Futures Trading Instruments: What Can I Trade

Futures trading instruments are one common way we could use to speculate on the price changes of different assets without really owning them. With the help of this trading approach, investors can buy and sell contracts that bind them to buying or selling an asset at a certain price on a given future date. Many traders find futures trading to be an appealing alternative due to its flexibility and leverage. The many futures trading instruments that are available, the markets in which they are used, and the ramifications for traders will all be covered in this article. We will also cover frequently asked questions in order to give a thorough grasp of futures trading.

Types of Trading Instruments for Futures

Depending on what kind of underlying asset they represent, futures contracts can be divided into multiple categories. The main types of futures trading instruments are as follows:

1. Futures on Commodities:

Contracts based on tangible items, such metals, agricultural products, and energy resources, are known as commodity futures. With these contracts, traders can speculate on potential future price movements or function as a hedge against price variations.

• Crop contracts for rice, soybeans, wheat, corn, and other crops are referred to as agricultural futures. These contracts are frequently used by farmers and producers to fix product pricing prior to harvest.
• Metal Futures: This category includes contracts for industrial metals like copper and aluminum as well as precious metals like gold and silver. Metal futures are used by investors as a hedge against economic instability and inflation.
• Energy Futures: Crude oil, natural gas, and gasoline form the basis of these contracts. Because of its significance to the world economy and volatility, energy futures are highly traded.

2. Equities Prospects:

Contracts based on financial instruments or indices as opposed to tangible commodities are known as financial futures. With the help of these contracts, traders can make predictions about the future worth of bonds, equities, and interest rates.

• Futures contracts based on stock market indices, like the NASDAQ, S&P 500, and Dow Jones Industrial Average, are called stock index futures. Index futures allow traders to purchase specific stocks without sacrificing exposure to the broader market.
• Interest Rate Futures: These are contracts that are based on interest rates; examples of these include Eurodollars and US Treasury bonds. With these futures, traders can speculate on potential changes in interest rates or act as a hedge against them.
• Currency Futures: Based on currency pairs, these contracts let traders make predictions about changes in exchange rates. Forex traders frequently employ currency futures as a hedge against foreign exchange risk.

3. Futures Options: 

With futures options, traders have the option—but not the duty—to purchase or sell a futures contract at a given price before the contract’s expiration date. This tool gives traders who want to control risk or make predictions about market movements more options.

• Call Options: At a predetermined strike price, the holder of a call option has the opportunity to purchase a futures contract. When traders believe the price of the underlying asset will increase, they buy call options.
• Put Options: The right to sell a futures contract at a predetermined strike price is granted to the holder of a put option. When they anticipate a decline in the value of the underlying asset, traders purchase put options.

4. Spread Futures Buying and selling two linked futures contracts at the same time is known as spread futures. Instead of capitalizing on the absolute price movement of a single contract, this method enables traders to profit from the difference in price between the two contracts.

• Inter-Commodity Spreads: These are trades involving two unrelated but distinct commodities. For example, you could buy futures on crude oil and simultaneously sell futures on gasoline.
• Intra-Commodity Spreads: These let traders profit from variations in supply and demand or seasonal price swings by allowing them to trade different delivery months of the same commodity.

Advantages of Trading Futures

1. Leverage: 

Using very little cash, traders can control enormous positions through futures trading. Although this leverage might raise income, there is also a greater chance of losing money.

Liquidity: A lot of futures markets are quite liquid, allowing traders to enter and exit positions with ease and without having a big effect on prices. For trading to be successful, there must be liquidity.

2. Opportunities for Hedging: 

Producers and consumers can protect themselves against changes in the value of the underlying assets by using futures contracts. This can lower risk and stabilize cash flows.

3. Diverse Trading Options: 

Traders can take advantage of various market conditions and diversify their portfolios by choosing from a wide range of futures contracts.

Risks Associated with Trading Futures 

1. Market Volatility: 

Price variations can occur quickly on futures markets, which can be very volatile. Although this volatility might present possibilities, if trades are not managed effectively, it can also lead to large losses.

2. Leverage Risk: 

Leverage has the potential to increase gains while also increasing losses. When utilizing leverage, traders need to exercise caution and make sure they have a sound risk management plan in place.

3. Complexity: 

Trading futures may be quite complicated, requiring a thorough comprehension of trading tactics, contract details, and market dynamics. It could be difficult for novice traders to get about in this environment.

4. Margin Calls: 

Trading futures necessitates keeping a margin account open. Traders may receive a margin call, ordering them to cancel positions or deposit more money, if losses cause the account balance to drop below the required margin level.

Summarily,

A wide variety of instruments are available in futures trading, enabling traders to make predictions about market movements and manage risks. Traders can find chances in a variety of marketplaces and asset classes thanks to the availability of numerous types of futures contracts. But it’s crucial to comprehend the dangers associated with trading futures, such as leverage, market volatility, and instrument complexity.

Traders can successfully traverse the futures market by creating a sound trading plan, putting good risk management tactics into practice, and keeping up to date on market conditions. Reaching your financial objectives depends on your ability to comprehend the various futures trading products and their ramifications, regardless of experience level.

Frequently Asked Questions (FAQs)

1. What are contracts for futures?

• Standardized agreements to purchase or sell an underlying asset at a fixed price on a given future date are known as futures contracts. They might be based on indices, financial instruments, or commodities and are traded on futures exchanges.

2. What kinds of assets are available for trading with futures?

• Futures trading allows you to trade a wide range of assets, such as metals, currencies, stock indexes, energy resources, and agricultural items.

3. How can I begin trading futures?

• A trading account must be opened with a brokerage that provides futures trading in order to begin trading futures. In addition, you will have to create a trading plan that incorporates risk management techniques and deposit the necessary margin.

4. How do futures and options differ from one another?

• A futures contract requires both the seller and the buyer to sell the underlying item at a predetermined price at a later time. Conversely, an option grants its holder the right—but not the responsibility—to purchase or sell the underlying asset at a given price prior to a predetermined expiration date.

5. What does margin mean when trading futures?

• The sum of money needed to start and keep a futures position is known as the margin in futures trading. It serves as a deposit for security against any losses. A minimum margin requirement must be maintained by traders in their accounts.

6. Is it possible to lose more money trading futures than I first invested?

• It is possible to lose more than your initial investment while trading futures because of the leverage involved. In order to reduce this risk, traders need to put good risk management techniques into place.

7. What is meant by a margin call?

• A margin call happens when a trader’s margin account balance drops below the minimum amount needed for maintenance margin. In order to replenish the account to the necessary amount, the broker will ask the trader to make further deposits or liquidate positions.

8. What is the method of settlement for futures contracts—cash or physical delivery?

• A futures contract can be settled in one of two ways: physically delivering the underlying asset when the contract expires, or settling it with cash settlement, which involves paying the difference between the contract price and the market price in cash.

9. What are the futures markets’ trading hours?

• Futures markets usually run for almost twenty-four hours a day, five days a week, giving traders the opportunity to react to news and events in the world market as they happen.