Futures market and its fundamentals
Futures market
What is a Future Market?
A Futures market is a financial market in which a trader is offered a contract to buy or sell an asset. You can buy and sell an asset at an agreed-upon date in future. It gives you the right to buy or sell assets in the futures market, but there is no obligation. Stocks can be ETF, Stock, Cryptocurrency, Commodities, etc. There are numerous financial players in the futures market like investors, speculators and companies who want physical delivery of commodities to sell it.
Investors can trade in index futures contracts, and it offers a wide range of assets. You can buy and resell future contracts at any time. The futures market is open till the fulfilment date.
More about Futures Market:
Future contracts help you buy an asset at a specific price and avoid volatility in the futures market, and the day of fulfilment is also known as the expiry date. It is common to trade commodities in the futures market. For example, if buyers agree to buy natural gas in October 2021 and the seller agrees to sell natural gas in October. The exchange will happen at an agreed-upon price. If there is no exchange with other buyers and sellers, the exchange will occur like it was supposed to happen.
The symbol in futures market contracts
Futures contracts trade on futures exchanges like Chicago Mercantile Exchange (CME) or Intercontinental Exchange (ICE). Here are all the contracts that trade in Chicago Mercantile Exchange (CME):
E-mini Index Future
Euro to US Dollar(6E) future
British Pound to US Dollar(6B) future
500 troy ounces silver(SI) future
5000 troy ounces gold(GC) future
1000 barrels crude oil(CL) future
Letter or number comes after the contract symbol. The letter represents the month of expiry for the contract, and the number represents the year of future contract expiry.
How does the future market work?
Future contract prices are always in motion. Tick is the slightest price fluctuation of a futures contract at any particular point in time. Tick size depends on the futures contract you are trading. Each tick represents a monetary gain or loss to the future contract holders. The worth of each tick is called the tick value. Tick value varies according to the contract. You should read future contract specifications to know the tick size and value. Tick size and value is published on the exchange in which the futures contract is traded.
Future day trading:
Future trading is done in commodities generally, but it is also an important market for long term speculators and day traders. The day traders goal is to make money from the fluctuations in the futures market. Traders don't want physical possessions or assets to sell it. Instead, day traders make money from cash settlement agreements.
Requirements for day trading future:
You need a broker to trade future's contracts. Brokers charge fees for trade. These charges are called commissions, and unlike Stock traders, Future day traders don't need 25000 dollars in their trading account. Instead, future day traders need sufficient day trade margin for the traded contracts. Some traders need a minimum balance that is more than the required day trading margin. Margins differ according to contracts and brokers. Your broker will tell you how much amount is required to open a futures account. Margin is the amount necessary to initiate the trade. Talk to your broker to know the minimum amount to trade. Sometimes you might trade with more than the minimum, which will help you accommodate the losing trades and the price fluctuations that occurred while holding the future contract. If you don't have the capital for future day trading, then you should reconsider your decision because the future market is highly volatile and risky.
Difference between future option and futures contracts:
One way to manage risk in the futures market is by purchasing future options rather than future contracts. Trade-in futures options execute when certain conditions are met. For example, if a trader buys crude oil for 50 dollars, it will sell at the strike price( 100 dollars). Currently, it's 70 dollars. Therefore, the trade will execute only at 100 dollars level. However, let's say the price of crude oil rises to 110 dollars. In that case, you buy crude oil at 100 dollars and sell it at 110 dollars to earn 10 dollar profit on each share. The difference between the futures contract and the future is :
In a future contract, there is an obligation to buy and sell at an agreed price at a specific date, but in options, you have an option to buy and sell, and there is no obligation.
You can buy and sell contracts repeatedly till the expiry without a premium, but if you want to buy and sell futures options repeatedly, then there is a premium that you have to pay.
In future contracts, there is a cash settlement or delivery of goods after the expiry of the contract, but in the future option, trade executes when the strike price is met before the expiry of the contract.
A future contract is riskier than the future option, and the future option is less risky than the futures contract.
Conclusion:
A futures contract means a contract for purchasing and selling an asset at an agreed-upon price on a particular date. You can buy and sell futures contracts repeatedly till the expiry date, and after expiry, there will be a cash settlement or physical delivery of goods. Future contracts help supply actors to hedge against the change in the market price of goods. Long term investors and day traders can make money through these fluctuations. Day traders earn a huge profit from futures trading, but there is a considerable risk involved.
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