Understanding (and managing) the Risks of Futures Trading

Anyone buying or selling futures contracts should clearly understand that any given transaction may result in a loss. The loss may exceed not only the amount of the initial margin but also the entire amount deposited in the account or more. Moreover, while there are a number of steps that can be taken in an … Read more

The Mechanics of Buying and Writing Options

Commission Charges Before you decide to buy and/or write (sell) options, you should understand the other costs involved in the transaction—commissions and fees. Commission is the amount of money, per option purchased or written, that is paid to the brokerage firm for its services, including the execution of the order on the trading floor of … Read more

The Arithmetic of Option Premiums

At the time you purchase a particular option, its premium cost may be $1,000. A month or so later, the same option may be worth only $800 or $700 or $600. Or it could be worth $1,200 or $1,300 or $1,400. Since an option is something that most people buy with the intention of eventually … Read more

The Arithmetic of Futures Trading and Leverage

To say that gains and losses in futures trading are the result of price changes is an accurate explanation but by no means a complete explanation. Perhaps more so than in any other form of speculation or investment, price changes in futures trading are highly leveraged. An understanding of this leverage and how it can … Read more

Stop Orders

A stop order is an order, placed with your broker, to buy or sell a particular futures contract at the market price if and when the price reaches a specified level. Stop orders are often used by futures traders in an effort to limit the amount they might lose if the futures price moves against … Read more

Selling Options

At this point, you might well ask, who sells the options that option buyers purchase? The answer is that options are sold by other market participants known as option writers, or grantors. Their sole reason for writing options is to earn the premium paid by the option buyer. If the option expires without being exercised … Read more

Regulation of Futures Trading

Firms and individuals that conduct futures trading business with the public are subject to regulation by the CFTC and by NFA. All U.S. futures exchanges are regulated by the CFTC. NFA is a congressionally authorized self-regulatory organization subject to CFTC oversight. It exercises regulatory authority over Futures Commission Merchants, Introducing Brokers, Commodity Trading Advisors, Commodity … Read more

Position Limits

Although the average trader is unlikely to ever approach them, the exchanges and the CFTC establish limits on the maximum speculative position that any one person can have at one time in any one futures contract. The purpose is to prevent one buyer or seller from being able to exert undue influence on the price … Read more

Participating in Futures Trading

Now that you have an overview of what futures markets are, why they exist and how they work, the next step is to consider various ways in which you may be able to participate in futures trading. There are a number of alternatives and the only best alternative if you decide to participate at all … Read more