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theloniouszen Posts:1 2006-10-30 16:01:20 |
How does futures trading work? |
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| What are you actually buying? If I go and buy winter wheat futures or whatever, and do not sell my contract in time, do I actually receive the pork bellies or Brent crude oil? How does one make money?
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| autbro2 Posts:1 2006-10-30 16:03:25 |
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| What are you talking about??? |
| open4one Posts:54 2006-10-30 16:08:07 |
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| You are doing one of two things.
You are either buying the right to BUY something at a price before a date certain, or buying the right to SELL something at a price before a date certain. If you purchase the right to buy oranges at $1.00 per bushel and it goes up to $1.50, you make $.50 for every bushel you have a contract on. Usually you just sell the contract, you don't actually take delivery. If it goes to $.75 per bushel, the contract merely expires and you lost the cost of the contract. If you purchase the right to SELL oranges at $1.00 per bushel, and the price goes to $1.50, it expires and nothing happens but you lost the cost of the contract. If it goes to $.75, you'll get bought out for the difference. With either, you know what your maximum exposure is. When you sell contracts, you can get really burned. If you take $.10 for a contract to buy oranges at $1.00 and it goes to $2.00, you're okay, you got your dime and it expires. If they go to $.10 per bushel, you better really like orange juice. |
| EAA Duro Posts:2 2006-10-30 16:55:13 |
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| It is a zero sum game. Some body wins and somebody loses for a zero sum.
If you buy and it goes up and you sell you win, if you buy and it goes down and you sell you lose. If you sell and it goes down and you buy it back you win, if you sell and it goes up and you buy it back you lose. Futures is very risky because of the huge amount of leverage involved. Most contracts traded never take delivery on the commodity they represent. They are usually closed out before the first notice day or rolled into the next month. Most speculators that trade futures DO NOT MAKE Money, They lose money. If want to make a small fortune in the futures market, start with a large fortune. |
| gatzap Posts:2 2006-10-30 18:31:40 |
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| Open4one is describing the workings of options - either calls (the right to buy the underlying issue at a set price by a set date) or puts (the right to sell at a set price by a set date). You are not buying the right to buy or sell. That is futures options. With futures you are buying the actual commodity at some future date/price. There are options on stocks and on futures. The underlying issue on a futures option is a futures contract which is a contract (not an option) to buy or sell the actual commodity. If you own an option an option on Dec wheat and the price is out of the money on the expiration date then it does expire worthless. If you have an actual futures contract position and the price goes against you you will have to have sufficient funds to cover that. It is essentially the same as stocks but with bushels of wheat instead of shares of a company. In theory you have have the actual wheat delivered but in practice the contracts are settled for profit or loss.
Warning: Futures markets are dominated by players with vested interest such as ADM for wheat. They also move at warp speed and may go for several days at limit moves. Ain't no playground. |
| stock.expert Posts:5 2006-10-30 19:36:34 |
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| g_tastyfish Posts:1 2006-10-30 21:17:10 |
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| I can't really improve on the answer given by the first responder as far as mechanics go except to say that a futures contract OBLIGATES you to a quantity and price. This is a HUGE difference from the options markets, futures do NOT expire worthless, and you do NOT know what your potential exposure will be.
It is not a zero sum game. The futures markets (commodity markets) are used as a hedge by either the consumers of the commodyity, or the producers of the commodity as well as the plain old speculator that is risking his/her own capital to try to make a profit. They use the contracts to lay off the risk of production or cost of comsumption. The airlines are some of the biggest players in the fuel and oil markets. Say you are a wheat farmer. The cost to grow and harvest your crop are pretty transparent. If you could lock in a porfitable price on say 25% of your crop - one that would pay all the bills associated with all the costs involved that is a pretty good deal. Sure, you may give up potential profit if the price of wheat rises, but the security of locking in that price is very valuable and this makes the futures markets not a true zero sum game. You make $ the same way you would in any other market, buy low and sell high. These markets are highly speculative, and full of people that are MUCH more savy and familiar with them than you are. They are also different than a traditional stock market in that you can lose more that you actually invested. In my opinion, they are best left to the pros, but there are many non-pro investors that do quite well in them - I suppose its all about how much can you afford to lose. In short, futures markets were designed to transfer risk between parties with different risk and times horizons (prodcer/consumer lays off risk on speculators) Yes, they will ask you where you want your pork bellies or Brent Sea crude delivered and they can stick you with phyiscal delivery, although this is very rare. |
