Futures and options trading explained

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. We Provide Free Derivatives Trading Insight. So You Can Trade Smarter, Not Harder. How to Buy Bitcoin Stock ETF. With the creation of two bitcoin futures products and an epic increase in price, lots of traders are wondering how. How to Buy CME Bitcoin BTC Futures. Bitcoin futures are the hottest commodity on the market today. So hot, in fact, that the Chicago Mercantile Exchange, also. Interactive Brokers is Dangerous for Options & Futures Trading. Interactive Brokers is one of the largest online discount brokers in the world. They average over 1,000,000 client trades every.

BTC Futures vs XBT Futures – What’s the Difference? BTC futures and XBT futures both track the price of bitcoin, so what’s the difference between the two sets of. Bloomberg Terminal Review – Is it Worth $2k a Month? The Bloomberg Terminal is one of the most iconic financial data platforms in the world. Recognized by the unique blue. Where to Buy Bitcoin futures – Best Broker BTC Futures. Are you wondering where to buy bitcoin futures? Well, bitcoin futures are now available to trade on the CFE, the. How to Short Bitcoin XBT Futures. Bitcoin is a fascinating financial instrument, and the cryptocurrency world has forever changed with the introduction of bitcoin futures (trading. How to Buy XBT Bitcoin Futures. Now that bitcoin futures have finally been created by the Cboe, what is the best way to buy XBT bitcoin. Futures Options. A futures option, or option on futures, is an option contract in which the underlying is a single futures contract. The buyer of a futures option contract has the right (but not the obligation) to assume a particular futures position at a specified price (the strike price) any time before the option expires.

The futures option seller must assume the opposite futures position when the buyer exercises this right. If you are unfamiliar with futures, it is recommended that you learn more about trading futures contracts before continuing with the rest of this article. Things To Note When Trading Futures Options. Futures options usually expire near the end of the month that precedes the delivery month of the underlying futures contract (i. e. March option expires in February) and very often, it is on a Friday. This is the price at which the futures position will be opened in the trading accounts of both the buyer and the seller if the futures option is exercised. Exercise & Assignment. When a futures option is exercised, a futures position is opened at the predetermined strike price in both the buyer and the seller's account. Depending on whether a call or a put is exercised, the option buyer and seller will assume either a long position or a short position. Futures Option Pricing. It is important to remember that the underlying of a futures options is the futures contract, not the commodity.

Hence, the option price move along with the futures price and not the commodity price. Although the futures price tracks the commodity price closely, they are not the same. For highly leveraged products like options, the impact of such tiny differences can be greatly magnified. 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 method, 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 method 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. Follow Us on Facebook to Get Daily Strategies & Tips! Futures Options. Metal Options. Softs Options. Options method 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. com 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 and options trading explained 1. UVXY is not a stock, it is an ETF (exchange-traded fund). 2. It has consistently lost money every year since its creation. UVXY’s full name is Ultra VIX Short-Term Futures ETF, and besides the fact that it can be bought and sold just like a stock, there’s actually not much that makes it similar to a stock at all. By knowing a few key points about this volatility ETF, like why it’s inherently flawed, who manages it, and how it trades, you can gain insight on how to capitalize on the opportunities it presents. UVXY is not a stock it’s an exchange-traded fund (ETF) Although it’s not a stock, it can be bought and sold just like a stock in regular and after-hours trading UVXY aims to track the S&P 500 VIX Short-Term Futures Index and leverage it 2x The S&P 500 VIX Short-Term Futures Index is comprised of a weighted average of VIX futures contracts UVXY does NOT track the CBOE VIX Index and the two assets often perform independently (although they are highly correlated) UVXY canwill go to zero and repeat this process by reverse splitting over and over again UVXY’s ROI since inception is -91.30% BidAsk spreads are tight. Its 90-day average daily volume is 3.5 million shares Penny penny increment options are available and are very liquid. UVXY aims to track 2x the performance the S&P 500 VIX Short-Term Futures Index, and this index measures the returns of a portfolio of monthly VIX futures contracts, namely the two nearest monthly contracts. ProShares, a large institution that creates and manages ETFs, runs UVXY and distinctly classifies it as a short-term trade due to its 2x leverage and exposure to volatility contango. Simply put, UVXY tracks twice the performance of the S&P 500 VIX Short-Term Futures Index and provides twice the leverage. In order to create a product that accurately replicates the performance S&P 500 VIX Short-Term Futures Index (which is not directly tradable itself, just like the VIX Index), the managers of UVXY need to hold a large amount of VIX futures contracts – and they certainly do. This is what the typical holdings in UVXY look like: On any given day, just to maintain adequate exposure to track the S&P 500 VIX Short-Term Futures Index, the managers of UVXY hold around 65,000 VIX futures contracts with a notional value of almost $700,000,000.

Why UVXY is NOT a Buy-and-Hold Investment. As a general rule, the further out in time you go, the more expensive it is to buy volatility, like VIX futures. In a period of time as narrow as five days from now, a market crash is somewhat unlikely. But on a time span of six months from now, the odds increase. This is one of the core principles of why VIX futures that are further out in time are generally more expensive, but not always. Look at this table showing the current prices of monthly VIX futures. The price of September futures are $12.775 and October futures are $13.515. In the case of UVXY, the ProShares managers are purchasing the September and October VIX futures contracts for a premium, and then ultimately selling them for a loss as expiration nears. If nothing happens in the markets, or even if something happens but the market recovers, the October VIX futures that were purchased for $13.515 would be worth around $12.775 after just 28 days. This is the cost of carry associated with VIX futures and this is the reason why UVXY closes in the red most months.

Since the fund managers of UVXY need to constantly purchase a basket of near-term VIX futures, ProShares is essentially buying high and selling low. Not a great recipe for investment success. Hence, the performance of UVXY is -91.30% since its inception. As you could guess, since UVXY was created on October 3, 2011, it has lost money every single year. This is why holding UVXY should never be done long-term! Look at the YTD return of UVXY vs the S&P 500 VIX Short-Term Futures Index (the index UVXY tracks). Due to the double leveraged nature of UVXY, it performs worse than the actual index it tracks! As if that weren’t enough, if you would have bought into UVXY when it first launched in 2011, you would have lost 91.31% of your investment. On the ProShares website, they explicitly state UVXY is “intended for short-term use investors should actively manage and monitor their investments, as frequently as daily.” If you’re thinking about buying and holding UVXY, simply don’t do it. You are almost guaranteed to lose your money unless there is a prolonged financial crisis and volatility reverses its course. Market Makers and UVXY.

ProShares and third-party Authorized Participants (market makers) have computer algorithms that ensure UVXY’s market price is always very close to the value of the S&P 500 VIX Short-Term Futures Index. If it diverges too much at any time, because a retail investor is purchasing a large amount of shares and pushes up the price for example, Authorized Participants will step in a short the necessary amount of stock. Similarly, if too many people are dumping their UVXY shares and it causes the price to sink below the value of the index it tracks, the Authorized Participants will step in and buy shares. Almost all of the “market making” in UVXY is done algorithmically. Meaning, very few people are sitting in front of their computers all day long waiting for the price of one ETF to deviate too much so they can correct it. How ProShares Makes Money From You. Managing a portfolio of 65,000+ VIX near-term futures contracts to maintain an average of 30 days until expiration is not done pro bono. If you buy UVXY, your entire position will automatically be subjected to an expense ratio of 0.95%. Expense ratios are standard practice in the world of ETFs, but there is something else ProShares does with their volatility ETFs that is not standard practice. From the above screenshot showing the daily holdings, note the large amount of cash, some $382 million, sitting on the sidelines. What does ProShares do with this uninvested cash? Simply put, they start collecting interest on the cash you give them after you buy UVXY. In ProShare’s investment prospectus, they state how a portion of any of the available funds can be used to purchase low risk, fixed-income investments like Treasury bills and money market fundsaccounts. Even if ProShares uses a money market account that yields just 1% on cash, that’s an extra $4,000,000 they make off of the investors who buy into their fund every year. Pretty smart, for them.

Will UVXY go to Zero? Although it’s not technically guaranteed, it’s highly likely. UVXY has gone to zero multiple times due to contango loss in VIX futures. Because financial assets can’t trade below zero, UVXY avoids trading below zero by reverse splitting at ratios as high as 5:1. Once UVXY gets close to, say, $5.00, the fund managers will reverse split it by creating 5 times the number of shares which brings the price back to $25.00. As the value of UVXY deteriorates, this splitting process repeats. Most UVXY charts don’t account for the numerous reverse splits, so long-term charts can be deceiving. Because UVXY is an ETF, it can be bought and sold just like a stock. Regular trading and after-hours trading is essentially the same. However, purchasing UVXY doesn’t give you a piece of a company like purchasing a stock does. Instead, you’re buying into a fund that that is dedicated to tracking the two nearest-term VIX futures. Traders look to purchase UVXY when they think there will be a sharp increase in volatility.

Buying UVXY equates to, more or less, direct exposure to the two most active (near-term) VIX futures. As long as VIX futures are in contango and volatility doesn’t increase, UVXY will lose money every month. As such, timing is crucial when going long, but it can be very profitable when volatility explodes. UVXY can double in price in a matter of a few days, and that’s why traders are always looking for the right opportunity to go long. Not many other financial assets offer that kind of opportunity, especially ones that are purchasable in an IRA or regular brokerage account. Because it’s literally not recommended to hold UVXY long-term by its creators, and since it has lost money every year since inception, many traders look to sell UVXY short, but this has its own set of risks. This has become a very popular trade in recent years, but traders looking to short volatility ETFs need to be aware of the possibility of a very sharp and fast increase in price. An overnight market crash or other panic-driven event would likely wipe out a 2x leveraged short volatility position. Nevertheless, a lot of traders accept the very low probability of a huge increase in volatility with a big loss for a very high probability of value deterioration for a small gain. Since UVXY is leveraged 2x, the contango effect is magnified and short sellers capitalize on this. Because of the popularity in shorting UVXY, it is sometimes hard to find shares to borrow. It is a little-known secret in the trading world that MB Trading and Cobra Trading have the best borrow available for short sellers.

MB Trading has been acquired and is now a part of Ally Invest. Cobra Trading is an introducing broker for Interactive Brokers, so this means Interactive Brokers usually has pretty good borrow available. The primary reason to trade UVXY is to gain exposure to volatility as an asset class. Remember, since there is no way to directly buy the VIX Index, traders resort to buying and selling ETFs like UVXY to speculate and hedge with volatility. Because futures trading requires additional broker approval, trading UVXY is a common approach in lieu of trading VIX futures. Because it’s leveraged 2x, and because the S&P 500 VIX Short-Term Futures Index can trade up by 20% on a volatile day, UVXY is appealing when volatility soars. It’s not uncommon to see UVXY increase by 30%+ in as short of time frame as an hour. You buy UVXY, volatility increases, and UVXY yields a 20%-100% ROI. You buy UVXY, it deteriorates from contango and 2x leverage, and you gradually lose money. You short UVXY, volatility increases, and you are suddenly out 20%-100% on your short position. When positions are sized properly, trading UVXY on either the long or the short side can be very effective. As it stands, it’s often best to avoid UVXY unless you are comfortable with the augmented exposure it provides.

Futures trading offers traders access to stock indexes, fixed income, currencies, and commodities globally. There’s ample liquidity and with. The Chicago Board Options Exchange Volatility Index, otherwise known as the VIX Index, is an expectation of near-term volatility in. What are Put Options? A put option is a financial contract that gives the buyer the right, but not the. What are Call Options? A call option is a financial contract that gives the buyer the right, but not the. 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. 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. The covered call is a popular option trading method that enables a stockholder to earn additional income by selling calls against a holding of his stock. Read more. 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. 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. Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. Read more. 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. Day trading options can be a successful, profitable method 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. Follow Us on Facebook to Get Daily Strategies & Tips! Futures Basics. Bearish Strategies. Synthetic Positions. 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. com 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 Contracts Explained: Getting Started in Futures Trading. What is a futures contract? A futures contract, quite simply, is an agreement to buy or sell an asset at a future date at an agreed-upon price. Futures contracts are standardized agreements that typically trade on an exchange. One party to the contract agrees to buy a given quantity of securities or a commodity, and take delivery on a certain date. The other party agrees to provide it. An airline company may want to hedge its bets against an unexpected increase in jet fuel prices.

Its traders will therefore seek to enter into a futures contract to lock in a purchase price closer to today’s prices for jet fuel. So they may buy a futures contract agreeing to buy 1 million gallons of JP-8 fuel, taking delivery 90 days in the future, at a price of 3 dollars per gallon. Someone else naturally wants to ensure they have a steady market for fuel. They also want to protect themselves against an unexpected decline in fuel prices, so they will gladly enter into either a futures contract. In this example, both parties are hedgers, rather than speculators. They are turning to the futures market as a way to manage their exposure to risk, rather than make money off of the deal directly. There are also people who seek to make money off of changes in the price of the contract itself, when bought or sold to other investors. Naturally, if the price of fuel rises, the contract itself becomes more valuable, and the owner of that contract could, if it chose, sell that contract for someone else who is willing to pay more for it. It may make sense for another airline to pay 10 cents per gallon for a contract to save 20 cents. And so there is a lively and relatively liquid market for these contracts, and they are bought and sold daily on exchanges. These contracts aren’t just bought and sold over jet fuel, but over almost any asset that’s commonly traded. Commodities represent a big part of the futures trading world: Futures contracts are issued on everything: eggs, gasoline, ethanol, lumber, precious metals.

The list goes on. All these commodities have markets and market makers and traders constantly monitoring them. Non-Commodity Futures Trading. As mentioned above, the futures market isn’t all about hogs, corn and soybeans. You can also trade futures shares of ETFs and even individual stocks and bonds as well. Some traders trade these vehicles extensively because of the greater potential for leverage. A trader can take a substantial position while putting up a relatively small amount of cash. One common application: Someone who wants to hedge his exposure to the U. S. stock market may short-sell a futures contract on the S&P 500. If stocks fall, he makes money on the short, balancing out his exposure to the index. Conversely, the same investor may feel confident in the future, and seek to buy a long contract – essentially leveraging his portfolio. Futures contracts, which you can actually readily buy and sell over exchanges, are standardized. Each futures contract will typically specify all the different contract parameters: The unit of measurement. How the trade will be settled – either with physical delivery of a given quantity of goods, or with a cash settlement.

The quantity of goods to be delivered or covered under the contract. The currency unit in which the contract is denominated The currency in which the futures contract is quoted. Grade or quality considerations, when appropriate. For example, this could be a certain octane of gasoline or a certain purity of metal. If you are getting involved in trading futures, you have to be careful. Most casual traders do not want to find themselves obligated to sign for receipt of a trainload of swine when the contract expires. But these abstract contracts represent, and are derived from, the movement of actual goods. Many speculators borrow a substantial amount of money to play the futures market. It’s the only way to magnify relatively small price movements to a point where they potentially create profits that are worth the time and effort. But borrowing money also increases risk: If markets move against you, and do so more dramatically than you expect, you could lose more than you have invested. Leverage and margin rules are a lot more liberal in the futures and commodities world than they are for the securities trading world. While your stock broker won’t let you borrow more than the amount you have put up, a commodities broker may allow you to leverage 10:1 or even 20:1, depending on the contract. The exchange, typically the Chicago Board of Exchange (CBOE), sets the rules. The greater the leverage, the greater the gains, but the greater the potential loss, as well: A 5 percent change in prices can cause an investor leveraged 10:1 to gain or lose 50 percent of his investment.

Borrowing is the only way to magnify relatively small price movements to a point where they potentially create profits that are worth the time and effort. But borrowing money also increases risk: If markets move against you, and do so more dramatically than you expect, you could lose more than you have invested. This naturally means that speculators in the futures markets should have the discipline not to overexpose themselves to any given risk. If you believe the futures markets are right for you, it’s not difficult to get started. Open an account with a broker that supports the markets you want to trade. The futures broker will likely ask how much experience you have with investing and what your income and net worth are. These questions are designed to determine the amount of risk the broker will allow you to take on, in terms of margin and positions. There is no industry standard for commission and fee structures in futures trading. Commissions can be per trade or for a round trip, which includes getting in and out of a contract. Every broker provides varying services. Some provide a good deal of research and advice, while others simply give you a quote and a chart. To help you get started, NerdWallet laid out the commission schedules of some of the most popular futures brokers.

Some sites will allow you to open up a virtual account. You can practice trading with “paper money” before you commit real dollars to your first trade. This is an invaluable way to check your understanding of the futures markets and how the markets, leverage and commissions interact with your portfolio. If you’re just getting started, we highly recommend spending some time trading in a virtual account until you’re sure you have the hang of it. Even experienced investors will often times use a virtual trading account to test a new method. Depending on the broker, they may allow you access to their full range of analytic services in the virtual account. The Best Online Brokers for Stock Trading. Power Trader? See the Best Online Trading Platforms. Find the Best Online Brokers. New Investor?

See the Best Brokers for Beginners. Best Online Advisors. Recent Broker Reviews. Recent Online Advisor Reviews. Disclaimer: NerdWallet has entered into referral and advertising arrangements with certain broker-dealers under which we receive compensation (in the form of flat fees per qualifying action) when you click on links to our partner broker-dealers andor submit an application or get approved for a brokerage account. At times, we may receive incentives (such as an increase in the flat fee) depending on how many users click on links to the broker-dealer and complete a qualifying action. futures+options+trading. Narrow Your Search. Tech Industry (110) Tech Culture (54) Internet (45) Computers (28) Mobile (24) Security (9) Phones (8) Software (8) Applications (5) Audio (4) Gadgets (4) Sci-Tech (4) Smart Home (4) Auto Tech (3) Gaming (3) Online shoppers are liking those speedy checkout options. Manuel BlondeauCorbis via Getty Images Apple Pay so far hasn't inspired people to burn their wallets, but there's one type of newer digital payment that's gaining traction. Visa on Thursday. By Ben Fox Rubin 06 April 2017. iPhone 7 storage options: Why 32GB is likely not enough.

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Futures are one of the, if not even THE most traded and oldest derivative in the markets. They are standardized, extremely liquid and can be traded on almost any underlying asset or security. Nevertheless, many people either have no idea what futures are or can’t tell the difference between futures and other derivatives like options or forwards. In this article I will try to clarify what futures are, how futures differ from other derivatives and when they are a good investment vehicle. Futures are standardized, exchange traded derivatives that are very popular. In other words, futures aren’t fully customizable as all futures follow the same basic guidelines and futures are traded on exchanges meaning that they aren’t over-the-counter (OTC) products that are made from your broker. More on that later. Other derivatives would be options, forwards, CFDs and many more. But there are some differences between futures and forwardsCFDs. These are not exchange traded because they are OTC products. Most of these derivatives work quite similar and therefore it is even more important to learn the small differences. How Do Futures Work – Futures Trading Explained. Basically, Futures are an agreement with a second party to buy or sell an asset for a certain price at a future date.

The underlying really can be anything, but typically this is some sort of commodity or similar asset. The original idea behind futures is to get rid of unwanted price volatility. Big firms and corporations that are dependent on certain commodities, use futures to guarantee that they can buy or sell these commodities for a certain price on a future date. For example a big oil firm would sell futures to lock in the oil price, meaning if the oil price falls until the expiration date they still can sell their oil at this price. The other side of this trade could be gas stations that buy futures to guarantee the oil for the agreed upon price. This is good for both because with this price both sides can profit from their oil. Without a futures contract, one side may profit from an incline in oil prices and the other side would lose. Additionally, futures can of course also be used for pure speculation and very many futures are used for that purpose. In this sense futures speculation is quite similar to options speculation. Basically, you buy futures if you think that the price will rise and you sell futures when you think the price will fall. But there are some more things to futures which I want to discuss now: The gains andor losses made from your futures positions are debitedcredited to your account after each trading day. So if you enter a long futures position on an underlying that is trading at 100$ and the price of the underlying moves up one Dollar within one day, you will be credited one Dollar (without leverage factored in). Therefore, you need enough capital in your account to handle the price fluctuations. Otherwise, you can’t open a futures position. If a price fluctuates too much and your account can’t handle that, you will receive a margin call requiring you to deposit more money or your position will be closed.

Most brokers only allow you to trade futures in ‘bigger’ accounts and margin accounts. As you can see the payoff profile of long and short futures looks quite similar to the payoff of long and short stock or forward positions. The more the price of the underlying moves in the correct direction, the bigger the profit becomes. The further it moves in the other direction, the bigger the loss becomes. Your PL at expiration would be the difference between the underlying’s price at entry and on the expiration date. So futures are both undefined risk and undefined profit strategies. I will now move on to the actual differences between all these investment products (futures, options, stocks, forwards…): Let’s begin with the more general bigger differences. One big difference between the futures market and the stockoption market are the market hours. The futures market isn’t settled in one central location. The market is open 24 hours a day, five days a week. It opens 5pm.

EST on Sunday and closes 4pm. EST Friday. Furthermore, the difference between futures and many other derivatives is that they are settled physically. This means that the actual physical underlying will be delivered at expiration. For example, if you buy futures on oil and don’t close the position before expiration, a truck full with barrels of oil will come to your house and deliver physical barrels of oil into your driveway. So if you aren’t an institution that actually wants these commodities, it is extremely important that you close any futures positions before the expiration date. It is never nice to have to get rid of huge amounts of commodities like oil. What Is The Difference Between Futures And Options. Even though options and futures seem very similar, they do have some essential differences that are important to know. One main difference being that an option buyer has the right and not the obligation to exercise his option. This means that the buyer can choose to buy or sell the underlying asset at the predetermined price. This is different with futures. In futures, both parties (buyer and seller) have the obligation to buysell the underlying asset at the predetermined price on the expiration date. The next big difference is that options require a premium to open.

So option buyers pay a premium to open their position and the seller receives one. Futures don’t require any premium to open. Additionally, futures mostly have much larger underlying sizes. One standard option contract controls 100 shares of the underlying asset, whereas futures contracts often control much more. The last important difference is the payoff profile of these two derivatives. Options are either defined risk (long options) or defined profit (short options). Futures are both undefined risk and undefined profit, just like stocks. This means that there is no limit for your maximum gainloss. Both futures and forwards don’t require a premium to open. But as the gain or loss made from futures is credited or debited to your account daily, you usually need to have enough free margin. So forwards can be opened even if you have no capitalmargin to allocate (this may vary from broker to broker). Otherwise, these two derivatives work very similar, have the same payoff and only few differences.

But one more difference is that forwards are Over-The-Counter (OTC) derivatives meaning that they usually aren’t standardized and exchange traded. Therefore, liquidity the forwards market is often quite limited and it can be hard to close positions before expiration. On the other hand, forwards often are more customizable in regards to expiration date. Forwards are only seen and used rather rarely in the retail trading market. Futures and stocks are actually more similar than you think. The payoff is extremely similar, but there are some other smaller differences. Probably the most obvious being that futures expire after a given period of time. Stocks can theoretically be held on forever. Furthermore, futures offer leverage and stocks don’t. To control 100 shares of a stock, you’ll have to pay the price of these 100 stocks and that price can be rather high. If you buy one stock, you will profit one Dollar for every one Dollar move in it. A normal amount of leverage on futures is around 1:15 meaning that you can profit 15$ from a 1$ move. But this leverage does vary immensely and depends on the underlying that you plan on trading and the broker that you are using.

Last but not least, the futures market is huge and even bigger than the stock market resulting in even higher liquidity. The higher the liquidity, the better. You can learn more about the importance of liquidity HERE. Risks And Advantages – Pros And Cons Of Futures. As you probably have noticed by now, futures have certain advantages and disadvantagesrisks. Here are some of the most important pros and cons: Very good liquidity Leverage Low commissions compared to other asset classes (depends on broker) Physical Delivery. Always close your position before expiration (unless you want to have the physical underlying delivered to you in large quantities) Both parties have the obligation to buysell asset Limited time. WhenHow To Trade Futures. Futures are quite versatile products that can be used in a variety of scenarios. I won’t go into detail with when exactly you can use certain strategies. But just to give you an idea, futures can be used for all these things: As I mentioned and as you can hopefully see, futures are versatile investment products that offer many advantages over other asset classes.

Futures are extremely liquid, versatile and easily accessible for retail traders. Furthermore, they can be traded around the clock. Therefore, they are very good investment products. BUT, just like with all other things in the market, you shouldn’t just try them out recklessly. Before trading futures or any other investment products it is essential to educate and inform yourself first. Without the correct education, you will likely lose your money especially with leveraged investment vehicles like futures. A good alternative to futures are options. These are a little safer than futures and generally a very good introduction to the derivative market. If you are interested in learning more about options, you may want to check out some of my education: 4 Replies to &ldquoFutures Trading Explained – Differences Between Futures And Other Products&rdquo I found your post to be very helpful. I only wish you would have written it and I would have had the opportunity to read it before I made a bad investment in futures years ago. Your advice about being educated and informed before making any kind of investing in futures, stocks, or options is right on point. I was one of those people who did not take the time to get educated on this type of investing and it cost me dearly.

You do a good job in laying out the pros and cons and I think anyone reading your article will receive some good information especially, those who may be as inexperience as I was. Thanks so much for sharing your story. Others can definitely learn from that mistake. Thank you for the wonderful and informative article. As i want to make sure that you and me are on the same page, and i already got the main idea of future trading. Is it like you put your asset in insurance company, so insurance will compensate you once your property damage or something bad happen. You have mentioned the oil example that if its price goes down so the company that you sell your asset to, is responsible to compensate you if under the date limit? Yes, that is basically how it works. A futures contract basically is an agreement to buysell an underlying asset at a specific price on a future date. I will use coffee as an example. Let’s say you are the owner of a restaurant that sells coffee. To get the coffee you have to buy it from a coffee farmer. If coffee prices go up, you as the owner of the restaurant would lose money because you need to pay more for your coffee.

If prices go down, you make more money because you have to pay less. On the other hand, the coffee farmer loses money due to the drop. To prevent these losses through price movements, the farmer and you (restaurant owner) could buy and sell futures. The farmer would sell a futures contract and you would buy it. This futures contract says that you can buy a certain amount of coffee for a certain price (where no one loses money) on a future date no matter what happens with the coffee price. So to answer your question: you don’t put any asset into an actual insurance company or anything. You just make an agreement with someone else. But note that this is only one of many uses of futures. You can also use futures for pure speculation even if you aren’t interested in the underlying asset. I really hope this helps. Leave a Reply Cancel reply. Find us on. Learn to Trade Options.

for Consistent Income: Option Courses for every Skill Level Interactive Quizzes to test knowledge Video Lessons In Depth Articles Multiple downloadable Cheat Sheets Personal Support And More. 5 basic options strategies explained. The ability to manage risk vs. reward precisely is one of the reasons traders continue to flock to options. While an understanding of simple calls and puts is enough to get started, adding simple strategies such as spreads, butterflies, condors, straddles and strangles can help you better define risk and even open up trading opportunities you didn&rsquot have access to previously. Although it may seem daunting at first to put on these strategies, it&rsquos important to remember most are just a combination of calls and puts, says Marty Kearney, senior instructor at CBOE Options Institute. &ldquoThese names came about so that people who were phoning in orders to trading desks could convey very quickly what they wanted to do. These are all pretty basic strategies, just taking things up a notch.&rdquo A call gives the buyer the right, but not the obligation, to buy the underlying asset at the purchased strike price. A put gives the buyer the right, but not the obligation to sell the underlying asset at the purchased strike price. An options spread is any combination of multiple positions. This can include buying a call and selling a call, buying a put and selling a put, or buying stock and selling the call (which would be a covered write). For our purposes, we are going to look more closely at a vertical call bull spread, which is used if we expect the price of the underlying stock to rise, although these same principles can be applied to bull put spreads, bear call spreads and bear put spreads. Fundamentally, vertical spreads are a directional play, says Joseph Burgoyne, director of institutional and retail marketing for the Options Industry Council, which means the investor needs to have an opinion whether the underlying is going to go up or down. Additionally, while they have limited risk, they also have limited reward. Kearney explains, &ldquoWhat I&rsquom looking at is I want to control the stock, and I think we&rsquore going to a certain dollar amount.

I&rsquom willing to give up anything above that,&rdquo he says. For our example of a vertical call bull spread, he uses a stock trading at $63 that he believes will go at least to $70. You simply could buy either the stock or a single call, but by purchasing the bull call spread you are able to better limit your risk. In Kearney&rsquos example, we put on the 60-70 vertical call spread, which consists of buying one in-the-money 60 call and selling one out-of-the-money 70 call. Because we sold the 70 call, we limit the maximum value of our spread to $10 (minus commissions), but we lower our breakeven for the trade because of the credit we earned selling the 70 call. Additionally, our loss is limited to the cost of the spread.