asset is protected against the price fluctuations of the asset in the market. This may result in profit or sometimes, a loss to the contract holder as there is an obligation to buy or sell at the specified price.
Many contracts in the financial world assign the ‘right’ to do something to the contract holder. Futures contracts differ in this aspect by assigning ‘right’ and ‘obligation’ to the contract holders (both parties) for performing what the futures contract details. Some futures contracts call for a physical delivery of the asset and others are settled in cash.
Many assets, especially commodities are subjected to futures contracts in futures exchanges. As an example, there is seller who would like to sell a high volume of corn at the next harvest. Although, the corn is not produced yet, the producer wants to make sure that a proper price is paid for the corn in the future. Then there is a buyer who is looking for corn from the next crop, who will be willing to pay the current market price for it or something similar. In this case, the seller and the buyer can form a futures contract on a specific price, through which both the seller and the buyer are protected against the high price changes.
There are two main traders of futures; hedgers and speculators. Hedgers are interested in the asset subjected to the futures contract and they seek to hedge out the risk of price changes. Speculators usually have no interest or practical use of the assets subjected to the futures contract. They usually buy futures for selling them later with profit to interested parties.
Futures and ‘Forwards’ looks the same in the finance market but they have two significant differences. Firstly, Futures are traded in Futures exchanges, but forwards are traded over the-counter. Secondly, Futures have a less credit risk while forwards carry a high risk.
Author: Zoran Maksimovic
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An Introduction to Options and Futures Trading
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.
Author: Larry Haywood
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The Four Key Elements of Futures Trading Success
There are four key elements to achieving success as a futures trader:
1. Self-confidence
2. Discipline
3. Ability to handle loss
4. Profitable trading system
1. Self-confidence
If you aren’t absolutely confident that you can become a successful futures trader, you might as well pack it in now and save yourself a lot of grief. Successful futures traders are bold, aggressive and self-assured. They do not lose faith in themselves when they lose. They have the courage and self-confidence to keep trading. Futures traders are risk takers. Successful futures traders are the Mario Andrettis of the Futures Exchange.
2. Discipline
If you’re going to be a successful futures trader, you have to learn to take emotion out of the equation. Learn to trade like a robot. There’s no room for emotion in futures trading.
Futures traders learn to trust themselves and their system. If you start letting emotion rule your decisions, fear, anger and greed will undermine your carefully planned and practiced strategies. It is by persistently following your system, by dispassionately relying on what your charts tell you, by religiously following your indicators that you will succeed as a futures trader.
When you trade with your emotions, it colors your judgment. You’re no longer trading on your indicators, you’re trading on your gut. And letting your gut rule is like “letting it ride” in Vegas. Eventually, fear or greed will compel you to make that final disastrous gamble that wipes you out.
The market is an inanimate object. It has no feelings, no agenda, no emotions. If you make a bad trade, you cannot personalize the market. The market is not ‘out to get you’. Start thinking this way and you toss logic and wisdom out the window. If you feel yourself getting caught up in emotion, if you feel logic slipping through your fingers, get out.
Just stop trading until you can regain control. Every minute you keep trading on your emotions, you come one step closer to disaster. No matter how emotional you become, the market will just sit there. You cannot change the market, you can only react to it.
If you cannot maintain self-discipline, and allow emotions to rule your decisions, you’d best take your money and run before you lose it. Successful futures traders are highly disciplined, consistent and rational. They do not allow themselves to be distracted by extraneous information. They have the ability to dispassionately evaluate their system, knowing when to stick with it and when to change what isn’t working.
Futures traders are cool and collected. Successful futures traders are the James Bonds of the Futures Exchange.
3. Ability to handle loss
If you can’t handle loss, if you are easily frustrated by loss, or if you can’t afford to lose, then you’d better get out before you gamble away the mortgage money. As a futures trader, particularly in the beginning as you hone your system and skills, you will lose. Successful futures traders are not flustered by loss. They do not panic when they lose. They do not abandon their system at the first sign of loss.
In futures trading, the nature of the beast is that sometimes you lose. Futures traders learn from their mistakes, build on the lessons loss teaches, remain confident in the face of loss and work to keep their losses small so that, overall, they win. Futures traders are not defeated by loss. Successful futures traders are the Lance Armstrongs of the Futures Exchange.
4. Profitable trading system
If you don’t have a trading system that has proven to be consistent and profitable, no amount of ability is going to make you a successful futures trader. You must have an effective conduit for that ability in order to succeed as a futures trader. An effective trading system is essential to your success as a futures trader. No matter how much self-confidence and discipline you have, no matter how well you can deal with the inevitable losses, the bottom line is that futures traders are only as good as their system.
Author: William Mccready
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Futures Exchanges – Knowing Where To Do Business
Good for you! You’ve been reading, you’ve put together a trading rules to lay the foundation for your futures trading plan and you’ve even been paper trading to prove your trading plan. Now you are ready to learn more about where you will be doing your business; it’s time to talk about the futures exchanges.
General Futures Exchange Information
As you know at this point, you will not actually do business with the futures exchanges listed below. You will work with your broker who will take your futures orders to the exchange floor for you. Since you have been paper trading, you probably have already established an account for commodities trading so we won’t go over that again. While there are futures exchanges throughout the world, we will focus on the ones in the US. The markets we will outline are in Minneapolis, Kansas City, New York and Chicago.
History of Futures Exchanges in the US
The modern futures trading began in Chicago, IL in the early 1800s. Chicago, with its location at the base of the Great Lakes, is close to the farm of the U.S. Midwest which made it a natural center for transportation, distribution and trading of agricultural produce. Gluts and shortages of these products caused extreme changes in price. An exchange was needed that would bring together a market to find potential buyers and sellers of a commodity instead of making people bear the burden of finding a buyer or seller. In 1848, the Chicago Board of Trade (CBOT), the world’s first futures market, or futures exchange, was formed. Trading was originally in futures and the first contract was written on March 13, 1851.
Futures Exchanges
Different futures exchanges trade different commodities. In addition, each future exchange accepts different futures orders. Since not every exchange allows every order it is necessary to talk with you broker about which orders are permitted in the markets you trade. The following is a list of the major commodity exchanges, their commodities, and the orders that they accept:
Chicago Board of Trade
Location: Chicago, IL
Commodities
o Corn
o Oats
o Soybeans
o Soybean Oil
o Soybean Meal
o T-Bonds
o T-Notes
o Muni Bonds
o 5 Year Notes
o 2 Year Notes
o DJIA Index
Acceptable orders: Market, Market on Close, Limit, Stop, and Fill or Kill Orders
Chicago Mercantile Exchange
Location: Chicago, IL
Commodities
o Live Cattle
o Lean Hogs
o Lumber
o Feeder Cattle
o Pork Bellies
Acceptable orders: All futures orders are acceptable.
Index and Option Market
Commodities
o S&P 500
o Mid-cap 400
o NASDAQ 100
Acceptable orders: All futures orders are acceptable.
International Monetary Exchange
Location: Chicago, IL
Commodities
o T-Bills
o Euro Dollars
o Canadian Dollar
o Euro Currency
o Australian Dollar
o Mexican Peso
o Euro Yen
o Japanese Yen
o British Pound
o Swiss Franc
Acceptable orders: All futures orders are acceptable.
New York Comex
Location: New York, NY
Commodities
o Copper
Acceptable orders: For Copper only, acceptable are Market, Market on Close, Limit, Stop, and Fill or Kill.
Commodities
o Gold
o Silver
Acceptable orders: For Gold and Silver, acceptable are Market, Market on Close, Limit, Stop, and Fill or Kill. Stop Limits are acceptable only on a not-held basis.
New York Cotton Exchange
Location: New York, NY
Commodities
o Cotton
o Orange Juice
o Dollar Index
Acceptable orders: Market, Market on Close, Limit, Stop, and Fill or Kill.
New York Coffee, Sugar & Cocoa Exchange
Location: New York, NY
Commodities
o Coffee
o Sugar
o Cocoa
Acceptable orders: All futures orders are acceptable.
New York Mercantile Exchange
Location: New York, NY
Commodities
o Unleaded Gasoline
o Platinum
o Palladium
o Heating Oil
o Crude Oil Natural Gas
Acceptable orders: All futures orders are acceptable.
New York Futures Exchange
Location: New York, NY
Commodities
o New York Stock Exchange Index
o CRB Index
Acceptable orders: All futures orders are acceptable.
Kansas City Board of Trade
Location: Kansas City, MO
Commodities
o Kansas City Value Line
o Kansas City Mini Value Line
Acceptable orders: All futures orders are acceptable.
o Kansas City Wheat
Acceptable orders: Market, Market on Close, Limit, Stop and Fill or Kill.
Minneapolis Board of Trade
Location: Minneapolis, MN
Commodities
o Minneapolis Wheat
o Minneapolis White Wheat
Acceptable orders: All futures orders are acceptable.
Author: Stephen Bigalow
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Futures Market
Trading
Trading can involve high risk and is not for all traders. Trading futures covers many items, covering such as the currencies, energy, financials, grains, livestock, metals, stock indexes and also housing. Trading the futures does create other trading strategies and opportunities. Trading index futures also enables you to participate in broad market moves with one trading decision, without having to select individual issues. Trading futures provide other benefits apart from the hedging of the risks associated with the price fluctuation. Trading in the futures market is based on leveraging your money so before making the decision to participate in this market, make sure you understand this important concept. Trading futures means buying or selling in futures contracts. Trading futures of course has many advantages, which can be easily had only when a person understands the concept of trading futures completely. Before beginning trading futures, paper trading is the approach want to take before you ever lay down your money.
Futures
Futures trading is definitely much harder for day trading as there is a lot more chopping going on. Futures in general lend themselves to a variety of different trading time frames: Short, medium, or long-term. Futures contracts, like stocks, are traded on exchanges, found mostly in New York and Chicago. Future traders can short without an uptick, as required in the stock market. Futures trading has a bad reputation as being filled with risk and while there is risk, the truth is that futures trading is only as risky as a trader makes it. Futures trading is fast and fun but definitely not for everyone.
Conclusion
Investing in commodity futures is very straightforward and is very similar to other forms of investments, particularly stocks. However, trading index futures is a very efficient way to trade the whole market. Future traders do not just buy a commodity and hope it goes up, they have various trading strategies, and trading futures is actually investing in that strategy, not the commodity. To begin you must get a fully understanding of what the futures market is exactly. So know what you are doing before you begin.
Author: Gerry Simoni
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Copper Futures
Copper may be one of the original members of the commodity trading world. Copper was first worked about 7,000 years ago and its softness, color and abundance made it a widely desired commodity. Today, this metal is a perfect indicator of the world’s economy. The third most widely used after iron and aluminum, copper is found in such industrial applications as construction, industrial machine manufacturing and electronics. Because of its demand, trading copper futures has become an important part of futures trading.
Because of the high demand in a wide variety of applications, commodity investing in copper futures can be very profitable. It is likely that demand will only continue to increase as more applications for this versatile metal are found. As supplies become more difficult to locate, the value of this metal will continue to climb, creating additional investment options for traders in this unique metal.
Reasons To Invest In Copper Futures
Futures trading can be a solid way to profit from investing in copper. As with any other commodity, copper futures provide investors with the ability to buy and sell this metal; a fact which is true for any commodity when trading futures. Futures is the investment strategy where you can purchase the right to buy or sell a commodity at a later date; in addition, you are able to leverage your investments, allowing you to control large sums of a particular commodity for a small price. Copper futures allow you to do this with one of the most versatile assets in the world.
Contract Details For Copper Futures
o Basic Trading Unit – 25,000 pounds
o Units of Price – Dollars and cents per troy ounce
o Tick (Basic Unit Of Change) – $0.0005 per pound or $12.50 per contract. A one cent movement in price creates a $250 movement per contract
o Trading Periods – Options contracts are traded beginning with the current month and typically the following twenty-three months
o Options Trading – Options trading includes market orders such as stop limits, buy straddles and buy strangles, among others
o Margin Requirements – Margins are required for open futures and short options positions. The margin requirement for an options purchaser will never exceed the premium paid
Who Handles The Copper Futures Trading?
Many futures markets exist throughout the world for trading copper futures. One of the most important locations for trading is the COMEX in New York City. This market was formed by a merger between New York Mercantile Exchange and the Commodity Exchange in 1994 and is now the world’s largest commodity futures exchange. By trading copper futures at an exchange, you received several distinct advantages:
o Contracts Are Standardized – This ensures that the agreement is consistent with accepted business practices
o Contracts Are Secure – Exchanges are able to offer commodities trading that is affordable and has well-established risk management opportunities
o Contract Prices Are Real-Time – Prices are instantly available to traders
o Contract Parties Are Unknown – Since trades are made through commodity brokers, trades are made anonymously
o Contracts Can Be Delivered Safely – Although futures contracts are rarely ever filled and delivered, futures exchanges offer solutions for safe delivery
o Futures Exchanges Are Ethical – Exchanges offer safe, fair, and orderly markets that are protected by its strict financial standards and surveillance procedures
o Insurance Is Available – Exchanges offer futures options and hedging insurance for additional investment opportunities
Is Investing In Copper Futures Right For You?
Deciding to include copper futures in your investment strategy is a very personal choice. Your trading plan, your investment objectives and your financial situation should all be first considered. Since you are trading on the margin, copper futures are allow you to contract large sums of money and it is even possible to lose more that your original investment while futures commodity trading. You should make sure that you understand copper futures trading and the related conditions before you enter.
Conclusion
Copper is a highly desirable commodity and its futures market can be very profitable. With an ever-increasing demand and increased pressure to mine it, copper futures will continue to be a profitable investment commodity well into the future. If you understand the process and learn the conditions involved, you can be a successful trader in one of the world’s oldest commodities.
Author: Stephen Bigalow
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Online Commodity Trading – Learning To Trade Futures
A futures contract is a commitment to buy a commodity with an inherent value at the date specified. It’s used by the people who produce those commodities to regularize their income streams and protect themselves from excessive market volatility.
Examples of futures are oil futures, steel futures, agricultural futures like corn, soybeans, sugar and wheat, or pork bellies. Any kind of product that’s produced in large quantities with regular production cycles, lead times of more than a month, seasonable variations in availability and price, and near constant demand for the raw material can be the subject of a futures contract. Futures can be thought of as agreements to sell or buy commodities at a specified price in the future, regardless of the market conditions. If you need the commodity in question, you may buy futures to hedge against a future rise in price. If you sell the commodity in question, you’re buying futures to hedge against a decrease in price.
Buying and selling futures contracts allow people to buy and sell the commitments to buy products in respond to market pressures. Unlike stock portfolio or bond investing, you aren’t buying a chunk of a corporation or a debt commitment to be paid back with interest, you’re taking a gamble on the future price of a commodity. Futures trading is risky, as is any kind of investment, but some of the risk can be ameliorated by taking on a diversified portfolio.
What Makes For A Good Futures Trader?
The personality type that thrives in futures trading is that of the professional gambler, the person who is certain that their instincts on the way commodities will flow will beat the market trends. (It is possible to take buy-and-hold positions with futures, but that tends to be less lucrative and less volatile. In general, it’s also less sound than buy-and-hold strategies for stocks and bonds.). Backing up that instinct is a lot of technical analysis. Futures traders watch all the news – for example, news about the weather directly impacts growing seasons for commodities such as corn, soybeans and sugar. News about port regulations impacts futures relating to delivery of durable goods and oil from overseas. News about increases in production capability at refineries, or improvements in oil extraction techniques can change the price of oil – and often in counterintuitive directions!
There is a lot to learn to become a successful online futures trader; you’ll want a mentor, and a couple of classes to learn the terminology, the regulations, and how to spot market trends (and how to divorce yourself from your own analysis, so that you don’t blind yourself to important trends because you’re in love with your own ideas.)
Interestingly, while futures are contracts meant to reduce risk between producers and purchasers of commodities, the trading of futures is a high volatility market. While there is risk, it can be (somewhat) ameliorated, and there are often trends that are easy to pick out that will help you avoid risk. The key to being successful as a futures trader is knowing when to NOT gamble, when to take what you’ve got and call it a day with a reasonable return on your investment.
Author: Amar Mahallati
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