Hedging Options » Commodity Trading

Commodity Trading Strategies – The Spread

admin — Sun, 24 Jan 2010 18:56:20 +0000

Many of the more common commodity trading strategies actually serve two purposes. The turn of a profit is but one. A hedge is the other purpose. Hedging is a method of minimizing risks by attempting to purchase some form of insurance. As well as minimizing risks, it also usually caps potential profits. One of the strategies to accomplish this is known as the spread.
The majority of the commodities trades do not involve trading the commodity directly, but more in buying or selling a futures contract. “Going long” and “going short” are two of the most basic strategies
To go long means to purchase a futures contract while anticipating that the price will rise before the contract expires. Futures contracts are very similar to stocks or options because vary rarely do the traders or specialists have any actual contact or participation with trading the commodity itself.
Conversely, to go short means to sell the contract while anticipating that the price will drop before the contract expires. Many novices are often perplexed by this strategy. The have trouble wrapping their mind around the concept that the contract is sold by the trader before they even own it.
While the notion may be confusing, the practice is quite simple. While the technicalities remain unseen by the traders, the inner workings are rather simple. The contract is borrowed and the one is bought to make of the shortfall later.
An illustration of this concept is as follows: Trader X sells a futures contract in May for September wheat for $6.00 per bushel. The contract will be written for a minimum amount, which is typically around 5,000 bushels. The price falls in August to $5.40 per bushel. This will yield a profit of 60 cents on each bushel, which equals $3,000, excluding commission. The profits and losses for these ventures are settled daily for trading accounts and the broker balances the books by buying a contract of the same type on the trader’s behalf with the trader’s money.
Effective trading strategies are a combination or different types and lengths of contracts. Throwing in some form of spread is one of the simplest. There are a number of varieties that can be executed, but a simpler approach is sometimes the best move.
An example of this more simple approach is illustrated in this hypothetical situation. In May, the price for a July wheat contract is $5.90 per bushel and for a September contract the price is $6.00 per bushel. By predicting the spread between these two and by anticipating changes before July to greater than 10 cents – and to be correct in that prediction could yield a profit by selling the July and purchasing the September. By shorting July and going long in September, you do profit.
This profit is incurred by watching carefully the behavior of the contracts and acting accordingly. In June, the July contract may have risen to $6.00 per bushel and the September to $6.25 per bushel. By liquidating both positions, in other words, settling both contracts, this results in a 10 cent loss on the July contract, but a gain of 25 cents on the September contract. This means a 15 cent profit per bushel. A small commission will be incurred on the turn around, but it is minute. On a contract that covers 5,000 bushels, this means a net gain of $750.
While a larger gain would have resulted had July not been shorted, but all trading carries risks and it is impossible to predict the future, especially in the stock market, with any degree of certainly. Hence, the term, speculation is used to refer to these activities.
There is an element of rationale for betting against yourself by shorting and by going long at once allows the trader to hedge their best on whichever direction they expect the market to take. Utilization of this spread strategy as well as with many other variations does succeed in capping the potential for profit. However, it does work to minimize downside losses as well.

Trade Currencies Like Stock and Make More Money

admin — Sun, 24 Jan 2010 07:02:02 +0000

The title is deceptive actually. What is being talked about is that if you are holding substantial amounts of Pounds, or Dollars or the Euro, or other currency, you can use that currency to make money on your currency by trading.
Currency Trade is where the currency is bought and sold. Just like stocks and shares are traded in the NYSE or the NASDAQ.
The difference in the two is only one. In stocks and shares, you are buying into or exiting from the companies in which you are holding stocks and shares, based upon the stock movements in the Stock Exchange, again based on supply/demand equations. You bought low and sold high, depending upon your perception of how much you wanted to cash in, and how much you wanted to retain in the long term. This depended on the individual company AND the way the market indices were moving. Currency trading works exactly the same way as the stock market does, based on demand and supply, but was earlier restricted to banks only. They traded on currencies based on values and requirements and whether the economic situation in that currency was good or likely to be good or bad, etc.
Today with the world having gone global, and individual countries freeing up foreign exchange regulations, even private companies (corporates) can trade in currencies. For this they have set up separate funds. Today, if the US dollar is fetching say 2 British Pounds Sterling, and it is expected that since the US economy is going down, then the holding of that dollar would fetch only 1 British Pound Sterling. So you have lost one British Pound Sterling. Conversely, if it is felt that the economy of the US is doing better than the British economy, one US Dollar could fetch as much as 2.5 British pound sterling.
So you now have an opportunity to use the ETFs or your portfolio manager to go in for currency trading. If you put in say $100 you would be getting 200 British Pounds sterling. But if the dollar is going down, you would get much less, say only 100 pounds. Normally in currency trading, a long term option is used. Because, it is based on long term indications of the currency of the country using it. Generally, the managers use a basket of currencies to trade, that smoothens the ups and downs of the currency market. Basket here means holding multiple currencies against which the dollar values goes up or down, and trade is accordingly conducted.
As an individual, you will have to check whether you can yourself trade in the currency market. That depends upon your countries Foreign Exchange Policy. You will have to check it out with your investment group. If you are allowed, you can do pretty well. But start slowly and hedge your bets always. It requires a lot of reading, keeping track of the global economy, your own economy, and of course your personal economy!
Try it through your investment manager, and see for about six months what your return is. Meanwhile, you can read up about it on various media, such as books, the internet, etc.

Commodities Trading… Do You Know Your Peas and Qâs Of Futures?

admin — Wed, 13 Jan 2010 07:50:12 +0000

More Than One Hundred and Fifty Years of U.S. HistoryAnyone who has seen the classic movie Trading Places knows what commodities are. For those of you who have not gotten the privilege of seeing Eddie Murphy at his best,Â commodities are any physical, tangible goods. From crops such as corn or wheat, to oil, gold, and currency, commodities get traded on the futures market. Rice was undoubtedly the very first commodity traded at the original market of the Chinese. Here in the U.S. it began more than 150 years ago at the Chicago Board of Trade with the first agricultural futures contract. In 1982 options on futures was introduced, and in the 1990’s exchanges introduced electronic trading. Futures trading is now a 24 hour, seven days a week enterprise, and undoubtedly the main reason you are researching it.Â Like all financial instruments, the futures market is highly regulated, but not by the SEC. The SEC administers and enforces the federal laws that govern the sale and trading of securities, such as stocks, bonds, and mutual funds, but they do not regulate futures trading. The federal agency that does regulate futures trading is the Commodity Futures Trading Commission. With limitedexceptions, the trading of futures must be executed on the floor of a commodity exchange. Similar to broker-dealers that are members of the National Association of Securities Dealers, Inc. or some other self-regulatory organization, all firms and individuals who trade futures with the public or give advice about futures trading must be registered with the National Futures Association (NFA).Hedgers and SpeculatorsTwo Kinds of Commodities Traders:Commercial hedgers are corporations and sometime individuals, that seek to ensure the stability of a given commodity by taking a position in the commodities market. Take peas for example, and the hedger, a food processor who cans them. If pea prices go up the hedger ends up having to pay the farmer or pea dealer more. Because it is basically a cash commodity, to protect himself against higher pea prices, the processor can âhedgeâ his risk exposure by buying enough pea futures contracts to cover the amount of peas he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of peas rise enough to offset cash pea losses.Speculators are the second major group of futures players. These participants include independent floor traders and investors. A speculator is a person, or more likely an institution, that purchases or sells the commodities based on factors other than simply analysis. Whereas investors will focus, by and large, on detailed analysis.The Proâs and Conâs of Speculating Futures Looking ProsperousSince most individual traders are speculators, here is a list of some of the advantages and disadvantages of the futures market over other investment possibilities. 1. The possibility exist that a person can make more money faster in the futures market, becauseÂ the speed of prices tend to change faster than stocks. Conversely, bad judgment can cause one to suffer greater losses than traditional investments.2. Futures are highly leveraged investments. The trader only puts up about 15-20% as a margin, yet still being able to ride the full amount of the contract. Unlike stocks where at least 50% of its value has to be put up, and the investor pays interest on the difference between the margin and the full contract value. 3. For the most part there is no inside trading. Everyone has the same insiders information on the weather, for example. This is an open outcry market, very public, which insures a fair outcome.4. Commission charges on futures trades are small compared to other investments, and the investor pays them after the position is liquidated.5. Most commodity markets are very broad and liquid. Transactions can be completed quickly, lowering the risk of adverse market moves between the time of the decision to trade and the trade’s execution. I hope this has helped in your research. I donât profess to being an expert, but I do know of some. I obviously donât have the time to go into all the details now, but at my siteÂ Market Mentalist you will find all you need to know about investing online. I have a page devoted to commodities. There is access to some of the top trading systems available including software, books, newsletters, and Forums. Whether you are an inquisitive novice or a seasoned pro Market Mentalist offers the online investment resource you just might be seeking.

Futures Trading…Know The Market Before The Experts

admin — Tue, 12 Jan 2010 08:17:54 +0000

You Don’t need a Crystal BallOne might say that there has to be some kind of mystical knowledge being used, considering the price for the commodity doesn’t yet exist. Commodities are any physical, tangible goods, such as crops like corn or wheat, to oil, gold, and currency, just to name a few. The futures market has nothing to do with the use of a crystal ball, though there are many traders who wish they had one. A futures contract is a standardized contract to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market determined price (the futures price). The contracts are traded on a futures exchange.A futures contract gives the holder the obligation to make or take delivery under the terms of the contract, whereas an option grants the buyer the right, but not the obligation, to establish a position previously held by the seller of the option. Like all financial instruments, the futures market is highly regulated, but not by the SEC. The SEC administers and enforces the federal laws that govern the sale and trading of securities, such as stocks, bonds, and mutual funds, but they do not regulate futures trading. The federal agency that does regulate futures trading is the Commodity Futures Trading Commission. With limitedexceptions, the trading of futures must be executed on the floor of a commodity exchange. Similar to broker-dealers that are members of the National Association of Securities Dealers, Inc. or some other self-regulatory organization, all firms and individuals who trade futures with the public or give advice about futures trading must be registered with the National Futures Association (NFA).The Players In This Chess MatchHedgers and Speculators

Commercial hedgers are corporations and sometime individuals, that seek to ensure the stability of a given commodity by taking a position in the commodities market. Take peas for example, and the hedger, a food processor who cans them. If pea prices go up the hedger ends up having to pay the farmer or pea dealer more. Because it is basically a cash commodity, to protect himself against higher pea prices, the processor can “hedge” his risk exposure by buying enough pea futures contracts to cover the amount of peas he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of peas rise enough to offset cash pea losses.Speculators are the second major group of futures players. These participants include independent floor traders and investors. A speculator is a person, or more likely an institution, that purchases or sells the commodities based on factors other than simply analysis. Whereas investors will focus, by and large, on detailed analysis.Gambling With Your FuturesFive Reasons To Roll the DiceSince most individual traders are speculators, here is a list of some of the advantages and disadvantages of the futures market over other investment possibilities. 1. The possibility exist that a person can make more money faster in the futures market, because the speed of prices tend to change faster than stocks. Conversely, bad judgment can cause one to suffer greater losses than traditional investments.2. Futures are highly leveraged investments. The trader only puts up about 15-20% as a margin, yet still being able to ride the full amount of the contract. Unlike stocks where at least 50% of its value has to be put up, and the investor pays interest on the difference between the margin and the full contract value. 3. For the most part there is no inside trading. Everyone has the same insiders information on the weather, for example. This is an open outcry market, very public, which insures a fair outcome.4. Commission charges on futures trades are small compared to other investments, and the investor pays them after the position is liquidated.5. Most commodity markets are very broad and liquid. Transactions can be completed quickly, lowering the risk of adverse market moves between the time of the decision to trade and the trade’s execution. I hope this has helped in your research. I don’t profess to being an expert, but I do know of some. I obviously don’t have the time to go into all the details now, but at my site Market Mentalist you will find all you need to know about investing online. I have a page devoted to futures. There is access to some of the top trading systems available including software, books, newsletters, and Forums. Whether you are an inquisitive novice or a seasoned pro Market Mentalist offers the online investment resource you just might be seeking.

An Introduction To Commodity Options Trading

admin — Wed, 16 Dec 2009 20:27:24 +0000

Commodity futures trading, as we know it today, is said to have originated in Japan in the 17th century, where rice was traded in future contracts. It was a period when farmers and buyers came together and decided to commit to each other future prices negotiated on suitable terms in exchange of grain for money. For example, a dealer would agree to buy a ton of rice at the end of the next month for a certain price from a farmer. This would be ideal for both parties, as the farmer would know how much he would get for his rice in advance, and the buyer could plan to raise the money he needed for the purchase. Contracts such as these became more and more popular and common, and were even used as collateral for taking loans. If the buyer could not take delivery of the rice, he could sell the contract to someone else. On the other hand, if the farmer could not deliver the goods, then he could hand over the contract to another farmer. Thus began commodity futures trading, as we know it today.

What Are Commodity Futures?

Today, most of the futures commodity trading exchanges are set up in a similar way. Typically, members of the exchange do the actual trading in face-to-face deals on the floor. Stock stands for equity in a public company, and can be held as long as you want, whereas commodity futures trading contracts have a specified life. In the past, people used commodity futures trading methods generally to hedge risks and fluctuation in prices, or to take advantage of them, and not for actually buying into the commodity. The idea is that a contract requires delivery of the commodity within a certain predefined time period unless it becomes null and void. The person buying the commodity futures trading contract agrees to buy the specified commodity at a fixed price on a certain date. The person selling the commodity futures trading contract agrees to sell the commodity at a certain price on a certain date. As time goes on, the contract price fluctuates, and this brings about profit and loss in the trade. The contract is usually liquidated before its expiry and the delivery generally doesn’t take place. The entire trade is based on the idea that there will be no delivery, but we can speculate on the price of the underlying commodity at a future time to make money. Commodity futures trading is done all over the world now.

Different Types Of Commodities