Futures 101
Although the idea of trading futures and options can be somewhat daunting at first, a little bit of education can aid everyone from the long-time producer to seasoned investors who are looking for diversification of their assets. The staff of Bower Trading, Inc. will be with you during all stages of the process in order to assure that your personal goals are being met.
Futures markets are designed to protect against wild price fluctuations in the cash market by buying or selling a contract for a given amount of the commodity in the future. This commodity can be anything in one of the following categories: physical commodities, interest rate products, and index products.
These products are bought and sold on centralized exchanges such as the Chicago Mercantile Exchange, the Intercontinental Exchange, and the New York Mercantile Exchange among others. These exchanges allow everyone from the small investor to the large multi-national bank to buy and sell these products via open out cry and the electronic market. Open out cry is a public method of price determination that allows for a known market to all participants.
When an investor buys (goes long) a contract they will profit when the price of the contract rises. On the flip side, when one sells (goes short) a contract they will profit when the price declines. This is different for investors who are familiar with the up-tick rule in the stock market, for in order to sell a contract it does not have to make an up move first.
All markets move in a different manner based off of information varying from weather reports in South America to the latest report of farm acreage. Each of the commodities markets has a different flair and tone that can only be grasped with experience and education in that given market.
The first step in learning how to trade is to become comfortable with the basic terminology and concepts. Feel free to look over our Futures 101 definition list and our links page. Happy Trading!
Agricultural Futures: Products traded on exchanges such as corn, wheat, soybeans, oats, pork bellies, lean hogs, cattle, lumber, and the by-products of these commodities.
Basis: The difference between the cash price minus the futures price for a given commodity.
Bear Market: A market in which prices are falling.
Bull Market: A market in which prices are rising.
Call Option: A contract giving the right to buy, but not the obligation, to own the given underlying contract at the strike price for a specified period of time.
Futures Contract: A standardized contract between buyer and seller to buy or sell a given amount of a commodity at a set price and date.
Hedging: The process of minimizing loss through adverse price movements by either buying or selling futures contracts.
Put Options: A contract giving the right to buy, but not the obligation, to sell the given underlying contract at the strike price for a specified period of time.
Spreading: The simultaneous buying and selling of contracts to benefit from the change in the price differences between the two contracts.
Volatile Market: One that is susceptible to wild price fluctuations.
