Winning Edge Trading: Successful and Profitable Short- and Long-Term Trading Systems and Strategies

CHAPTER 6

The Futures Market: Financial and Physical Commodities

Futures markets are part of a derivative family, another type of financial asset that provides potential opportunities for trading. Trading the futures market is an effective way to hedge your equity position or just speculate for profit.

In the stock market, you trade stock; in the futures market, you trade futures contracts. A futures contract is a standardized contract traded on a futures exchange. It calls for the delivery of a commodity, either physical or financial, at a specified delivery date or maturity, for a specified price. In other words, a futures contract lists contractual obligations that stipulate delivery of a commodity at a certain date and price in the future. The futures price is called the settlement price; the futures date is called the delivery or final settlement date.

For example, one futures contract for an agricultural commodity like wheat would specify No. 1 soft red wheat or No. 2 hard winter wheat. The place and date of delivery to warehouses that have been preapproved by exchanges are denoted. The delivery for financial futures is made by wire transfer; in the case of index futures, delivery is done by a cash settlement procedure. As a trader, you buy or sell a futures contract with the intention that any time before the delivery or expiration date, you could sell or buy back your contract for a profit.

CHARACTERISTICS OF THE FUTURES MARKETS

Futures markets offer a great opportunity ...