Buying (Going Long) Tin Futures to Profit from a Rise in Tin Prices

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

Futures

What Are Futures?

Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.

Underlying assets include physical commodities or other financial instruments. Futures contracts detail the quantity of the underlying asset and are standardized to facilitate trading on a futures exchange. Futures can be used for hedging or trade speculation.

Key Takeaways

  • Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset and have a predetermined future date and price.
  • A futures contract allows an investor to speculate on the direction of a security, commodity, or a financial instrument.
  • Futures are used to hedge the price movement of the underlying asset to help prevent losses from unfavorable price changes.

Futures Explained

Futures—also called futures contracts—allow traders to lock in a price of the underlying asset or commodity. These contracts have expirations dates and set prices that are known up front. Futures are identified by their expiration month. For example, a December gold futures contract expires in December. The term futures tend to represent the overall market. However, there are many types of futures contracts available for trading including:

  • Commodity futures such as in crude oil, natural gas, corn, and wheat
  • Stock index futures such as the S&P 500 Index
  • Currency futures including those for the euro and the British pound
  • Precious metal futures for gold and silver
  • U.S. Treasury futures for bonds and other products

It’s important to note the distinction between options and futures. Options contracts give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of the contract.

Investors can use futures contracts to speculate on the direction in the price of an underlying asset

Companies can hedge the price of their raw materials or products they sell to protect from adverse price movements

Futures contracts may only require a deposit of a fraction of the contract amount with a broker

Investors have a risk that they can lose more than the initial margin amount since futures use leverage

Investing in a futures contract might cause a company that hedged to miss out on favorable price movements

Margin can be a double-edged sword meaning gains are amplified but so too are losses

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

Using Futures

The futures markets typically use high leverage. Leverage means that the trader does not need to put up 100% of the contract’s value amount when entering into a trade. Instead, the broker would require an initial margin amount, which consists of a fraction of the total contract value. The amount held by the broker can vary depending on the size of the contract, the creditworthiness of the investor, and the broker’s terms and conditions.

The exchange where the future trades will determine if the contract is for physical delivery or if it can be cash settled. A corporation may enter into a physical delivery contract to lock in—hedge—the price of a commodity they need for production. However, most futures contracts are from traders who speculate on the trade. These contracts are closed out or netted—the difference in the original trade and closing trade price—and are cash settled.

Futures Speculation

A futures contract allows a trader to speculate on the direction of movement of a commodity’s price.

If a trader bought a futures contract and the price of the commodity rose and was trading above the original contract price at expiration, then they would have a profit. Before expiration, the buy trade—long position—would be offset or unwound with a sell trade for the same amount at the current price effectively closing the long position. The difference between the prices of the two contracts would be cash settled in the investor’s brokerage account, and no physical product will change hands. However, the trader could also lose if the commodity’s price was lower than the purchase price specified in the futures contract.

Speculators can also take a short or sell speculative position if they predict the price of the underlying asset will fall. If the price does decline, the trader will take an offsetting position to close the contract. Again, the net difference would be settled at the expiration of the contract. An investor would realize a gain if the underlying asset’s price was below the contract price and a loss if the current price was above the contract price.

It’s important to note that trading on margin allows for a much larger position than the amount held by the brokerage account. As a result, margin investing can amplify gains, but it can also magnify losses. Imagine a trader who has a $5,000 broker account balance and is in a trade for a $50,000 position in crude oil. Should the price of oil move against their trade, they can incur losses that far exceed the account’s $5,000 initial margin amount. In this case, the broker would make a margin call requiring additional funds be deposited to cover the market losses.

Futures Hedging

Futures can be used to hedge the price movement of the underlying asset. Here, the goal is to prevent losses from potentially unfavorable price changes rather than to speculate. Many companies that enter hedges are using—or in many cases producing—the underlying asset.

For example, a corn farmer can use futures to lock in a specific price for selling their corn crop. By doing so, they reduce their risk and guarantee they will receive the fixed price. If the price of corn decreased, the company would have a gain on the hedge to offset losses from selling the corn at the market. With such a gain and loss offsetting each other, the hedging effectively locks in an acceptable market price.

Finance English practice: Unit 35 — Derivatives

  • Complete the sentences below. Use the key words if necessary.
    • Options

    are financial products whose value depends on — or is derived from — another financial product, such as a stock, a stock market index, or interest rate payments. They can be used to manage the risks associated with securities, to protect against fluctuations in value, or to speculate. The main kinds of derivatives are and .

    Options are like futures (see Unit 34) except that they — give the possibility, but not the obligation — to buy or sell an asset in the future. If you it gives you the right to buy an asset for a specific price, either at any time before the option ends or on a specific future date. However, if you , it gives you the right to sell an asset at a specific price within a specified period or on a specific future date. Investors can buy put options to hedge against falls in the price of stocks.

    In-the-money and out-of-the-money

    Selling or option contracts involves the obligation either to deliver or to buy assets, if the buyer — chooses to make the trade. For this the seller (writer) receives a fee called a from the buyer. But writers of options do not expect them to be exercised. For example, if you expect the price of a stock to rise from 100 to 120, you can buy a call option giving the right to buy the stock at 110. If the stock price does not rise to 110, you will not exercise the option, and the seller of the option will gain the premium.

    Your option will be , as the stock is trading at below the or of 110, the price stated in the option. If, on the other hand, the stock price rises above 110, you are : you can exercise the option and you will gain the difference between the current market price and 110. If the market moves in an unexpected direction, the writers of options can lose enormous amounts of money.

    Warrants and swaps

    Some companies issue which, like options, give the right, but not the obligation, to buy stocks in the future at a particular price, probably higher than the current market price. They are usually issued along with bonds, but they can generally be detached from the bonds and traded separately. Unlike call options, which last three, six or nine months, warrants have long maturities of up to ten years.

    Please verify you are a human

    Access to this page has been denied because we believe you are using automation tools to browse the website.

    This may happen as a result of the following:

    • Javascript is disabled or blocked by an extension (ad blockers for example)
    • Your browser does not support cookies

    Please make sure that Javascript and cookies are enabled on your browser and that you are not blocking them from loading.

    Reference ID: #fa1df7b0-776d-11ea-9c56-53d458f54d8f

    Best Binary Options Brokers 2020:
    • Binarium
      Binarium

      Best Binary Options Broker!
      Perfect For Beginners!
      Free Trading Education!
      Free Demo Account!
      Sign-up Bonus:

    • Binomo
      Binomo

      Good Choice For Experienced Traders!

Like this post? Please share to your friends:
Best Binary Options Trading Guide For Beginners
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: