Commodity Futures Trading / Commodity Options Trading

July 17, 2010 · Posted in futures and options · Comment 

Commodity trading involves the exchange of primary products. It can be the buying and selling of future contracts in Gold, Silver, Oil, Gas, Platinum, Copper, Zinc, Cotton, Wheat, Corn and many more physical products. These row commodities are bought and sold in standardized contracts. The products are uniform; one of its quantity or fraction serves the same purpose as any other. Considering the following cases – a barrel of oil, an ounce of gold, and a bushel of wheat – one is pretty much like another. The most extensively traded and most liquid commodities are Oil and Gold.

There are some differences also. This difference is owing to shipping costs, differences in composition, etc. For example, some oil does sell for a diverse price than that from another source. Commodities are usually traded in the form of futures. It can be also traded on spot markets, where the trading is happened immediately in exchange for cash or some other good.

Commodity futures trading, also known as commodity options trading, creates a contract to sell or buy the goods for a fixed price by a certain date in the future. This contract period is the major reason of the huge potential for profit and loss. Future trading also involves all the exciting aspects of trading, as it intrinsically occupies predictions of the future and consequently uncertainty and risk.

The commodity futures trading puts some obligations on the buyers and sellers. The buyer is responsible for taking delivery and paying for the cash commodity during a fixed time period. The seller is responsible for delivering the commodity, for which he/she will be paid the price that was decided in the exchange pit by the dealers.

This article is written for www.orientfinance.com. Orient Financial Brokers (OFB) S.L.P. conducts brokerage in Foreign Exchange, Futures, and Commodities in the Middle East.

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An Initiation To Commodity Futures Trading

May 25, 2010 · Posted in futures and options · Comment 

How It All Began

Commodity futures trading, as we know it today, came about for the first time in Japan in the 17th century, where rice was traded in future contracts. It was a period when farmers and buyers came together and decided to commit to each other future prices negotiated on suitable terms in exchange of grain for money. For example, a dealer would agree to buy a ton of rice at the end of the next month for a certain price from a farmer. This would be ideal for both parties, as the farmer would know how much he would get for his rice in advance, and the buyer could plan to raise the money he needed for the purchase. Contracts such as these became more and more popular and common, and were even used as collateral for taking loans. If the buyer could not take delivery of the rice, he could sell the contract to someone else. On the other hand, if the farmer could not deliver the goods, then he could hand over the contract to another farmer. Thus began commodity futures trading, as we know it today.

What Are Commodity Futures?

Today, most of the futures commodity trading exchanges are set up in a similar way. Members of the exchange do the actual trading on the floor. Stock stands for equity in a public company, and can be held as long as you want, whereas commodity futures trading contracts have a specified life. In the past, people used commodity futures trading methods generally to hedge risks and fluctuation in prices, or to take advantage of them, and not for actually buying into the commodity. The idea is that a contract requires delivery of the commodity within a certain predefined time period unless it becomes null and void. The person buying the commodity futures trading contract agrees to buy the specified commodity at a fixed price on a certain date. The person selling the commodity futures trading contract agrees to sell the commodity at a certain price on a certain date. As time goes on, the contract price fluctuates, and this brings about profit and loss in the trade. It is to be noted, however that, the delivery generally doesn’t take place. The contract is usually liquidated before its expiry. The entire trade is based on the idea that there will be no delivery, but we can speculate on the price of the underlying commodity at a future time to make money. Commodity futures trading is done all over the world now.

Different Types Of Commodities

There are many types of commodities that are traded in the international market. These can be very broadly categorized into the following:

• Precious metals like Gold, Platinum, Silver, etc.,
• Metals such as Aluminum, Copper, Steel, etc.,
• Agricultural products like Rice, Corn, Oils, Cotton, Wheat, etc.,
• Soft commodities such as Cocoa, Coffee, Tea, Sugar, etc.,
• Livestock like porkbellies, cattle, etc.,
• Energy commodities like Crude oil, Gasoline, Gas, etc.

David Rivera has traded commodities and options for one of the largest cash trading firms in the world. He currently owns and runs the following websites: Futures & Options Simulated trading: http://www.futuresoptionspapertrading.com Options Secrets course: http://www.deltaneutraltrading.com Price and Time trading: http://stock-commodity-trading.com

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Futures Exchanges – Knowing Where To Do Business

March 10, 2010 · Posted in commodity trading · Comment 

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
Article Source: EzineArticles.com
Provided by: Duty tariff

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Using a Spread Bet to Hedge the Pound Value

December 6, 2009 · Posted in futures trading · Comment 

It is quite easy to use a spreadbet to hedge the value of your pound.

Open a financial spread betting account and make a spread bet that the EUR/GBP will go up (Euro strengthens).  But be careful to bet just enough per point so that the Euro’s gain against the Pound makes you as much money as you lose in the real world. Make sure you go for the longest term possible (MAR-10, JUN-10, etc).

Just make sure you have a generous enough stop to account for minor fluctuations. If the GBP gains significantly against the EUR, your stop limit will be hit and you’ll have to pay. But, you’ll be paying safe in the knowledge that the amount you pay is equivalent to the amount you gained relative to the lads across the channel. If the market moves against the Pound, you’ll see the bet going very well. Don’t get excited, it’ll be money you’re losing in the real world and making back in a bet.

BTW, you’ll find that this is an interesting way to budget for all kinds of things. If you are going to go skiing next year, for example, and the exchange rate is good now, then bet so as to hedge or fix the current rate. You could nip on down and buy the real thing, but there’s a fair spread and no stop limit when you hold the actual currency.

Go to the your spread betting account and have a look at the EUR/GBP spread.

The Euro is worth: 71.40 pence.
The spread figures are quoted as: 7138–7142 EUR/GBP March 10
Now, you can BUY (bet that Euro will gain in value relative to the Pound) or SELL (bet that the Euro will lose value). You bet a specific amount per point. The amount that your bet is placed at is the one that is least favourable to you. So, if you BUY at 7138 and immediately SELL at 7142 at £1 per point, then you will have just lost £4. That is the spread that goes to the bookmaker. Spreads on the long-term bets will normally be larger.

Let’s hedge that £20K using the fictional spreads above. You’re in it for the long term so you go for:

7138–7142 EUR/GBP MARCH 10

You can use formulae to work it out, but I’ll do it by example. Suppose, £1.00 buys EUR1.401  (I know, I know the pound has been decimated but this is just an example). If the value moves to: 7238–7242 EUR/GBP, then £1.00 buys EUR1.381. That move of 100 points cost you 1.42% or £286 if you have £20K in the bank. Scary, yes?

If you had bought 7138–7142 EUR/GBP MARCH 09 at £2.86 per point, then the 100 point move would have made you £286 on the bet. In fact, if you have £20K in the bank or anywhere else and you fancy keeping its value relative to the Euro, then that is exactly what you should be doing. On the other side of the channel, people are doing the exact opposite, or perhaps there are people just hoping to get lucky. It’s their money you’ll have. Or they’ll have your money.

DISCLAIMER: PLEASE DO NOT BLINDLY DO THIS ON MY SAY SO! I personally did something like the above on EUR/GBP back in September ’07 at 6960.  I viewed it as a hedge against devaluation – if GBP devalued, my savings would be worth less but my spreadbet position would make me money to compensate. If GBP increased in value, my savings would be (arguably) worth more but my spreadbet position would lose me money.

In fact, as time went on I got slightly more “sophisticated” and spread my bets across a basket of currencies. So instead of just EUR, I hedged a little bit against the Swiss Franc, Japanese Yen, Norweigan Krone and Swedish Krone … oh, and a sprinkling of Gold and Silver. I’ve actually gone a bit over-board and hold positions in excess of the amount of GBP savings I have. I don’t recommend this unless you’re very confident and can afford the losses if you get it wrong (and can handle seeing your “worth” swing by as much as a few £k on a daily basis – especially in weeks like this!).

This article was written by Andy who publishes a financial stock market guide, which specialises in offering free guides and information on stockmarket products such as financial spread betting

Article Source:http://www.articlesbase.com/day-trading-articles/using-a-spread-bet-to-hedge-the-pound-value-1545574.html

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