Introduction
Futures101 - 05 April 2006
Futures markets have been described as continuous auction markets and as clearing houses for the latest information about supply and demand. They are the meeting places of buyers and sellers of an ever-expanding list of commodities that today includes agricultural products, metals, ... read more

The Futures Market
Futures101 - 05 April 2006
The frantic shouting and signaling of bids and offers on the trading floor of a futures exchange undeniably convey an impression of chaos. The reality however, is that chaos is what futures markets replaced. Prior to the establishment of central grain markets in the mid-nineteenth century, the ... read more

The Market Participants
Futures101 - 05 April 2006
The details of hedging can be somewhat complex but the principle is simple. Hedgers are individuals and firms that make purchases and sales in the futures market solely for the purpose of establishing a known price level--weeks or months in advance--for something they later intend to buy or ... read more

What is a Futures Contract?
Futures101 - 05 April 2006
There are two types of futures contracts, those that provide for physical delivery of a particular commodity or item and those which call for a cash settlement. The month during which delivery or settlement is to occur is specified. Thus, a July futures contract is one ... read more

The Process of Price Discovery
Futures101 - 05 April 2006
Futures prices increase and decrease largely because of the myriad factors that influence buyers' and sellers' judgments about what a particular commodity will be worth at a given time in the future (anywhere from less than a month to more than two years). ... read more

After the Closing Bell
Futures101 - 05 April 2006
Once a closing bell signals the end of a day's trading, the exchange's clearing organization matches each purchase made that day with its corresponding sale and tallies each member firm's gains or losses based on that day's price changes--a massive undertaking considering that nearly two-thirds of a ... read more

The Arithmetic of Futures Trading
Futures101 - 05 April 2006
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, gains and losses in futures trading are highly leveraged. An understanding of leverage--and of ... read more

Trading
Futures101 - 05 April 2006
An absolute requisite for anyone considering trading in futures contracts--whether it's sugar or stock indexes, pork bellies or petroleum--is to clearly understand the concept of leverage as well as the amount of gain or loss that will result from any given change in the futures price of the ... read more

Margins
Futures101 - 05 April 2006
As is apparent from the preceding discussion, the arithmetic of leverage is the arithmetic of margins. An understanding of margins--and of the several different kinds of margin--is essential to an understanding of futures trading. ... read more

Basic Trading Strategies
Futures101 - 05 April 2006
Even if you should decide to participate in futures trading in a way that doesn't involve having to make day-to-day trading decisions (such as a managed account or commodity pool), it is nonetheless useful to understand the dollars and cents of how futures trading gains and losses are realized. And, of course, if ... read more

Participating in Futures Trading
Futures101 - 05 April 2006
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 ... read more

Deciding How to Participate
Futures101 - 05 April 2006
At the risk of oversimplification, choosing a method of participation is largely a matter of deciding how directly and extensively you, personally, want to be involved in making trading decisions and managing your account. Many futures traders prefer to do their own research and ... read more

Regulation of Futures Trading
Futures101 - 05 April 2006
Firms and individuals that conduct futures trading business with the public are subject to regulation by the CFTC and by NFA. All futures exchanges are also regulated by the CFTC. NFA is a congressionally authorized self-regulatory organization subject to CFTC ... read more

Establishing an Account
Futures101 - 05 April 2006
At the time you apply to establish a futures trading account, you can expect to be asked for certain information beyond simply your name, address and phone number. The requested information will generally include (but not necessarily be limited to) your income, net worth, what previous investment or futures trading experience you have ... read more

What to Look for in a Futures Contract?
Futures101 - 05 April 2006
Whatever type of investment you are considering--including but not limited to futures contracts--it makes sense to begin by obtaining as much information as possible about that particular investment. The more you know in advance, the less likely there will be surprises later on. Moreover, even ... read more

Options on Futures Contracts
Futures101 - 05 April 2006
What are known as put and call options are being traded on a growing number of futures contracts. The principal attraction of buying options is that they make it possible to speculate on increasing or decreasing futures prices with a known and limited risk. The most that the ... read more

Buying Call Options
Futures101 - 05 April 2006
The buyer of a call option acquires the right but not the obligation to purchase (go long) a particular futures contract at a specified price at any time during the life of the option. Each option specifies the futures contract which may be purchased (known as the "underlying" futures contract) and ... read more

Buying Put Options
Futures101 - 05 April 2006
Whereas a call option conveys the right to purchase (go long) a particular futures contract at a specified price, a put option conveys the right to sell (go short) a particular futures contract at a specified price. Put options can be purchased to profit from an anticipated price decrease. As in the case of call options, the most that ... read more

How Option Premiums are Determined
Futures101 - 05 April 2006
Option premiums are determined the same way futures prices are determined, through active competition between buyers and sellers. Three major variables influence the premium for a given option: * The option's exercise price, or, more specifically, the relationship between the exercise price and the ... read more

Selling Options
Futures101 - 05 April 2006
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 ... read more

In Closing
Futures101 - 05 April 2006
The foregoing is, at most, a brief and incomplete discussion of a complex topic. Options trading has its own vocabulary and its own arithmetic. If you wish to consider trading in options on futures contracts, you should discuss the possibility with your broker and read and thoroughly understand the Options ... read more