Why Trade Futures and Options?

Futures and Options on Futures can make you very high returns. But make no mistake, trading Futures also bring you very high losses as well. Futures are where the action is. Every move of the market results in a profit or potential loss. With the big moves that we have seen in the precious metals markets these past few years, some futures traders have made a fortune. However that means that other futures traders have lost a fortune as well. Unlike the buy and hold strategies of Physical Metal or Exchange Traded Funds, futures trading is for the movers and shakers, and for people who want and are able to get in and out of the market as they see fit.

What is a Futures Contract?

A futures contract is an agreement to buy or sell in the future a specific quantity of a commodity at a specific price. Futures are available on commodities such as crude oil, cotton, and natural gas, as well as agricultural products such as cattle or corn.

Options on Futures

Most futures contracts will also have options associated with them. Options on futures contracts still allow you to invest in the futures contract, but limit your loss to the cost of the option. Options are derivatives and usually do not move point-for-point with the futures contract. Instead they move a percentage relative to the movement in the underlying futures contract.

Options are an entirely different ball of wax and we cannot begin to explain all of the techniques and strategies involved here. However we will say that Options on futures are a great way to take advantage of the leverage offered in the futures market, while limiting your risk. Please contact us right away if you are interested in the Options market and we can connect you to some of the best educational tools and resources in the industry.

 

Risk

Futures speculation is recommended for individuals with higher net worth, and higher risk tolerance. This is truly the big leagues, and it is not for everyone. Most of the participants in the futures markets are commercial or institutional users of the commodities they trade, however other participants, mainly individuals, are speculators who hope to profit from changes in the price of the futures contract.

The risks associated with futures contracts apply mainly to speculators. Speculators take positions on their expectations of future price movement, often with no intention of either making or taking delivery of the commodity. They buy when they anticipate rising prices and sell when they anticipate declining prices. The reason futures are so risky is because they are usually bought on margin and each futures contract represents a large amount of the underlying asset.

For example, a COMEX Gold futures contract represents 100 troy ounces of gold. That means that for every dollar that the Gold market moves, a futures trader can potentially make or lose $100. It is not uncommon to see the Gold market move $20 in a given day. A $20 move can fetch you $2,000 per contract making for a great day in the market, however if you were on the wrong side of that trade, that $2,000 loss could make for a rough day at the office.

 

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