The Basic Difference Between Futures and Options Trading Spelled Out

Futures and options trading can be a risky business indeed and should only be undertaken with risk capital that won’t change your lifestyle if you should lose your investment. The potential for profits is almost unlimited while the potential for loss is almost equally unlimited. This means that if you are on the losing end of a naked futures trade you can stand to lose more money than you have in margin and you are responsible for the entire contract amount because of the highly leveraged nature of the investment. There are many ways to limit your risk and one of these is to use options as a hedge against a negative price movement away from your position whether it is on the long side or on the short side. Lets take a look at some of the differences between futures and options trading.

While I said that there is almost unlimited downside potential this is basically only true for an option if you sell that option without holding an opposite position. So if you were to sell a June 900 put gold option and the market went to 800 you are responsible for the 100 points that the gold contract has gone against your position. Your loss would be the difference minus the premium you collected for selling the gold put. Because of the volatile nature of the markets you should figure in how much you are willing to risk on any one trade and then open an opposite position to minimize your downside risk. This can be done with both futures and options trading.

Differences between futures and options trading

1. Premium vs margin

Options: When you buy an option you are not required to put up any margin because you are purchasing the option at a fixed price, which is also referred to as the premium. This premium can decline over the life of the option if the underlying commodity price moves against your position or remains flat. If the option isn’t exercised before expiration you will lose the premium you paid and the seller of the option will profit the amount of the premium paid.

Futures: While the premium for a futures option will waste away with time the futures contract will not. You can think of the margin on a futures contract as earnest money that will make you liable for the full amount of the futures contract. This is very risky if an offsetting position is not opened to help protect you against a negative price move.

2. Risk

Options: As an options purchaser you are only limited to the amount of the premium that you paid for the option therefore your risk is considered to be limited.

Futures: Regardless of whether you purchase a futures contract or you sell a futures contract you are liable for more than just the initial margin you were required to put up to make the trade. This makes this type of trade risk unlimited.

3. Expiration Dates

One last notable difference between futures and options trading is the expiration date of each particular contract. If you were going to exercise an option to control the underlying futures contract you should know that this has to be delivered approximately one month before the underlying futures is set to be delivered. This is for physical delivery of the commodity and doesn’t hold true for the indices, which are not physical commodities and allows the expiration dates to be the same as the delivery dates.

As you can see there are several fundamental differences between futures and options trading with regards to technical aspects of each contract. Trading these instruments is a whole other matter in terms of trading platforms and specialized risk management techniques. Use this article as a basic primer for further studies on futures trading and see if futures and options trading are right for you.

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Trading Futures and Options

Contrary to what most people think, trading futures and options is not that complicated. People can get into this type of trading through stock or commodity exchanges. All they have to do is for them to be able to open their trading accounts for stock and option trading through a broker. They can do this by calling over the phone, through the mail or through the internet. Online futures and options trading may be very convenient for people because they do not have to call their brokers in order for them to trade. People may check what major brokerage companies are offering like free trades or some cash bonus when they open a trading account.

The next step is for people to fund their accounts. Most of the time, online brokers would require at least $500 to be deposited before starting any trading activities. People may send a check to their broker or they may also transfer the funds from their accounts from their banks. New traders do not just jump into the trading activities right away. They will have to do a little research on the stocks or options that they would like to deal with. They may also look into commodities or futures that they would like to buy. New traders can get reports or the price history of the assets that they would like to trade especially on the price changes that occurred over a period of time.

Traders who are buying options contracts are actually buying either “put” or “call” which is a representation of 100 shares of a particular equity over a strike price. Those who are dealing with futures are buying contracts of a specified volume of commodity and a given price. Traders earn from their options or from their futures contracts depending on whether the price moves in favor or against them. Both types of trading are affected by the time element so traders have to see to it that they are aware of what is happening on the price of the underlying asset over a certain time frame.

People who are not sure about what to do with futures or options can get some experience first through practice trading. There are brokerage companies that allow them to practice first before they put in real money for their trading activities. Once they get themselves familiar with all of the trading moves and processes, it would be easier for them to make decisions in trading.

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Investing in Futures and Commodities, Now That the July Supply and Demand Report is Out

Now that the July Supply and Demand report is out, the soybeans and corn markets should put focus on the weather.

Basically, the USDA did not have any surprises in their soybean numbers as traders anticipated a decline of at least ½ bushel in yield.

In 1993, the USDA lowered yields for soybeans 1 bushel to the acre from the June estimate to the July estimate.

In June, the yield estimate was at 42.1 bpa. Looking at the current crop condition ratings, the June estimate appeared to high.

The USDA lowered the yield down to 41.5 bushels. Carryouts continued to decline for the new crop, to 140 million bushels and that was in line with the expectations.

Futures opened strong on Friday, but, could not maintain the strength and fell hard. However, mid-day forecasts were indicating the potential for building a ridge of heat and moving into the heart of corn and soybeans two weeks out.

This was enough to send the shorts running in front of a forecast of heat for the weekend.

While research tends to indicate that higher highs may still be in store for soybeans during August and possibly the first half of September, the percentage of odds isn’t as good as the expectation of new all time highs for the July contract was.

Therefore, I tend to be open-minded with this market for future expectation.

However, weather will be a key driving force for both corn and soybeans.

Argentine farmers ended the week with frustration and promises of more strikes. This rhetoric continues to breed instability in the export sector for Argentine commodities.

The Brazilian farmer has been more aggressive this year to forward cash sales than last year and this is positive for US exports of soybeans through late summer. A pick-up of Argentine soy exports during late summer and early fall, could spell trouble for prices at a seasonal soft time for US producers.

I like the idea of making cash sales on new crop soybeans from here forward into September.

Hopefully, having all cash sold for new crop (via into 2009 contracts) done by the third week of September.

In other words, not carrying any new crop over without a forward contract attached.

I suspect readers first thought is taxes and not liking to have commodities to sell next year. Next year might not pay as good as this year by harvest.

Over the first half of 2008, China’s corn exports fell 96% to only 150,000 mt. During the same period, imports of soybeans increased 24.4%.

During December of last year, the Chinese government canceled the export tax rebate for grain products. Then, in January, the government levied new export duties for grain products ranging from 5% to 25%. It is thought that under the current policy, China’s grain supplies may be in good supply in the mid-term, but the country will need to import non-grain crops, especially oil-bearing crops such as soybeans and palm.

China’s agricultural trade deficit stood at $7.57 billion for the first five months of this year, up 14.3 times from the same period a year ago.

Major corn and soybean producing provinces Jilin, and Heilongjang may have to deal with a major locust problem this season. Locusts are 70 for every 1.2 square yard in Inner Mongolia. The winds tend to move across Jilin and Heilongjiang towards Beijing. The appearance of the locusts is a little later this year, but, the last time China experienced such a problem was in 2002 when locust were 5000 per 1.2 square yard. So, the current outbreak is nothing at present, but concern is that it will grow in proportion rapidly if funding is not available and rising fuel costs hamper the efforts to prevent the locust invasion.

Soybeans remain fundamentally bullish. But, if the weather remains favorable, prices could stall for now. August is bean month. Corn, fell victim to a $1 plus break this past week and, that seems to be enough to usher in a short covering rally for now. A test of the gaps left this past week?

Sue K Martin is president and owner of Ag. & Investment Services, Inc. she has more than 30 years experience in the brokerage business. (she started young)

Sue is a daily analyst for the University of Illinois Radio Station,W.I.L.L. in Champagne-Urbana, Illinois.

If you have been looking for a Brokerage Firm, Run by a person who knows the Markets better than most… and who routinely out smarts the dailies Keeping you informed way ahead of the curve.

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Money Management for Futures and Commodity Traders, Part II

A number of qualities are necessary in order to become a successful futures trader. These characteristics can be your keys to success. Some are more crucial than others, but together they form an unbeatable — and winning — combination.

The Discipline of Excellence

Discipline is the primary key to successful futures trading. You must have the discipline to learn your system, study it daily and tweak it to perfection. You must have the discipline to keep a trading log that records your trades, as well as the market conditions, thought processes and external influences that affected each trade. Without such a log, you are doomed to repeat your mistakes, rather than learning from them. You must have the discipline to do your homework, to study and keep up with the market, and to keep your system current.

The Profit of Patience

You must be patient if your trading system is to be effective. By trading too soon, you negate the value of your trading system. You must exercise patience and give your system time to work. More than a virtue, patience for the futures trader is sheer profit.

Learning to Deal With Loss

Loss is simply part of the trading game. You must be able to take losses in stride and get right back in the game. When your system dictates that a loss be taken, you must have the discipline to follow your system, take the loss quickly, minimize the damage and move on.

Perseverance

There are no overnight success stories in futures trading. Success is a matter of building experience, working and perfecting your system, minimizing losses, and capitalizing on small gains. Success, particularly at the beginning, is more often a series of small steps than giant leaps.

Confidence

Above all, a futures trader must have confidence in him or herself. You must have confidence in your system and your ability to work your system — to “pull the trigger”. Futures trading is a game of risk. You can’t be afraid to act. You must have confidence in your ability to read your system and act. Those who hesitate or who second-guess themselves on every trade are doomed to lose in the futures trading game.

Flexibility

The market and market forces are ever changing. You must have the flexibility to change with the times, and to make changes to your system so it remains viable and in tune with current market conditions.

Each individual component of futures trading — from timing, to entry, money management, and exit — is directly affected by the person calling the shots: the trader. For this reason, personal traits and characteristics of the trader must be continually examined and developed, in order that optimal performance be accomplished and maintained.

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Futures and Commodities – Invest For Your Future

To make money with futures and commodities you need to understand how both of these work. There are many people that have made great fortunes speculating with these types of investments. many people say that commodities could be one of the most profitable things you can invest in the next five or so years. It is important that you find a great broker that can help you in choosing the right commodities to invest in. Commodities are basic products that people use each and every daysuch as rice, corn and grain are good examples. The price of these goods fluctuates from day to day and buying and selling these commodities can make you money.

Basically what happens is you have a futures contract so that you can buy and sell the commodity you want to. It is not feasible for you to actually take possession of the product that you are purchasing so they have a futures contract to expedite the sale.the futures contracts are very similar to trading stocks except for they have an expiration date and the delivery date. Once you learn how these markets were again be easy for you to make a sizable profit. It is important that you get as much information as you can before you begin so that you can be as successful as possible.

Remember that trading commodities and futures is a great way for you to make money. But as with most markets you need to have the knowledge it takes to be successful before you begin. It is a good idea to search and find out exactly how these markets work before you spend any of your own money. Also having a broker that can help you understand the terminology is very helpful. After you your feet wet in this market you can see there are great opportunities for you to make a lot of money.

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