Trading The Futures Market Facts
Mar0
Contracts in the futures market are between a buyer and seller. The contract states that the seller must provide the buyer a very specific quantity of a certain item, such as grain, oil etc, for a price agreed today, but at a date in the future.
It is important not to get confused about what the word future refers to. Futures traders are not day trading futures prices, we are trading today’s prices, but the settlement is taking place in the future. So we buy if we think prices will increase and sell if we think prices will drop.
If I buy (or sell) a futures contract today, I don’t have to hold it until the contract expires, I can simply choose to sell it (or buy it) in the market at the prevailing price. Futures contracts are bought and sold in the controlled environment of a futures exchange, such as the Chicago Board of Trade (CBOT) in the U.S. and the London International Futures and Options Exchange (LIFFE) in the U.K.
Futures were originally developed to help offset the risks and uncertainties experienced by farmers and merchants due to the varying supply and demand for produce. Take for example a coffee plantation farmer. The price that he will receive for his bean crop will vary according to the vagaries of supply and demand. In a year when supplies are limited and demand is high, prices will be high. In a year when demand falls and the supply is plentiful, the price will fall.
The use of futures trading in the farming industry has many benefits such as allowing the farmer to be able to plan ahead as he already knows what kind of profit he can expect from his crop of say coffee beans. The price may not be the best and the merchant may make a killing but the risk is reduced.
By using a type of futures contract long before harvest time both the farmer and the merchant can reduce their risks by setting the price.
Today the futures market has changed a lot from the historical origins. There are now futures contracts on financial instruments such as stocks and bonds. broadly speaking futures contracts are split between commodity type products and financial type products. It is usually not that important because they are rarely held until expiration.
The CBOT was started about 1848 for the benefit of the farmers and merchants. The exchange was to regulate both the quality and quantity of the actual crop that was being traded. Today the CBOT offers many contracts on items like wheat, silver, corn, bonds and soybeans.
The Chicago Mercantile Exchange (CME) was created in 1919 and has managed a futures market in such things as pork bellies, live cattle and the SP500 index.
In London the big financial futures exchange is the London International Futures and Options Exchange (LIFFE). Here financial instruments such as the FTSE100, the GILT and Short Sterling are traded, the exchange is relativily new and opened around 1982.
EUREX started life as the DTB, the German futures exchange. The DTB has always been an electronic exchange and started around 1990, when electronic exchanges were still considered to be inferior to the open outcry system.
The German Bund was a heavily traded financial contract and one of the biggest markets on the LIFFE.
Many futures markets have very high volumes and hence very good liquidity, these are attractive markets for traders. The high leverage means that profits can be made very fast when the market moves, however money can also be lost very fast. If you want to learn to trade futures, or are even thinking of trading futures make sure that you learn as much as you can before using real money.
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What are commodity options?
Mar0
Commodity options are capable of offering the options holder the right to buy and sell commodities at the specified rates within a specific time. The commodity options are offered in several over-the-counter markets and exchanges. Helping people to ensure against the price volatility is the main function of these options.
There are two main varieties of commodity options. These are called call and put options. Over-the-counter markets offer different varieties of them. They can be defined as the contracts that allow the buyers an option, the right not an obligation for buying and selling at specific rate with the specified date. The most important feature of these options is that they do not obligate either of the parties. This can be called as the most important difference between a futures contract and an options contract.
Futures contracts are known to obligate both parties to abide by the terms of the contract. The options may be written for the underlying assets including financial indexes and financial instruments. However, if the underlying assets are commodities like precious metals, grain, oil and other agricultural products, the options will be called commodity options.
The main factor that differentiates the options is the criteria whether they offer the ‘buyer of option’, the right to buy or sell the commodity at rates that are specified before their expiration date. The options that offer a right to buy are known as call options whereas the ones that offer a right to sell are known as put options.
An options contract must specify certain things including the commodity being traded, whether the options are call or put, number of units being traded, the expiration date and the strike price fundamentally. In brief, commodity options are a great help to traders as they offer an insurance against the price volatility.
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Futures Options Contracts
Jan0
I want to go over a common concern with futures options trading. I only recommend and teach selling options if you are covering them by buying options. Sold options that are not covered are called “naked options”. That means that if there is a move against you, and you did not also buy options, there is potential unlimited loss.
If you did cover your sold position by buying a future option as protection, you are no longer naked. Now even if a sold option is covered some still feel nervous if an option they sold is exercised into a futures contract. The buyer of an option has the right at any time to exercise their option. Let’s assume you sold a call option to someone. They exercise the option and now they are long a futures. That means you are short the futures. Should you be concerned?
Two things to consider:
You have unlimited loss potential whether you are selling a futures option or long or short a futures contract. So the fact that someone exercises an option should not worry you more. Either way, there is unlimited loss potential. But you always want to cover the position. So either way, now that it is covered, you do not have unlimited loss potential.
The second thing is that you should be happy if the seller exercises it if there is still time value left. When they do this, they are giving up on some of the time value. So if there is $100 time value left and the buyer exercises the option, he gives up that time value when he gets the futures. So either way, don't worry if you are protected.
If you only sell uncovered or naked options because you do not want to spend the money to buy options as protection, you might want to re think your strategy. Find cheap options to cover your sold options instead of being naked.
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Pricing Futures Options
Jan0
Many traders who understand futures trading have a hard time understanding futures options. This is because the pricing of the options is sometimes different for the futures option contracts compared to the futures contracts.
For example, the 30 year t-bond futures contract has 32 ticks for each point in t-bonds. Each tick is worth $31.25. Now the options have 64 ticks in every point. Each tick in options is worth $15.625. See how this is confusing. Not every market is like this. The financials have markets like this as discussed with bonds and also the grains.
For instance wheat futures are priced at $50 per cent. Each tick is ¼ cent. So each tick in wheat futures is $12.50. In the options market there are 8 ticks in each cent. So each tick is 1/8 cent and each tick is $6.25. We purchase or sell options while looking at the underlying contract. The underlying contract might be priced differently so that is why it can get confusing.
Keep this is mind when buying or selling any options and futures. You would notice the prices are different if you check the quotes in the futures market compared to the options market.
For bonds I might see that bonds are priced at 115-31. I then look at an option and it is priced at 1-32. Now you will notice that bonds are never priced above -31 because there are 32 ticks and the next tick after 31 ticks is one point. So after 115-31 the next price is 116. In bonds options as we have seen, the price of the option can go from 1-31 to 1-32 because there are 64 ticks in every point in the bond markets.
For wheat you can see futures at 5546 which is 554 and ¾ or 554.75. Three quarters happens to be the highest price for futures ticks. You might see an option contract for wheat priced at 9-7 which is 9 and 7/8 which is 9.875.
So remember this when you are comparing futures options prices with futures prices.
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Learn Day Trading – Learn To Trade Futures Contracts Without Charts!
Jan0
A common question that I get asked is “Do I have to spend hours reading stock charts to learn how to trade?” This is one of the great misconceptions of would-be traders.
They think that they have to spend hours analyzing charts and other data, trying to decipher trends and patterns in the markets, in the HOPE that they will guess right on the next movement in the stock market. And quite often, they are DEAD WRONG.
This is called “technical analysis”. Technical analysis is a form of security analysis discipline for forecasting the future direction of prices through the study of past market data, primarily price and volume.
In its purest form, technical analysis considers only the actual price and volume behavior of the market or instrument. Technical analysts may employ models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, cycles or, classically, through recognition of chart patterns.
To most new traders, the various terms, rules, methods, and strategies employed by technical analysts are very confusing, intimidating, and amount to little more than foretune telling.
I can see why people would think this. You are trying to predict the future by looking at the past. Many people would equate this to trying to determine the next spin of the Roulette wheel by the previous spins. Or trying to tell someone’s future by reading their palm.
While this isn’t entirely accurate, it is easy to see why people who want to learn how to trade futures, e-minis, commodities, or other contracts would shy away from trading after digging into technical analysis.
So back to the question – “Do I have to spend hours reading stock charts to learn how to trade”? The answer is: It depends.
This may sound like a cop-out, but it’s not. It depends on whether or not you want to learn technical analysis. If the answer is “yes”, then yes, you need to spend hours and hours (and hours and hours) learning to read stock charts, learning to decipher patterns and trends, drawing lines, hoping that what you think you see is really what is going on, etc.
If you are NOT specifically looking to learn technical analysis, then NO, you do NOT need to spend any time reading charts.
In fact, I have learned a successful that requires only the very basics of chart analysis – meaning I can look at a chart for 5 seconds as I get ready to enter a trade, and I’ve seen all that I need to see. No time spent analyzing market movement. No lines drawn. No trying to calculate formulas that would make Einstein choke. And no guessing which way the market is going to move.
In fact, I don’t CARE which way the market moves. Because I make money no matter which direction it goes.
And I don’t need to spend hours sitting in front of a computer, making hundreds of trades. I know EXACTLY when the market is going to move. And I also know about how much movement to expect. And I also know how to capitalize on that movement, no matter which direction the market goes.
I don’t care if you have free stock charts, are looking at esignal for your trades, or are using optionsxpress, this is all unnecessary. There are many options around you – consider them all before making your decision.
The Guerrilla Trader is dedicated to educating traders and investors alike on understanding the inner workings of the markets. If you really want to learn day trading, then visit The Guerrilla Trader today and pick up your FREE Guerrilla Trader Day Trading Video Boot Camp Training Course! TheGuerrillaTrader.com Get in, hit your target, get out…like you were never there. You can learn to trade with DEADLY precision. Article Source:http://www.articlesbase.com/day-trading-articles/learn-day-trading-learn-to-trade-futures-contracts-without-charts-1662256.html
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