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Sunday, November 4, 2007

What are Futures?

Futures? What are 'Futures'?

This is going to take a while to explain, so I'm going to do so over the course of the next few days.

Futures contracts (not shares, contracts) generally deal with, and / or are called "Commodity Futures" or "Commodities". But futures, and commodities are a bit different. What are commodities? That's what I will discuss today.

Quite simply, commodities are things we use every day. Items that are consumed, en masse' and needed by our civilization. Food items such as Wheat. Sugar. Corn. Without them, we can't live. We can live without Ford. We can't live without food. They are items that make the world go around like Copper. Gold. Silver. Natural Gas. Unleaded Gasoline. The Commodity Futures that I trade Futures Options in are:

Sugar #11, Cocoa, Coffee, Cotton, Orange Juice, Copper, Gold, Silver, Feeder Cattle, Cattle, Hogs, Pork Bellies, Corn, Wheat, Soybeans, Soybean Oil, Soybean Meal, Oil, Unleaded Gasoline, and Natural Gas.

Those are commodities. From time to time, I deal with Futures Options on the major Indices; or stock markets. Such as Futures for the S&P 500, etc. But those are a bit different that just raw commodities. But I digress. Smile

These are all basic commodities that we all use. How is the price determined? Ah, this is something that you generally won't hear about when Politicians want to promise you lower food prices.

How is any price determined between a buyer and a seller? You haggle right? That's free market at work. Without the freedom to haggle for price? Then you're no longer in a free-market, and I won't even begin to go into the horrors that this can produce. One form of haggling is the bid-ask spread. This is basically a form and descendant of the auction (Asking for a price, and bidding on it), only it's a form of haggling for price. The purchaser will announce the highest price he is willing to pay. This is the bid. The Seller will announce the lowest price they are willing to accept. This is the "ask". In our modern day, various exchanges have developed where buyers and sellers (Farmers, Commercial Interests such as Kellog, etc.) meet to try to agree on a the price to a future contract of a given commodity via the bid-ask. So Hershey needs to buy so many tons of Cocoa for production of their candy? They do so at a Commodities Exchange. If you've ever seen Ferris Bueller's Day Off? Ferris, Sloan, and Cameron visit and sit in the spectator booths at one of Chicago's commodity exchanges. If you've ever seen the movie "Trading Spaces", then you've seen a movie that's about Commodities.

The above, is a very brief overlook as to the commodities that are traded on the Commodity Markets. Here is a wikipedia article that discusses Commodities a bit more, and one describing the Commodity Markets.

Ok. Now. How do you make money doing this? What are Futures? And why is it considered so risky? Why do I insist on using Futures Options for some commodity futures? I will discuss that tomorrow . . .

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This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The $500.00 challenge account is run for the education of other traders.

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