Newbie Question

futuresbuyer3 · Mar 24, 2011

I'm the new webmaster for a futures trading company and I have no idea how this stuff works. From what I understand futures are about transferring risk?

A wheat farmer will enter a contract so that he may sell at a fixed price, thus eliminating the risk of falling prices. He also waives any possible gains he might see if prices go up. The speculator is willing to risk a price drop but really wants to see the price go up so that he can profit.

Is this the right way to think about it?

1a2b3cppp · Mar 25, 2011

Are you wondering what futures are, or how to trade them?

Futures trade just like any stock. Try to buy low, sell high, or short high, buy low.

They differ from stocks in that every month or every few months or every so often (depending on the how that contract is set up), they "roll over" to another contract.

But overall they're basically just like stocks.

The other noteable difference is that with stocks you can buy as much or as little as you want. With futures, you buy contracts, and each contract is worth a certain amount. So with S&P500 futures, for example (the contract ticker is ES), each contract is worth $50 per point, and each point can be broken into quarters (called "ticks") worth $12.50.

So what this means is you cannot trade any smaller than that. The smallest amount of ES you can buy is one contract, which is going to be $12.50 per tick. The margin required for one ES contract is like $500 (depending on the broker). This is part of what makes futures risky, is that they force you into using leverage.

You could trade SPY (S&P500 ETF) and buy a position such that an equal move was only a few dollars if you wanted, but not with futures.

Of course, there are some rich people and funds who trade hundreds of contracts per day. Imagine buying 10 contracts and price moves 2 points in your favor: 10 contracts * $50 per point * 2 points = $1,000!

Options, on the other hand, are much different and have a ton of weird stuff to learn about.

jo0477 · Mar 25, 2011

Quote from futuresbuyer3:

I'm the new webmaster for a futures trading company and I have no idea how this stuff works. From what I understand futures are about transferring risk?

A wheat farmer will enter a contract so that he may sell at a fixed price, thus eliminating the risk of falling prices. He also waives any possible gains he might see if prices go up. The speculator is willing to risk a price drop but really wants to see the price go up so that he can profit.

Is this the right way to think about it?

I think you have the basic understanding of the difference between Speculators and hedgers.

The previous poster gave an excellent explanation of how futures work so that's covered.

As an example, I trade cash nat-gas (for a marketer) and my job is to hedge the physical gas that we flow to end users. Many times, I'm back-to-backing purchases/sales or capturing index spreads in order to maximize my book. So this is akin to your wheat farmer example - where our marketing group tries to secure the best price for end users and I try to hedge our book to maximize spreads.

On the other hand, I like trading the 6E in the evenings and in this case, I'm purely speculating on price (as described by the previous post). Just like stocks but geared way up!

Lotsa fun and best of luck learning the ropes

Roark · Mar 25, 2011

Quote from futuresbuyer3:

I'm the new webmaster for a futures trading company and I have no idea how this stuff works.

Damn! You should get a job with IB cranking out crappy, inadequately tested code for the TWS. I just love using trading software developed by programmers who have no clue as to how or what's being traded.

1a2b3cppp · Mar 25, 2011

dude, he's the webmaster. He makes their website look pretty. I doubt he writes the content or programs the trading software.

It's like a bilboard advertising company doing an ad for a turbo car. They don't have to know how a turbo system works, they just need to know what the client wants to appear on the bilboard.

intradaybill · Mar 25, 2011

Quote from futuresbuyer3:

I'm the new webmaster for a futures trading company and I have no idea how this stuff works. From what I understand futures are about transferring risk?

A wheat farmer will enter a contract so that he may sell at a fixed price, thus eliminating the risk of falling prices. He also waives any possible gains he might see if prices go up. The speculator is willing to risk a price drop but really wants to see the price go up so that he can profit.

Is this the right way to think about it?

Did you ask anyone in the company to give you a briefing?

As a webmaster, do you know how to google things?

http://en.wikipedia.org/wiki/Futures_contract

futuresbuyer3 · Mar 25, 2011

Hey thanks everyone.

I guess now I'm going to do a little research on the rollover aspect of things. I assume speculators don't really want to receive the barrels of oil on the contracts they trade. Bloomberg news always says something like "for April delivery" after every kind of contract they talk about.

Right now I'm thinking its like hot potato. You buy a contract and you have to get rid of it before it expires. The last person holding the contract ends up with the shipment. Does it ever happen that a speculator procrastinates and ends up holding a contract on the day of delivery?

jo0477 · Mar 25, 2011

Quote from futuresbuyer3:

Hey thanks everyone.

I guess now I'm going to do a little research on the rollover aspect of things. I assume speculators don't really want to receive the barrels of oil on the contracts they trade. Bloomberg news always says something like "for April delivery" after every kind of contract they talk about.

Right now I'm thinking its like hot potato. You buy a contract and you have to get rid of it before it expires. The last person holding the contract ends up with the shipment. Does it ever happen that a speculator procrastinates and ends up holding a contract on the day of delivery?

Here's a link to CME regarding procedures for delivery.

http://www.cmegroup.com/rulebook/CBOT/I/7/13.html

But your broker will always notify you ahead of time that you have expiring contracts pending (options/futures)

futuresbuyer3 · Mar 28, 2011

@1a2b3cppp and jo0477, thank you! I am "Googling" it and doing my own research, it's just a pretty conceptually complicated process so it helps to bounce the ideas off of somebody else, and I appreciate your replies.

@intradaybill Everybody's pretty busy, and 1a2b3cppp is right - my job is to make the website look pretty

. However, obviously the more I understand the industry the more effective I'll be. I also got this job because I'm interested in investing in futures myself eventually, so I was hoping it may help facilitate that.

GoldenGeorge · Mar 28, 2011

Quote from futuresbuyer3:

I'm the new webmaster for a futures trading company and I have no idea how this stuff works. From what I understand futures are about transferring risk?

A wheat farmer will enter a contract so that he may sell at a fixed price, thus eliminating the risk of falling prices. He also waives any possible gains he might see if prices go up. The speculator is willing to risk a price drop but really wants to see the price go up so that he can profit.

Is this the right way to think about it?

Thanks for asking, and thanks for the feedback people. I'm new to trading and don't deal with futures, so this was an interesting post to help educate me a little more as well.