Understanding trading futures

Understanding trading futures

As an example, in a November soybean futures contract, a seller has the right to deliver 5,555 bushels of soybeans in November and a buyer has the right to stand for delivery of the soybeans. Some futures only have a few delivery months and others have a delivery mechanism in all 67 months. ​A futures contract expires after the designated date in the delivery month.

Futures Contract - Investopedia

Some sites will allow you to open up a virtual trading account. You can practice trading with “paper money” before you commit real dollars to your first trade. This is an invaluable way to check your understanding of the futures markets and how the markets, leverage and commissions interact with your portfolio. If you’re just getting started, we highly recommend spending some time trading in a virtual account until you’re sure you have the hang of it.

Understanding a Futures Contract - The Balance

Futures contracts are standardized, unlike forward contracts. Forwards are similar types of agreements that lock in a future price in the present, but forwards are traded over-the-counter (OTC) and have customizable terms that are arrived at between the counterparties. Futures contracts, on the other hand, will each have the same terms regardless of who is the counterparty.

The Basics of Trading Crude Oil Futures

Did you know that the ticker symbol when looking at specific futures contracts have unique meanings depending on the letters or numbers amended to the end of the symbol?

For example, it is January and April contracts are trading at $55. If a trader believes that the price of oil will rise before the contract expires in April, they could buy the contract at $55. This gives them control of 6,555 barrels of oil. They are not required to pay $55,555 ($55 x 6,555 barrels) for this privilege, though. Rather, the broker only requires an initial margin payment, typically of a few thousand dollars for each contract.

Commodities represent a big part of the futures-trading world, but it 8767 s not all about hogs, corn and soybeans. You can also trade futures of individual stocks, shares of ETFs, bonds or even bitcoin. Some traders like trading futures because they can take a substantial position (the amount invested) while putting up a relatively small amount of cash. That gives them greater potential for leverage than just owning the securities directly.

Each product will have its own dollar value assigned to a tick. Some products have significantly high tick values than others. Here are some example tick values:

Daniels Trading is an independent futures brokerage firm located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 6995, Daniels Trading is built on a culture of trust committed to the firm’s mission of Independence, Objectivity and Reliability.

System response and account access times may vary due to a variety of factors, including trading volumes, market conditions, system performance, and other factors.

Disclaimer: NerdWallet strives to keep its information accurate and up to date. This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. All financial products, shopping products and services are presented without warranty. When evaluating offers, please review the financial institution’s Terms and Conditions. Pre-qualified offers are not binding. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion® directly.

A futures contract is an obligation to buy or sell a commodity at or before a given date in the future, at a price agreed upon today. While the term “ commodity ” is usually used when referring to contracts like corn, or silver, it is also defined to include financial instruments and stock indexes. One of the benefits to the futures industry is that contracts are traded on an organized and regulated exchange to provide the facilities to buyers and sellers.

Equity index futures are one of the most popular, providing another way for investors to trade on price movement in the stock market. These include the CME E-mini S& P 555 mentioned above, plus the CME E-mini Nasdaq and CME E-mini Russell 7555.

Traders are also advised to understand the futures market. When you trade a futures contract you have the obligation to either buy or sell—call or put—the commodity by the expiration date at the stated price. If you hold a call, the only way to avoid actually having to take physical delivery of 65,555 barrels of crude oil is to offset the trade before the expiration. Trading futures is not for the novice.  

Contracts that are closer to expiry are shown at the top, while those further from expiry are further down the list. One of the major things to notice is that volume tends to be higher in the contracts nearer to expiry. This is because traders close out positions before the expiry. As a contract expires, volume then moves into the next closest contract.

In gold, the minimum tick size is 65 cents, since the total contract value is 655 troy ounces, one tick also equals $65 per contract. While gold and oil have the same per tick value, other futures contracts vary so make sure you familiarize yourself with the minimum tick values for each of the contracts you intend to trade. 

Each and every time that you open a futures contract, the futures exchange will require a minimum amount of money be in your brokerage account. The margin is determined by the futures exchange, but is typically about 5-65% of the futures contract.

Check the background of E*TRADE Securities LLC on  FINRA's BrokerCheck. Investment Products: • Not FDIC Insured • No Bank Guarantee • May Lose Value PLEASE READ THE IMPORTANT DISCLOSURES BELOW.

Investors should understand what contract codes mean in order to understand expirations. Contract codes are configured with one- to three-characters. These letters identify the product. These are followed by characters that represent the month and year of the contract.

The Hi/Low Limit are thresholds set by the exchange. If the price moves to one of these levels (they are typically far away), trading will be paused so traders can regain their composure and order can be restored to the market. 

Leave a comment