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How to Subscribe this feed? Download any online RSS reader of your choice. Stock Futures. What are Stock Futures? So, one needs to understand the mechanism and risks involved before entering the futures market. Here are some terms that can help you. Its major determinants are demand and supply, because of which it keeps changing, and can be either positive or negative.
If the demand is stronger than supply, the spot price will rise relative to the futures price, which, in turn, will strengthen the basis. On the other hand, if the supply is higher, the spot price will fall and the basis will weaken. The basis tends to reduce as the futures contract approaches its date of expiration. A mathematical model is used to price futures, which takes into account the current spot price , the risk-free rate of return , time to maturity, storage costs, dividends, dividend yields, and convenience yields.
Contracts are standardized. The CFTC is a federal agency created by Congress in to ensure the integrity of futures market pricing, including preventing abusive trading practices, fraud, and regulating brokerage firms engaged in futures trading.
Retail traders and portfolio managers are not interested in delivering or receiving the underlying asset. A retail trader has little need to receive 1, barrels of oil, but they may be interested in capturing a profit on the price moves of oil. Futures contracts can be traded purely for profit, as long as the trade is closed before expiration. Many futures contracts expire on the third Friday of the month, but contracts do vary so check the contract specifications of any and all contracts before trading them.
This gives them control of 1, barrels of oil. Rather, the broker only requires an initial margin payment, typically of a few thousand dollars for each contract. The profit or loss of the position fluctuates in the account as the price of the futures contract moves. If the loss gets too big, the broker will ask the trader to deposit more money to cover the loss.
This is called maintenance margin. The final profit or loss of the trade is realized when the trade is closed. A futures contract gets its name from the fact that the buyer and seller of the contract are agreeing to a price today for some asset or security that is to be delivered in the future. These two types of derivatives contract function in much the same way, but the main difference is that futures are exchange-traded and have standardized contract specifications.
These exchanges are highly regulated and provide transparent contract and pricing data. Forwards, in contrast, trade over the counter OTC with terms and contract specifications customized by the two parties involved. Unless the contract position is closed out prior to its expiration, the short is obligated to make delivery to the long, who is obligated to take it.
Depending on the contract, the values exchanged can be settled in cash. Most often, the trader will simply pay or receive a cash settlement depending on whether the underlying asset increased or decreased during the investment holding period.
In some cases, however, futures contracts will require physical delivery. In this scenario, the investor holding the contract upon expiration would be responsible for storing the goods and would need to cover costs for material handling, physical storage, and insurance. Speculators can use futures contracts to bet on the future price of some asset or security. Hedgers use futures to lock in a price today to reduce market uncertainty between now and the time that good is to be delivered or received.
Arbitrageurs trade futures contracts in or across related markets, taking advantage of theoretical mispricings that may exist temporarily. Depending on your broker and your account status with that broker, you may be eligible to trade futures. You will require a margin account and be approved to do so. Qualified traders in the U. CME Group. Commodity Futures Trading Commission.
Energy Trading. Future Delivery Future delivery refers to the quantity of financial instrument or commodities contracted to be delivered at a future date. The strike prices of both the options are chosen just next to the at-the-money ATM Calls and Puts, i. This is a costly option, as in-the-money ITM options are considered, which are generally expensive. Description: This is a neutral option strategy, where if the price moves on either side, profit on one option will reduce the loss on the other option.
This strategy is opted when the trader is not sure of the direction but anticipates major price movement in the security, which increases the value of one of the options chosen and raises the chances of unlimited profit with limited risk.
The Long Guts strategy is somewhat like a Long Strangle with the only difference being that out-of-the-money options are considered in the latter case. Also the cost involved in Long Guts is less than that needed in a Long Strangle.
The total cost at the start of trade would be Rs So call option at Rs 1, expires worthless and Put option at Rs 1, gets executed. A trader opts for this strategy when he expects less volatility. The short guts strategy is somewhat like a short strangle, with the only difference being that out-of-the-money options are considered in the latter case.
Now Case 1: If the security price moves upwards to Rs on the expiry day, the Put option at Rs expires worthless and the Call option at Rs gets executed. Related Definitions. Browse Companies:. Mail this Definition. My Saved Definitions Sign in Sign up. Find this comment offensive? This will alert our moderators to take action Name Reason for reporting: Foul language Slanderous Inciting hatred against a certain community Others.
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