Commodity options trading 101

You should be able to evaluate and choose the futures contracts that appear based on present information most likely to meet your objectives and willingness to accept risk. The process of reassessment of price discovery is continuous. It should be recognized, though, that the loss of money from a spread can be as great as or even greater than that which might be incurred in having an outright futures position. Competitive price discovery is a major economic function and, indeed, a major economic benefit of futures trading. While most speculative futures transactions involve a simple purchase of futures contracts to profit from an expected price increase or an equally simple sale to profit from an expected price decrease numerous other possible strategies exist. By buying or selling futures contracts contracts that establish a price level now for items to be delivered later individuals and businesses seek to achieve what amounts to insurance against adverse price changes. If your previous investment experience has mainly involved common stocks, you know that the term margin as used in connection with securities has to do with the cash down payment and money borrowed from a broker to purchase stocks. There are a number of alternatives and the only best alternative if you decide to participate at all is whichever one is best for you. If and when the funds remaining available in your margin account are reduced by losses to below a certain level known as the maintenance margin requirement your broker will require that you deposit additional funds to bring the account back to the level of the initial margin. Were you to speculate in futures contracts, the person taking the opposite side of your trade on any given occasion could be a hedger or it might well be another speculator someone whose opinion about the probable direction of prices differs from your own.

Because gains and losses occur only as the result of a change in the price difference rather than as a result of a change in the overall level of futures prices spreads are often considered more conservative and less risky than having an outright long or short futures position. An understanding of margins and of the several different kinds of margin is essential to an understanding of futures trading. Opening a futures account is a serious decision no less so than making any major financial investment and should obviously be approached as such. This involves opening your individual trading account and with or without the recommendations of the brokerage firm making your own trading decisions. Similarly, your broker or advisor as well as the exchanges where futures contracts are traded are your best sources for additional, more detailed information about futures trading. Whatever type of investment you are considering including but not limited to futures contracts it makes sense to begin by obtaining as much information as possible about that particular investment. The major difference is that you give an account manager written power of attorney to make and execute decisions about what and when to trade.

It is not the purpose of this brochure to suggest that you should or should not participate in futures trading. An understanding of leverage and of how it can work to your advantage or disadvantage is crucial to an understanding of futures trading. The arithmetic of speculation in futures contracts including the opportunities it offers and the risks it involves will be discussed in detail later on. Moreover, even among futures contracts, there are important differences which because they can affect your investment results should be taken into account in making your investment decisions. And, should they choose, they can establish a price level for future delivery or for speculative purposes simply by having their broker buy or sell the appropriate contracts. Board of Directors and management. CME clears, settles and guarantees all matched transactions in CME contracts occurring through its facilities. Chicago Mercantile Exchange provides and regulates a marketplace where futures and options on futures are traded.

Futures brokerages are not the same as stock brokerages, but some companies are licensed to trade both stocks and futures. Commodities contracts trade on designated exchanges around the United States. This is no different than opening a stock trading account. Another great thing about trading commodities is that they tend to move in more predictable and smoother patterns over the long run compared to stocks. All of these events and more will affect commodity prices. Commodities refer to the actual physical products that can be traded on a qualified exchange within the United States, just like with stocks. We expressly forbid our writers from having a financial interest in any security recommended to our readers.

And a cold winter could end up depleting natural gas supplies. With that said, trading commodities means that we need to keep completely different indicators on our radar. Do you think trading options on futures is easier or less complicated than trading options on equity? There are no CEOs, company mergers or quarterly reports to get in the way. However, nothing published by Wall Street Daily should be considered personalized investment advice. The first step is to open a commodity trading account with a registered commodity broker. Sure, commodities can move erratically in the short term just like stocks. Options keep your risk limited at all times. One of the biggest benefits of trading commodities is that there are only about a dozen markets worth looking into based on volume and liquidity.

Any investments recommended by Wall Street Daily should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. So you can give yourself as much time as you need for your prediction to pay off. Like crop growing patterns, seasonal tendencies and weather. Commodity trading is actually just as not difficult as trading normal stocks or options. This allows you to become intimately familiar with each commodity, which makes trading them much more profitable over time. But the gains can be unlimited. Other than buying the actual product like orange juice or coffee at your local grocery store, you can speculate on the future movement of physical commodities by buying or selling futures and futures options contracts.

But sticking with futures and futures options contracts is the way to go if you want a pure play on the actual, physical commodity. Louis Basenese and the gang regularly discuss innovative investment ideas and strategies. But they tend to follow a more predictable pattern in the long term. Plus, which one is the best broker with the best platform for futures options trading? Next: Where Will I Put All Those Pork Bellies? Where Will I Put All Those Pork Bellies? It costs more to store copper, silver, cattle, orange juice, pork bellies or virtually any commodity.

Commodity futures contracts allow you to directly purchase a wide variety of commodities. The only thing you have to pay for upfront is the good faith deposit. But why are these contracts called futures? If the price falls, traders with long positions must add to their accounts. Therefore, a futures contract is not an option. If they do not respond immediately, a broker will liquidate their position.

April price by more than 4 cents. Commodity options are different than stock options. Commodity options control futures contracts; and futures contracts, in turn, control physical commodities. With stock options each contract controls 100 shares of stock. What usually happens is that most futures positions are closed out before the deliver date. Next: Is a Futures Contract an Option?

Is a Futures Contract an Option? When the price of a contract changes, you may find yourself with too much or too little margin deposit. For example, if carrying charges are 2 cents per month, June hogs would sell for 4 cents more than April. When you buy options on a futures contract, there are no margin requirements. An introduction to commodities, futures and options trading from The National Futures Association. Learn how trading in the Foreign Exchange market came about, from GFT Forex. This charting technique has become very popular among traders, learn why, from Investopedia.

Read more, from GFT Forex Trading. The purpose of this ebook is to introduce the forex market to you, from Surefire Forex Trading. No other market can come close to the amount of monetary volume and participation as the Forex market, making it a haven for traders not having to deal with choppy market conditions more commonly experienced in the futures markets. Reasons for trading options, terminology, motives for buying and selling options, and how they are valued, from The National Futures Association. Learn how to get started. From GFT Forex Trading. An Introduction to Foreign Exchange Trading. Maybe the term continuation patterns is unfamiliar to some, but perhaps triangles, flags, pennants, and rectangles are more recognizable to most.

Learn how this massive international market can work to the benefit of the individual trader, from Investopedia. Former securities day traders have an excellent home in spot foreign exchange. This course teaches the ABCs of option market, from XPRESSTRADE. Describes how and when to use various types of orders, from XPRESSTRADE. Learn more about these continuation patterns, from Investopedia. Topics include understanding of prices, Forex vs. Derek Dobrowolski of Orion Futures. The National Futures Association. Unravel the symbology of forex pricing, from World Link Futures. Many futures and stock traders are aware of the excitement surrounding the currency market.

Read more, from Investopedia.