What are Futures?

Futures contracts are forward contracts, meaning they represent a pledge to make a certain transaction at a future date.

Futures markets have been described as continuous auction markets and as clearing houses for the latest information about supply and demand. They are worldwide meeting places of buyers and sellers of an ever-expanding list of products that includes

  • financial instruments such as  bonds, stock indexes, and foreign currencies
  • traditional agricultural commodities
  • metals
  • petroleum products

Commercial hedgers use futures to protect the downside of their portfolios.  As well, other futures market participants are speculators and yet others individual traders.  By buying or selling, depending on which direction they expect prices to move, they hope to profit from the very price changes that hedgers seek to avoid.  The interaction of hedgers and speculators, each pursuing their own goals, helps to provide active, liquid, and competitive markets.

 

Leverage:  return & risk

Futures should only be traded by very experienced traders who fully understand the risks of leverage.   If you speculate in futures contracts and the price moves in the direction you anticipated, high leverage can yield large profits in relation to your initial margin deposit.  But if prices moves against you, high leverage can produce large losses in relation to your initial margin deposit.     Due to low margins and the power of leverage, five percent stock price decline could potentially wipe out 100 percent of your investment in futures contracts.  Leverage is a double-edged sword. 

 

Easy start-up alternatives for trading futures

 Eminis are mini contracts and allow you to experience trading futures with less capital required.

 

Volatility Index

The volatility index, often called the “fear index”, tracks futures trading to determine overall levels of financial market turmoil.  The higher the figure, the more volatile, or jumpy in price movements and unpredictable the swings in price of the market.  Volatility in secure times, as in 1993-1996 was low and flat, measuring around 10 on the Volatility Index.  This increased to 25 at the time of the dot-com crash in 2000.  A measure of 20 was recorded following September 11, 2001 attacks and 35 for the Gulf War times of uncertainty in 2002-2003.   2004-2007 returned to the low levels recorded at a 10 on the VIX.  A spike in the recording has occurred for 2008 with the Volatility Index reaching it’s highest point on record at a level of 60 in October.