How to make money by trading in futures and options

Gains and losses on futures contracts are not only calculated on a daily basis, they are credited and deducted on a daily basis. In , steel began trading on the London Metal Exchange. In other words, how stable or unstable have market prices been throughout history? Interest Rates Futures Pricing Some of the most heavily traded futures contracts in the world are the Classic bond, year note, and the 5-year note. Which are the best books to read? This provides exposure to the commodity, but subjects the investor to risks involved in different prices along the term structure , such as a high cost to roll.

FUTURES & OPTIONS What Purposes They Serve and How To Use Them Dr. L. C. Gupta & ASPECTS OF FUTURES TRADING The futures segment The clearing corporation to Detailed examples Call option case Put option case Option’s maturity or expiration date.

Futures Measures

In a sense, the trading screen replaces the trading pit, and the electronic market participants replace the brokers standing in the pit. The exchange computer system keeps track of all trading activity, and identifies matches of bids and offers, with fills generally made according to a first-in, first-out FIFO process, although some alternate allocation processes are used in particular markets.

Trade information is sent to the clearing house and brokerage, and prices are also instantaneously broadcast to the public. Trades made on CME Globex exchange, for instance, are typically completed in a fraction of a second.

In open outcry trading, however, it can take from a few seconds to minutes to execute a trade, according to the complexity of the order. How does the process of price discovery work? Futures prices increase and decrease largely because of the myriad factors that influence buyers' and sellers' judgments about what a particular commodity will be worth at a given time in the future anywhere from less than a month to more than two years. As new supply and demand developments occur and as new and more current information becomes available, these judgments are reassessed and the price of a particular futures contract may be bid upward or downward.

The process of reassessment--of price discovery--is continuous. Thus, in January, the price of a July futures contract would reflect the consensus of buyers' and sellers' opinions at that time as to what the value of a commodity or item will be when the contract expires in July. On any given day, with the arrival of new or more accurate information, the price of the July futures contract might increase or decrease in response to changing expectations.

Competitive price discovery is a major economic function--and, indeed, a major economic benefit--of futures trading. The trading floor of a futures exchange is where available information about the future value of a commodity or item is translated into the language of price. In summary, futures prices are an ever changing barometer of supply and demand and, in a dynamic market, the only certainty is that prices will change. What happens after the closing bell? Once a closing bell signals the end of a day's trading, the exchange's clearing organization matches each purchase made that day with its corresponding sale and tallies each member firm's gains or losses based on that day's price changes--a massive undertaking considering that nearly two-thirds of a million futures contracts are bought and sold on an average day.

Each firm, in turn, calculates the gains and losses for each of its customers having futures contracts. Gains and losses on futures contracts are not only calculated on a daily basis, they are credited and deducted on a daily basis. The process just described is known as a daily cash settlement and is an important feature of futures trading. As will be seen when we discuss margin requirements, it is also the reason a customer who incurs a loss on a futures position may be called on to deposit additional funds to his account.

Is the arithmetic of futures trading complicated? To say that gains and losses in futures trading are the result of price changes is an accurate explanation but by no means a complete explanation. Perhaps more so than in any other form of speculation or investment, gains and losses in futures trading are highly leveraged. An understanding of leverage--and of how it can work to your advantage or disadvantage--is crucial to an understanding of futures trading.

As mentioned in the introduction, the leverage of futures trading stems from the fact that only a relatively small amount of money known as initial margin is required to buy or sell a futures contract.

The smaller the margin in relation to the value of the futures contract, the greater the leverage. If you speculate in futures contracts and the price moves in the direction you anticipated, high leverage can produce large profits in relation to your initial margin. Conversely, if prices move in the opposite direction, high leverage can produce large losses in relation to your initial margin.

Leverage is a two-edged sword. Said another way, while buying or selling a futures contract provides exactly the same dollars and cents profit potential as owning or selling short the actual commodities or items covered by the contract, low margin requirements sharply increase the percentage profit or loss potential.

Futures trading requires not only the necessary financial resources but also the necessary financial and emotional temperament. What risks should I consider when trading? An absolute requisite for anyone considering trading in futures contracts--whether it's sugar or stock indexes, pork bellies or petroleum--is to clearly understand the concept of leverage as well as the amount of gain or loss that will result from any given change in the futures price of the particular futures contract you would be trading.

If you cannot afford the risk, or even if you are uncomfortable with the risk, the only sound advice is don't trade. Futures trading is not for everyone. As is apparent from the preceding discussion, the arithmetic of leverage is the arithmetic of margins.

An understanding of margins--and of the several different kinds of margin--is essential to an understanding of futures trading. If your previous investment experience has mainly involved common stocks, you know that the term margin--as used in connection with securities--has to do with the cash down payment and money borrowed from a broker to purchase stocks.

But used in connection with futures trading, margin has an altogether different meaning and serves an altogether different purpose. Rather than providing a down payment, the margin required to buy or sell a futures contract is solely a deposit of good faith money that can be drawn on by your brokerage firm to cover losses that you may incur in the course of futures trading. It is much like money held in an escrow account. Minimum margin requirements for a particular futures contract at a particular time are set by the exchange on which the contract is traded.

They are typically about five percent of the current value of the futures contract. Exchanges continuously monitor market conditions and risks and, as necessary, raise or reduce their margin requirements. Individual brokerage firms may require higher margin amounts from their customers than the exchange-set minimums.

There are two margin-related terms you should know: Initial margin and maintenance margin. Initial margin sometimes called original margin is the sum of money that the customer must deposit with the brokerage firm for each futures contract to be bought or sold.

On any day that profits accrue on your open positions, the profits will be added to the balance in your margin account. On any day losses accrue, the losses will be deducted from the balance in your margin account. If and when the funds remaining available in your margin account are reduced by losses to below a certain level--known as the maintenance margin requirement--your broker will require that you deposit additional funds to bring the account back to the level of the initial margin.

Or, you may also be asked for additional margin if the exchange or your brokerage firm raises its margin requirements. Requests for additional margin are known as margin calls. Before trading in futures contracts, be sure you understand the brokerage firm's Margin Agreement and know how and when the firm expects margin calls to be met. Some firms may require only that you mail a personal check. Others may insist you wire transfer funds from your bank or provide same-day or next-day delivery of a certified or cashier's check.

If margin calls are not met in the prescribed time and form, the firm can protect itself by liquidating your open positions at the available market price possibly resulting in an unsecured loss for which you would be liable. Where does my money go when I open an account? The cornerstone of the U. According to strict regulations that are aggressively enforced by the CFTC and NFA, futures brokerage companies are required to maintain customer funds in bank accounts that are totally separate from their own bank accounts.

By law, funds deposited by customers may never, under any circumstances, be commingled with the brokerage company's own funds. Your trading funds will always be carefully and securely held in a "customer segregated funds account. What is a futures exchange? A futures exchange, legally known in the U. Also the activity in stock options is really low. There is no preset strategy to trade on expiry day, all you have to be careful is about not letting your in the money options expire you rather sell it on the exchange rather than holding it till the close of trading on the expiry day.

The reason for this is because the STT on expired options which are in the money goes up significantly. How can I calculate it? IV of an option contract is the value of volatility of the underlying instrument. Most trading platforms have an in built tool to calculate IV, this is typically using the Black Scholes model.

Risks associated are the same, since you are trading with leverage, i. How can I make profits on results day. A lot of benchmark stocks will be announcing their results starting october As mentioned in Anil's query earlier, buying both calls and puts is the best bet when expecting volatility in the markets. What makes more money? What are the risks attached? But leverage is a double edged sword, so the risk also goes up quite a bit. But how do they help me make profits? What are the risks associated with such strategies?

Straddles and strangles are option strategies that you can take when instead of direction of the markets, you are betting on the volatility. Safer than naked options trading because your risk is hedged.

Which are the best books to read? The payment of this premium grants the options buyer the privilege to not buy the asset on a future date if it becomes less attractive. Should the options contract holder choose not to buy the asset, the premium paid is the amount he stands to lose. A futures contract is executed on the date agreed upon in the contract. On this date, the buyer purchases the underlying asset.

Meanwhile, the buyer in an options contract can execute the contract anytime before the date of expiry.

So, you are free to buy the asset whenever you feel the conditions are right. The trade in futures takes place on the stock exchange. The options trade takes place both on and off the exchanges.

Types of assets covered:. Learn about the different types of options contracts. By now, you have studied all the important parts of the derivatives market. You know what are derivatives contracts, the different types of derivatives contracts, futures and options, call and put contracts, and how to trade these. It is time to wrap up this section and move on to the next—mutual funds. Mon to Fri — 8. Existing customers can send in their grievances to service. No need to issue cheques by investors while subscribing to IPO.

Example of Call Options Trading:

Mastering Options Strategies PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE PERFORMANCE. 3 Why You Need This Workbook Learning the basics of options involves three steps: 1. Understand the rights and obligations of long and short ing or trading, you must learn a two-step thinking process. After identifying a goal. BASICS OF EQUITY DERIVATIVES Futures and Options 18 - 33 4. Trading, Clearing and Settlement 34 - 62 If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two. A Trader’s Guide to Futures The first global electronic trading system for futures and options has evolved to become the world’s premier marketplace for derivatives trading. With continual enhancements, the For example, if you have $, and you want to .




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Beginner's Guide To Trading Futures: Evaluating Futures Beginner's Guide To Trading Futures: Conclusion You can only learn so much from reading books and watching trading videos; investing and. For example on January Derivatives Trading 5 Out-of-the-money-option (OTM) - An out-of- the-money Option is an option that would lead to negative cash flow if it were exercised Derivatives Trading futures contracts for the trading day and the final settlement price shall be the. 26 Long Hedges Along hedge isonewherealongpositionistakenonafuturescontract. Itis typicallyappropriateforahedgertousewhenanassetisexpectedtobebought.




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