Beginner's Guide To Trading Futures.
A futures contract is an agreement between two parties – a buyer and a seller – to buy or sell an asset at a specified future date and price. Each futures contract represents a specific amount of a given security or commodity. The most widely traded commodity futures contract, for example, is crude oil, which has a contract unit of 1,000 barrels. Each futures contract of corn, on the other hand, represents 5,000 bushels – or about 127 metric tons of corn.
Futures contracts were originally designed to allow farmers to hedge against changes in the prices of their crops between planting and when they could be harvested and brought to market. While producers (e. g., farmers) and end users continue to use futures to hedge against risk, investors and traders of all types use futures contracts for the purpose of speculation – to profit by betting on the direction the asset will move. (For more, see What is the Difference Between Hedging and Speculation? )
While the first futures contracts focused on agricultural commodities such as livestock and grains, the market now includes contracts linked to a wide variety of assets, including precious metals (gold), industrial metals (aluminum), energy (oil), bonds (Treasury bonds) and stocks (S&P 500). These contracts are standardized agreements that trade on futures exchanges around the world, including the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE) in the U. S. (For more, see How Do Futures Contracts Work? )
This tutorial provides a general overview of the futures market, including a discussion of how futures work, how they differ from other financial instruments, and understanding the benefits and drawbacks of leverage. It also covers important considerations, how to evaluate futures and a basic example of a futures trade – taking a step-by-step look at instrument selection, market analysis and trade execution. If you are considering trading in the futures markets, it’s important that you understand how the markets works. Here’s a quick introduction to help you get started.
The Options & Futures Guide.
Learn option trading and you can profit from any market condition. Understand how to trade the options market using the wide range of option strategies.
Discover new trading opportunities and the various ways of diversifying your investment portfolio with commodity and financial futures.
To help you along in your path towards understanding the complex world of financial derivatives, we offer a comprehensive futures and options trading education resource that includes detailed tutorials, tips and advice right here at The Options Guide .
Profit graphs are visual representations of the possible outcomes of options strategies. Profit or loss are graphed on the vertical axis while the underlying stock price on expiration date is graphed on the horizontal axis.
Option Basics:
Before you begin trading options, you should know what exactly is a stock option and understand the two basic types of option contracts - puts and calls. Learn how they work and how to trade them for profits. [Read more. ]
Binary Option Basics:
Binary option trading is quickly gaining popularity since their introduction in 2008. Check out our complete guide to trading binary options. [Read more. ]
Beginner Strategy:
The covered call is a popular option trading strategy that enables a stockholder to earn additional income by selling calls against a holding of his stock. [Read more. ]
Stock Option Advice:
Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read more. ]
Stock Option Trading Basics:
For the short to medium term investor, stock option investing provide an additional suite of investment options to let him make better use of his investment capital. [Read more. ]
Advanced Concepts:
When trading options, you will come across the use of certain greek alphabets such as delta or gamma when describing risks associated with various options positions. They are known as "the greeks". [Read more. ]
Option Trading Advice:
Many options traders tend to overlook the effects of commission charges on their overall profit or loss. It's easy to forget about the lowly $15 commission fee when every profitable trade nets you $500 or more. Heck, it's only 3% right. [Read more. ]
Stock Options Advice:
Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read more. ]
Advanced Concepts:
Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read more. ]
Advanced Concepts:
Another way to play the futures market is via options on futures. Using options to trade futures offer additional leverage and open up more trading opportunities for the seasoned trader. [Read more. ]
Stock Option Advice:
Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read more. ]
Stock Options Tutorial:
If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read more. ]
Stock Options Advice:
To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read more. ]
Stock Option Tutorial:
Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read more. ]
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Options Basics.
Futures Basics.
Bullish Strategies.
Bearish Strategies.
Neutral Strategies.
Synthetic Positions.
Options Arbitrage.
Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. TheOptionsGuide shall not be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon.
The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose.
Futures Trading Basics.
A futures contract is a standardized contract that calls for the delivery of a specific quantity of a specific product at some time in the future at a predetermined price. Futures contracts are derivative instruments very similar to forward contracts but they differ in some aspects.
Futures contracts are traded in futures exchanges worldwide and covers a wide range of commodities such as agriculture produce, livestock, energy, metals and financial products such as market indices, interest rates and currencies.
Why Trade Futures?
The primary purpose of the futures market is to allow those who wish to manage price risk (the hedgers) to transfer that risk to those who are willing to take that risk (the speculators) in return for an opportunity to profit.
Producers and manufacturers can make use of the futures market to hedge the price risk of commodities that they need to purchase or sell in order to protect their profit margins. Businesses employ a long hedge to lock in the price of a raw material that they wish to purchase some time in the future. To lock in a selling price for a product to be sold in the future, a short hedge is used.
Speculation.
Speculators assume the price risk that hedgers try to avoid in return for a possibility of profits. They have no commercial interest in the underlying commodities and are motivated purely by the potential for profits. Although this makes them appear to be mere gamblers, speculators do play an important role in the futures market. Without speculators bridging the gap between buyers and sellers with a commercial interest, the market will be less fluid, less efficient and more volatile.
Futures speculators take up a long futures position when they believe that the price of the underlying will rise. They take up a short futures position when they believe that the price of the underlying will fall.
Example of a Futures Trade.
In March, a speculator bullish on soybeans purchased one May Soybeans futures at $9.60 per bushel. Each Soybeans futures contract represents 5000 bushels and requires an initial margin of $3500. To open the futures position, $3500 is debited from his trading account and held by the exchange clearinghouse.
Come May, the price of soybeans has gone up to $10 per bushel. Since the price has gone up by $0.40 per bushel, the speculator can exit his futures position with a profit of $0.40 x 5000 bushels = $2000.
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Continue Reading.
Buying Straddles into Earnings.
Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]
Writing Puts to Purchase Stocks.
If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]
What are Binary Options and How to Trade Them?
Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]
Investing in Growth Stocks using LEAPS® options.
If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]
Effect of Dividends on Option Pricing.
Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]
Bull Call Spread: An Alternative to the Covered Call.
As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]
Dividend Capture using Covered Calls.
Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]
Leverage using Calls, Not Margin Calls.
To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]
Day Trading using Options.
Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]
What is the Put Call Ratio and How to Use It.
Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]
Understanding Put-Call Parity.
Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]
Understanding the Greeks.
In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks". [Read on. ]
Valuing Common Stock using Discounted Cash Flow Analysis.
Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]
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Futures Basics.
Futures Options.
Energy Futures.
Metal Futures.
Grains Futures.
Softs Futures.
Livestock Futures.
Options Strategy Finder.
Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. TheOptionsGuide shall not be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon.
The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose.
How Do Futures and Options Compare?
Although they are similar, futures and options have some important differences. Futures markets are the hub of capitalism. They provide the bases for prices at wholesale and eventually retail markets for commodities ranging from gasoline and lumber to key items in the food chain, such as cattle, pork, corn, and soybeans.
Just like futures contracts, options are securities that are subject to binding agreements. The key difference between options and futures contracts is that options give you the right to buy or sell an underlying security or asset without being obligated to do so, as long as you follow the rules of the options contract.
In addition, options are derivatives . A derivative is a financial instrument that gets its value not from its own intrinsic value but rather from the value of the underlying security and time. Options on the stock of IBM, for example, are directly influenced by the price of IBM stock.
A futures contract is a security, similar in concept to a stock or a bond while being significantly different. Whereas a stock gives you equity and a bond makes you a debt holder, a futures contract is a legally binding agreement that sets the conditions for the delivery of commodities or financial instruments at a specific time in the future.
Futures contracts are available for more than just mainstream commodities. You can contract stock index futures, interest rate products — bonds and Treasury bills, and lesser known commodities like propane. Some futures contracts are even designed to hedge against weather risk.
Futures markets emerged and developed in fits and starts several hundred years ago as a mechanism through which merchants traded goods and services at some point in the future, based on their expectations for crops and harvest yields. Now virtually all financial and commodity markets are linked, with futures and cash markets functioning as a single entity on a daily basis.
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