Futures & Options Trading
- What are Futures?
- Futures: Contracts to buy or sell specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future.
- Why trade Futures?
- When a trader buys a futures contract, you lock in a purchase price for the underlying commodity. Similarly, when you sell a futures contract, you lock in a selling price of the underlying commodity. Futures prices move around all of the time, meaning they are volatile. Prices of agricultural commodities, for example, may rise in response to unfavorable weather conditions, increased demand by importers, or spread of plant diseases, and fall in response to abundant supplies or a shift in consumer preference. If prices go up after a trader buys a futures contract, then you earn profit since the futures contract has increased in value.
- The challenge is to anticipate price movements correctly and make the appropriate trade. If a trader expects prices to rise, the trader will buy futures or buy call options, and if they expect prices to decline, the trader will sell futures or buy put options. If the expectations turn out to be correct, then a profit will be made. If not, a loss will occur. Realistically, it is virtually impossible to be right all of the time. In fact, many traders are wrong more often than right. Managing risk is the key here.
- What are Options?
- Contracts which give the holder the right to buy (call options) or sell (put options) a fixed amount of a certain stock or future at a specified price within a specified time.
- Why trade Options?
- For those with a high level of risk tolerance, commodity options trading provides an opportunity to use relatively moderate sums of money to leverage sizable positions.
- What are Single Stock Futures?
- Futures contracts on individual stocks.
- Why trade Single Stock Futures?
- Single Stock Futures are the first truly hybrid product, blending the benefits of stocks and futures. They are capital-efficient. You can trade on 20 percent margin, whereas for stocks you must put up at least 50 percent margin. This offers greater leverage and exposure to the underlying stock.
- They will also be easier to trade than stocks, as there is no uptick rule. To short stocks, you must wait until the stock goes up, according to securities law. To short single stock futures, you will not have to wait for an uptick in the stock.
- They will be marketed to the market closing price every day.
- They will create tighter spreads. For example, at MEFF, the Spanish exchange for single stock futures, contracts trade at a spread of 2 to 3 Euro cents versus a spread of 10 cents for the underlying stock.
- They will have better price transparency.
- Single stock futures trades will be executed quickly, as these futures will be predominantly traded electronically. OneChicago is a wholly electronic market.
- They will be cheaper. No certificates will change hands until settlement, whereas in regular stock trading, the transfer of certificates between safekeeping accounts results in fees that are passed on to investors. In addition, there are no borrowing costs on short sales or margin accounts, whereas broker/dealers charge interest for short sales of stock and margined transactions. Also, no prospectus is required for them; there are fewer legal documents and, thus, fewer fees. Again, with regular stock trading, the cost of the legal documents would be passed on to you in fees.
- Single stock futures are also cheaper than their closest trading relative: the synthetic short future. To create a synthetic short future, you must sell a call and buy a put; thus you will be charged for two transactions.
- What can I trade?
- After opening an account with PFG, Inc., you and your broker will thoroughly explore all trading options available to you.