|
The Basics Of Options
Trading
Futures Trading Opportunities
Futures trading offers tremendous opportunities for
investors with the capital to risk. Futures speculators
invest in commodity futures in the same way others invest
in common stocks, bonds, and real estate. The primary
purpose of futures markets is the same as it has been
for the last century and a half to provide an efficient
and effective mechanism for the management of price
risks. Futures traders accept price risks from producers
and users with the idea of making substantial profits.
After careful analysis of market factors, the speculator
invests risk capital to take advantage of price fluctuations.
Futures trading is not suitable for everyone and there
is a risk of loss. A futures trader can potentially
lose
more than his initial investment.
What is a Futures Contract?
A commodity FUTURES CONTRACT is a firm commitment to
deliver or receive a specific quantity and quality of
a commodity during a designated month at a price determined
by open auction on a futures exchange. For example,
someone buying an April Gold contract at $345 an ounce
is obligated to accept delivery of 100 ounces of gold
during the month of April at a price of $345 an ounce.
Someone selling an April Gold contract would be obligated
to deliver the same quantity and quality of gold at
$345 an ounce.
What are the Mechanics of a Futures Trade?
As a buyer or seller of futures con tracts, you must
make an initial "good faith" deposit (margin).
Since contracts may be closed (liquidated) at any time
prior to the "settlement" date, every futures
position in your account is marked to the market (its
value calculated at the close of each trading day) and
profits/ losses are credited to/debited against your
account. Any profits over the margin requirement may
be withdrawn or used for other futures contracts.
Futures traders exercise substantial leverage by utilizing
a performance bond or MARGIN to control a futures contract.
Margin is money deposited by both the buyer and the
seller to assure the integrity of the contract. Minimum
mar gins are set by the Exchange and are usually about
10% of the total value of the contract. Details concerning
customer margin requirements can be obtained from a
broker. In this way investors realize full price movements
without investing the full amount of capital which each
contract represents.
However, because futures transactions are leveraged,
a relatively small market movement will have a proportionately
larger impact on the funds you have deposited. This
may work against you as well as for you. You may sustain
a total loss of initial margin funds and any additional
funds deposited to maintain your position and you may
be called upon to pay substantial additional funds on
short notice to maintain your position.
A futures margin deposit is not the same as margin
on stock purchases. Both margins secure your purchases
or sales, but they differ in many ways. Stock mar market
margins are a form of down payment for the purchases
of an asset. A futures margin is more of a performance
pledge, ensuring that obligations will be honored Since
a futures deposit isn't an extension of credit (like
a stock margin is), you may earn interest rather than
pay it. Moreover, while a stock margin is typically
50% of the value of the purchased assets, a futures
margin generally ranges from 50%of the contract value
Making a Futures Trade
Futures contracts are traded through Futures Commission
Merchants (FCMs) or commodity brokers. These individuals
are licensed through the Commodity Futures Trading Commission
(CFTC), a regulatory agency of the fed federal government.
When you have satisfied the financial requirements
set by the brokerage firm, a futures trading account
will be opened in your name. Through your broker you
are then able to make a commodity futures trade. Pacific
Rim Asset Management, Inc. (PRAM), through Vision L.P.,
can make trades for clients on all major commodity exchanges.
Commodity brokers will charge a commission for executing
your trade. The commission constitutes the only major
cost of buying and selling a con tract. Managed commodity
accounts may also be charged management fees and/or
percent of profit fees. Our brokers can supply you with
our commission schedule .
At the end of each trading session, all trades are
checked and balanced with the Clearing House, which
becomes the guarantor of all trades. In effect, the
Clearing House becomes the buyer for every seller and
the seller for every buyer. Therefore, the Clearing
House insures both sides of every futures transaction.
Price Risk Management
Downward or upward shifts in the demand or supply of
a commodity can result in PRICE VOLATILITY. Price volatility
creates financial risk for users and suppliers of a
commodity. Anyone whose business depends on a volatile
commodity has a real need to manage price risk in order
to insure continued profitability.
Standardized contracts for the delivery of a commodity
are exchanged (traded) in the trading pit. The price
of contracts is determined through competitive bids
and offers, a process called OPEN OUTCRY. The purchase
of futures contracts offsets the obligations to deliver
the actual commodity by later selling a contract for
delivery in the same month. The vast majority of futures
contract obligations are met by taking such offsetting
positions.
Offsetting Contracts
In practice, only a small percentage of futures contracts
traded are actually held to delivery. Maturing futures
contracts expire on specific dates during the contract
month. Your broker can supply you with expiration dates.
At any time before the month the contract matures, the
trader may close out his obligation through an opposite
of offsetting trade. By offsetting a futures contract,
the trader cancels any obligation he has to take delivery
of the underlying commodity.
For example, the buyer of an April Gold contract can
sell that contract before April. The difference between
the price when the trade was initiated and the price
when it was offset is the gain or loss on the trade.
Who Uses Commodity Futures? There are two reasons to
use commodity futures contracts:
1. To hedge a price risk, and 2. To speculate in the
changing price.
A HEDGER is someone who owns or plans to purchase
an inventory of a commodity and wishes to reduce risk
associated with this ownership. Hedgers make their purchases
or sales solely for the purpose of establishing a known
price level in advance for something they later intend
to buy or sell in the cash market.
They do this by taking an equal and opposite position
in the futures market than they have in the cash market.
As the price of the commodity fluctuates, the hedger
is protected because gains in one market are offset
by losses in the other market, regardless of which direction
the price moves. Hedgers willingly give up the opportunity
to benefit from favorable price changes in order to
achieve protection against unfavorable price changes.
SPECULATORS, on the other hand, are willing to accept
the risk the hedger wishes to relinquish. Speculators
take positions on their expectations of future price
movement often with no intention of mailing or taking
delivery of the commodity. They buy when they anticipate
rising prices and sell when they anticipate declining
prices. The speculator provides a very important function
in the futures market because with out him, the market
would not be liquid and the price protection sought
by the hedger would be very costly.
How is P.R.A.M. Regulated and Licensed?
All futures industry related operations and personnel
are strictly regulated and licensed by the CFTC, a federal
agency operating at the direction of Congress. This
agency is analogous to the Securities & Exchange
Commission (SEC) that regulates stock exchanges and
personnel.
The CFTC has transferred many of its regulatory powers
to the NFA. The NFA has been designated as a "registered
futures association" under the pro visions of the
Commodity Futures Trading Commission Act of 1974. The
NFA officially began operations on October 1, 1982.
The primary purpose of the NFA is to ensure, through
self regulation, high standards of professional conduct
and financial responsibility on the part of the individuals
and organizations that are its members: Futures Commission
Merchants, Introducing Brokers, Commodity Trading Advisors,
Commodity Pool Operators, and Associated Persons of
any of the foregoing. In connection with its regulatory
responsibilities, the NFA conducts periodic audits of
its members' financial and other records, monitors sales
practices and provides a mechanism for the arbitration
of futures related disputes between NFA members and
the investing public. Information regarding these activities
can be obtained by writing or phoning the NFA.
How Can an Investor Determine That P.R.A.M. is Properly
Registered With the CFTC and the NFA?
Anyone sending their money to an investment company
should know that the firm they are going to do business
with is legitimate and is properly registered and licensed.
To check our registration, or any other commodity futures
company or personnel, you may call or write to: 1. National
Futures Association 200 West Madison Street Chicago,
IL 60606 (312) 7811300 (800) 6213570 2. Commodity Futures
Trading Commission 2033 K Street Northwest Washington,
D.C. 20581 (202) 254-8630. PRAM is registered with these
regulatory agencies as an Introducing Broker. Futures
trading may not be suitable for everyone. The risk of
loss can be substantial. Pacific Rim Asset Management,
Inc. 5410 SW Macadam, Suite 240 Portland, Oregon 9720
1 (503) 2410107 (800) 4433684
|
