Last Updated on 3 November, 2022 by Samuelsson
Futures Market Guide For Trading and strategies. Are you looking for a financial market where you can hedge risk or speculate on price movement while easily using leverage to increase your exposure? The futures market is your best bet. It is traded as standardized contracts, and it has enough liquidity and volatility. Whether you are a merchant who wants physical delivery of the underlying assets or a speculator who just wants to benefit from price fluctuations, the futures market is for you.
Future markets and trading futures have a lot of benefits, such as low cost of execution and commissions, adequate liquidity, up to 10x leverage, enough volatility, ease of short-selling, better market efficiency, and a unique way to hedge against risk. Considering all these benefits, you may want to know what the futures market is.
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The futures market, also known as a futures exchange, is a marketplace where people can buy or sell futures contracts and options on futures contracts. A Futures contract is a standardized contract to buy or sell specific quantities of an asset at a presently agreed price, to be delivered at a specified time in the future.
There are many things you may want to know about the futures market, so keep reading to find out more about markets, the history, and how futures work.
Interestingly, there are many different futures assets you can trade. These are some of them:
Micro E-mini S&P 500 Index Futures (MES)
The Micro E-mini S&P 500 Index futures are a type of the S&P 500 futures that are worth 1/50 of the value of the standard S&P 500 futures contract or 1/10 of the value of the E-mini S&P 500 futures. This contract trades only on the Globex electronic trading platform.
You want to trade this contract because it offers capital efficiency. For instance, you only need $660 in maintenance margin when trading the Micro E-mini S&P 500 Index futures contract, unlike the $6,600 you would need when trading the E-mini S&P 500 Index futures. Moreover, with this contract, you can easily diversify your portfolio to other assets since the low margins afford you some spare cash to trade other assets. Since you don’t risk a lot trading the Micro E-mini S&P 500 Index futures, it’s easier to manage your emotions when trading.
5-Year T-Note Futures (ZF / FV)
The 5-T-Note futures is an interest rate futures contract in which the underlying asset is a Treasury note with the specified maturity period and interest rate. A qualifying T-Note for this contract is one whose original term to maturity is not more than five years and three months and the remaining term to maturity is not less than four years and two months as of the first day of the delivery month. The contract can be traded on the CME’s Globex electronic marketplace.
This contract allows you to speculate on the short-term direction of the Fed’s interest rates or even profit from arbitrage trading. You can also use the contract to hedge your exposure in the equity market, diversify your portfolio.
Micro E-mini Russell 2000 Index Futures (M2k)
The Micro E-mini Russell 2000 Index futures are a type of electronically traded Russell 2000 Index futures whose value is one-tenth of the E-mini Russell 2000 Index futures. The underlying asset is the Russell 2000 Index, and the contract is offered only on the CME’s Globex electronic trading platform.
With the Micro E-mini Russell 2000 Index futures, you can hedge your exposure in the U.S. stock market. The contract allows you to speculate on the direction of the index. Since it is less capital intensive, it makes it cheaper to build a diversified portfolio.
Micro E-mini Nasdaq 100 Futures
With the Nasdaq 100 index as their underlying asset, the Micro E-mini Nasdaq 100 futures is a type of electronically traded Nasdaq 100 futures whose value is one-tenth of the E-mini Nasdaq 100 futures. The contract is traded exclusively on the CME’s Globex electronic trading platform.
You can use the Micro E-mini Nasdaq 100 futures to hedge your exposure in technology stocks, as well as diversify your portfolio into the technology industry. If you just want to speculate, the contract offers you easy exposure to the Nasdaq futures market. With low margin and tick size, it’s easier to control your emotions.
E-mini Russell 2000 Index Futures (RTY)
Since its launch on the Chicago Mercantile Exchange Group’s marketplace, the E-mini Russell 2000 Index futures have gained tremendous popularity among traders. The contract is an electronically traded equity index futures that has the Russell 2000 Index as its underlying asset. It is worth a fraction of the standard contract.
You can use the Russell 2000 Index futures to gain exposure to the U.S. stock market without owning the individual company stocks. RTY is a diversified equity index derivative product, so it gives you an already diversified portfolio. Owing to its huge liquidity and adequate volatility, you can day trade the market as you like.
Euro Bund Futures
The Euro Bund futures are interest rate futures contracts in which the underlying asset is a notional long-term German federal government bond (Bundesanleihe). They are the most actively traded interest rate futures in the European Economic Area. As a result, they are considered the benchmark by which other long-term euro-denominated government debt instruments are measured.
The contract is a haven asset you can use to hedge your portfolio during an equity market crisis. You can use it for arbitrage trading or speculate on the direction of interest rates in the Eurozone. It can be a great product for portfolio diversification.
Nasdaq 100 E-mini Futures
The E-mini Nasdaq 100 futures are electronically traded Nasdaq futures that were launched in the 1990s to provide small traders with an alternative to the standard contract. The value of the E-mini Nasdaq 100 futures is one-fifth of the standard contract, and the trading volume has since surpassed that of the standard contracts.
You can use the E-mini Nasdaq 100 futures to hedge your exposure in technology stock since it has a heavy concentration of tech stocks. And you can also use the contract to diversify your portfolio into tech stocks even without owning any of those stocks.
Micro E-mini Dow Jones Futures
Introduced on May 6, 2019, on the Chicago Mercantile Exchange Globex platform, the Micro E-mini Dow Jones futures are a type of electronically traded Dow Jones Index futures that are worth one-tenth of the E-mini Dow Jones futures. They were created to offer small traders exposure to the Dow Jones Index futures at a much lower cost than the already existing e-mini futures contracts.
The low margin needed to trade this contract makes it easy for you to trade other assets at the same time. You can use the Micro E-mini Dow Jones futures to hedge your exposure in U.S. stocks, especially for blue-chip stocks. Given the adequate liquidity and volatility, the contract is good for speculative trading.
Dow Jones E-mini Futures
The E-mini Dow Jones futures are a type of the Dow Jones Index futures that is only traded electronically on the Globex electronic trading platform. They are very popular among equity index futures traders as they offer investors exposure to the U.S. stock market without really owning the stocks. They are the most efficient and cost-effective way to gain market exposure to the most-capitalized U.S. stocks.
The Dow Jones E-mini futures have good volatility and liquidity, which make them for speculation. You can also use them to hedge your exposure in blue-chip U.S. stocks. The contracts offer you a great way to own an already diversified stock portfolio.
Euro F.X. Futures
The euro is the underlying asset of the Euro F.X. future, so the contract pricing of this currency futures is based on the expected exchange rate of the euro against the U.S. dollar in the future. In other words, the Euro F.X. futures is an exchange-traded contract that represents an agreement to receive or deliver the specified amount of euros on a future date at an already agreed exchange rate. The contract size is €125,000.
You can trade the Euro F.X. futures to make money from price movements or to hedge against interest rate risks. The contract is also good for arbitrage trading.
E-mini S&P Mid-Cap 400 Futures
The E-mini S&P Mid-Cap 400 futures is one of the prominent E-mini equity index futures on the Chicago Mercantile Exchange electronic marketplace. The underlying asset is the S&P Mid-Cap 400 Index. The contract size is $100 x S&P Mid-Cap 400, while the tick size is $10.
With the E-mini S&P Mid-Cap 400 futures, you can gain exposure to a basket of mid-size U.S. stocks without owning the stocks. You can use the contract to diversify the portfolio or hedge your equity investments. You can also speculate on price movements without any hassle.
E-mini S&P 500 Futures (ES)
The E-mini S&P 500 futures are a type of the S&P 500 futures that is traded only on the Globex electronic trading platform and is worth one-fifth of the value of the standard S&P 500 futures contract. The underlying asset for the S&P futures is the S&P Index, but the contract is cash-settled. The contract size is $50 x S&P 500 Index, while the tick size and the point value are $12.5 and $50 respectively.
The E-mini S&P 500 futures provides you with a way to diversify their stock portfolio, as well as hedge your exposure in the U.S. stock market. It is a very active market for speculation.
Launched in the German futures market in 1990, the DAX futures are tradable contracts to receive or deliver the specified value of the DAX index on a future date at an already agreed price. The DAX futures contracts are standardized and traded on futures exchanges. The contract is mostly cash-settled.
The DAX Futures is known for adequate volatility and liquidity, which makes it a popular choice for speculation. It offers you exposure to the German stock market. You can also use it to hedge your equity market investments.
Japanese Yen Futures
The Japanese yen future is a financial derivative contract in which the underlying asset is the Japanese yen. The pricing of the Japanese yen futures is based on the expected exchange rate of the Japanese yen to the U.S. dollar on a future date. Like all other futures contracts, the Japanese yen futures are standardized and traded on the futures exchanges. This ensures that the trading activities are well regulated, unlike the spot forex market, where the broker can trade against the trader. One contract size is worth 12,500,000 Japanese yen, while the tick size is $6.25.
You may use the contract to hedge your exchange rate risk against the Japanese yen. The Japanese yen futures presents a liquid market for speculative trade.
Mexican Peso Futures
Backed by the Mexican peso as its underlying asset, the Mexican peso future is a tradable agreement to receive or deliver a specified amount of the currency on a future date at an already agreed exchange rate. The Mexican peso futures have pricing based on the Mexican peso’s expected future exchange rate to the U.S. dollar. The contract trades on the CME and its Globex electronic trading platform. One contract is worth 500,000 Mexican pesos, with the tick size being $5.
You can use the Mexican peso futures to hedge your exchange rate-exposed obligations in the Mexican market. The contract also provides you with the opportunity to speculate on the Mexican peso. In addition, if you love arbitrage trading, the contract is a great fit for it.
Nikkei 225 Futures
The Nikkei 225 futures is an equity index futures in which the underlying asset is the Nikkei 225 Index. It is a tradable contract to receive or deliver the specified value of the underlying index on a future date at an already agreed price, and the contract can be traded on the CME, JPX, and SGX.
You can use the contract to diversify your portfolios, as well as hedge your exposure in Japanese stocks. It also provides you with an opportunity to speculate on the Japanese stock market. There is also the opportunity for arbitrage trading.
Swiss Franc Futures
The Swiss franc future is a financial derivative product in which the underlying asset is the Swiss franc. It has a pricing system that is based on the expected exchange rate of the Swiss franc to the U.S. dollar in the future. The Swiss franc futures are standardized contracts that trade on the futures exchanges, and as such, it is highly regulated.
Being a futures contract, the Swiss franc futures is a leveraged instrument. So, you only need to deposit a portion of the contract’s total worth to be able to trade the contract. The Swiss franc is considered a safe-haven currency, so you use it to hedge your wealth during periods of global financial market crises. The market is also liquid and volatile enough for speculative trading.
Trading Strategy in Swiss Franc Futures
Australian Dollar Futures
This is a currency futures contract in which the underlying asset is the Australian dollar, and the pricing reflects the expected exchange rate of the Australian dollar to the U.S. dollar in the future. It is an exchange-traded currency contract that represents an agreement to receive or deliver a specified amount of Australian dollars on a future date at an already agreed exchange rate. It is offered on the CME and its Globex electronic trading platforms. One contract is worth 100,000 Australian dollars, with a tick size of $10. The last trading day is the second business day immediately before the third Wednesday of the contract month, which can be March, June, September, or December.
The Australian dollar futures offer you a way to hedge your exchange rate-exposed obligations in the Australian market. It also provides you with the opportunity to speculate on the Australian dollar and conduct arbitrage trading with ease.
Bitcoin futures are a type of futures where the underlying asset is Bitcoin. The prices of Bitcoin futures depend on spot Bitcoin prices and reflect the expected future value of Bitcoin. It is offered on the CFE, CME, and ICE. Bitcoin futures are standardized and traded on regulated futures exchanges, so the price discovery process is transparent, unlike the OTC-traded spot Bitcoin market.
If you’re a Bitcoin miner, Bitcoin futures offer you a way to hedge against price volatility. The contract also offers an opportunity for speculation and arbitrage trading.
Canadian Dollar Futures (CD)
The Canadian dollar futures is a tradable contract to receive or deliver the specified amount of Canadian dollars on a future date at an already agreed exchange rate. So, the underlying asset is the Canadian dollar, and the pricing is based on the expected future exchange rate of the Canadian dollar to the U.S. dollar. It trades on the CME and its Globex electronic trading platforms. One contract is worth 100,000 Canadian dollars.
If you are exposed to Canadian dollar exchange rate risks, you may use the Canadian dollar futures as a risk management tool. You can also use it for speculative trading or arbitrage trading.
U.S. Dollar Index Futures (DX)
The U.S. Dollar Index futures is a standardized futures contract whose value reflects the expected value of the U.S. Dollar Index in the future. The contract represents an agreement to make or take delivery of the currencies that make up the index — in their respective percentage weights — on a specified future date and at a predetermined rate. One contract is worth $1000 X Index value.
The U.S. Dollar Index futures is a great instrument for speculative trading and arbitrage trading. You can also use it to hedge your exchange rate risks in the component currencies.
British Pound Futures
The British pound futures is a futures contract whose underlying asset is the British pound, with its pricing based on the expected future exchange rate of the British pound to the U.S. dollar. It is a contract to receive or deliver the specified amount of GBP on a future date at an already agreed exchange rate. One contract is worth 62,500 British Pounds, and the tick size is $6.25.
The British pound futures is highly liquid and has adequate volatility, so it’s good for speculative trading. If you are an American resident invested in the British market, you can use it to hedge exchange rate risks. Similarly, if you’re a British resident invested in the US market, you can use it to hedge exchange rate risks too.
Crude Oil Futures (CL)
A crude oil futures contract is a standardized contract that trades on commodity exchanges. The value reflects the anticipated price of crude oil in the future. A crude oil futures contract is an agreement to make or take delivery of a specified quantity of crude oil on a specified future date at a predetermined price. CL is the most popular and most actively traded energy contract on the commodity market. Little wonder they are the global benchmark for the energy market. The contract is highly liquid and, at the same time, has the kind of volatility that attracts both traders and investors.
You can trade the CL contract just to benefit from price movements, but you can also use the contract to diversify your portfolio or hedge your exposure in certain energy stocks.
Eurodollar futures contracts are futures contracts whose values derive from the interest-yielding U.S. dollar deposits held outside of the U.S. So, the price of this contract moves in response to the interest rate offered on U.S. dollar deposits held in foreign banks, specifically London banks. The contract is a LIBOR-based derivative, so it reflects the London Interbank Offered Rate for a 3-month $1 million offshore deposit. The Eurodollar futures are actively traded on the CME and ICE electronic platforms.
You can use the Eurodollars futures for arbitrage trading, hedging, speculative trading, or portfolio diversification.
Natural Gas Futures (N.G.)
This is one of the most actively traded energy futures, after crude oil, but it is also known for its high price volatility. Natural gas futures are offered on many commodity exchanges, such as the ICE, NYMEX, and TOCOM. One contract is worth 10,000 million British thermal units (mmBtu), and the tick size is $10.
The high volatility in the Natural gas futures market makes it suitable for speculative trading, especially day trading. But you can also use it to diversify your portfolio and hedge inflation since commodities often increase in value when inflation hits hard on the economy. If you are a stakeholder in the energy sector, you can use it to manage price risks.
Heating Oil Futures
Heating oil futures are futures contracts traded on commodity exchanges whose underlying assets are heating oil, which is used for heating residential and office buildings. The contracts are traded on the Intercontinental Exchange (ICE) and the New York Mercantile Exchange (NYMEX) and can be traded even after the regular trading hours through their electronic trading platforms. Heating oil futures show significant seasonal variations — the prices of heating oil futures go up during the winter months and decline in the summer months.
You can use heating oil futures for speculative trading, diversifying your portfolio, or simply hedging against inflation. If you are a producer of heating oil or run a business that needs a huge supply of heating oil, you can also use heating oil futures to hedge price risks.
Orange Juice O.J. Futures
This is a futures contract whose underlying asset is orange juice, which can be frozen concentrated orange juice (FCOJ), reconstituted liquid juice, and not-from-concentrate (NFC) juice. While there are other forms of the commodity, frozen concentrated orange juice futures are the industry benchmark, and the contract is traded on the ICE. Owing to its nutritional importance and diverse uses, the orange juice futures contract is very popular among commodity traders worldwide.
If you are an orange farmer, a producer of FCOJ, or a maker of orange juices, you can use the orange juice futures market to secure a reasonable price for your products. Moreover, you can trade the contract to diversify your portfolio, hedge against inflation, or simply speculate on price movements.
This is a futures contract whose underlying asset is the physical silver metal. One contract is worth 5,000 troy ounces. Silver futures started trading on commodity exchanges as early as 1933. You can trade the contract on the CME Group, LME, MCX, and TOCOM. The contract is settled by physical delivery.
You can trade silver futures to diversify their portfolios, hedge inflation, or speculate on price movements. If you’re a silver producer and use silver in manufacturing processes, you can come to the silver futures market to hedge price fluctuations.
Gold futures are derivative financial instruments whose value depends on the overall value of gold. Trading in gold futures started on the Commodity Exchanges Inc. in 1974. The underlying commodity in the gold futures is the physical gold bars or ingots, and it is delivered at the expiration of the contract. One contract is worth 100 troy ounces of gold.
You can trade gold futures to hedge inflation, diversify your portfolio, or speculate on gold price movements. If you’re involved in gold production or your business uses gold, you can use gold futures to hedge future price changes.
This is a contract to receive or deliver a specified quantity of lead on a future date at an already agreed price. Lead futures contracts are offered on the London Metal Exchange (LME) and the Commodity Exchange Inc. (COMEX), which is a member of the Chicago Mercantile Exchange (CME) Group. The contract is quite popular, given the importance of lead in battery production and making protective shields in a radioactive environment. A contract of lead futures is worth 25 metric tons of lead.
There are many reasons to trade lead futures. You can trade it to speculate on price movements, hedge against inflation, or diversify your portfolio. If you are a producer or have a company that uses the product, you can use lead futures to protect your business from price fluctuations.
RBOB Gasoline Futures
This is a futures contract whose underlying asset is the Reformulated Blendstock for Oxygenate Blending (RBOB) gasoline, also known as petrol. Following the ban on MTBE-containing gasoline, the RBOB gasoline futures contract has become very popular among futures traders. A gasoline futures contract (RB) is equivalent to 42,000 gallons or 1,000 barrels of gasoline, and the price quotation is in U.S. dollars and cents per gallon. The minimum price fluctuation is 1/100 of a cent per gallon or $4.2 per contract. The RBOB gasoline futures can be traded on various commodity exchanges, including the ICE, CME, and TOCOM.
You can trade the RBOB gasoline futures contract for speculation or to diversify your portfolio. If you are a stakeholder in the industry, you can trade the contract to hedge price fluctuations.
30-Year Treasury Bond Futures
This is a futures contract in which the contract holder is obligated to buy or sell a qualified Treasury bond on a specified date at a presently agreed price. Introduced on the Chicago Board of Trade (CBOT) in 1977, the 30-year Treasury bond futures are the most traded Treasury bond contracts on the futures market. They serve as an important benchmark by which other long-term securities are measured. The 30-year Treasury bond is actively traded on the CBOT and CME Globex electronic platforms.
You can use the 30-year Treasury bond futures to speculate on the direction of interest rates or hedge your portfolios. The contract also presents an opportunity for arbitrage trading.
10-Year Treasury Bond Futures
The 10-year U.S. Treasury note futures contract (TY) is a futures product that has the 10-year Treasury note as its underlying asset. A Treasury note (T-note) is a U.S. debt instrument with a fixed interest rate and matures between one and ten years. It is traded on the Chicago Board of Trade (CBOT), which is a member of the Chicago Mercantile Exchange (CME) Group.
You can use this contract to hedge your investment against a medium-term economic crisis. You can also trade this contract to speculate on the direction of interest rates and profit from the fluctuations.
This is a futures contract whose underlying asset is the Cboe’s Volatility Index (VIX). The VIX is a real-time market estimate of the expected volatility in the stock market and is often considered the first barometer of equity market volatility. The VIX futures contract shows the market’s estimate of the value of the VIX Index on various expiration dates in the future. It trades on the Cboe Futures Exchange (CFE)’s all-electronic marketplace, but it can be quite volatile. One contract size is $1000 times the current value of the VIX, and the contract is cash settled.
You can trade VIX Futures to speculate on the anticipated volatility in the equity market. You may also use it to hedge your exposure in the equity market or simply trade it as a way to diversify your portfolio.
This is a futures contract on palladium. Trading palladium futures is the easiest and cheapest way to access the palladium market. One palladium futures contract (P.A.) is equivalent to 100 troy ounces of the commodity, and the price quotation is in U.S. dollars and cents per troy ounce. The minimum price fluctuation is 10 cents per troy ounce or $10.00 per contract. Palladium futures are traded on various commodity exchanges, including the TOCOM and the CME Group, and the contract is settled by physical delivery.
If you mine the metal or use it in your business, you may want to trade the palladium futures to hedge against future price fluctuations. As a retail trader, you may want to trade it to benefit from price changes, diversify your portfolio, or hedge against inflation.
Copper futures are among the most heavily traded on commodity exchanges. Copper futures contracts are offered on the London Metal Exchange, Multi Commodity Exchange, Shanghai Futures Exchange, Tokyo Commodity Exchange, and the Commodity Exchange Inc (COMEX). The contracts can be traded from any part of the world through the CME Globex electronic trading platform.
Trading copper futures is a perfect way to gain easy and cheap access to the copper market. You can trade copper futures to speculate on price changes, hedge inflation, or diversify your investment portfolios. If you are directly involved in the production or utilization of copper, you may want to use copper futures to hedge future price changes.
Platinum is a dense, silvery-white precious metal. Platinum futures is perfect for traders who are looking to get easy and cheap exposure to the platinum market. The contract is traded on various commodity exchanges, including the TOCOM and the CME Group. One platinum futures contract (P.L.) is equivalent to 50 troy ounces of the commodity, and the price quotation is in U.S. dollars and cents per troy ounce.
If you produce the commodity or use it in your business, you may want to trade platinum futures to hedge your business from future price fluctuations. But even as an investor or trader, you can trade platinum futures to diversify your portfolio, hedge against inflation, or just profit from price changes.
Here, the underlying asset is sugar. This contract is offered on the Intercontinental Exchange (ICE) and the New York Mercantile Exchange (NYMEX), which is a member of the Chicago Mercantile Exchange (CME) Group. The contracts can be traded from any part of the world through the CME Globex electronic trading platform. One sugar futures contract (S.B.) is equivalent to 112,000 pounds of sugar. The price quotation is in cents and hundredths of a cent per pound.
You may trade sugar futures to speculate on sugar prices, hedge against inflation, or diversify your investment portfolios. If you have a stake in the sugar industry, you may want to trade sugar futures to protect your business from future price changes.
The underlying asset in oat futures is oats. Oats futures are popular on the commodity market because the grain can be used to make a wide variety of products. The contract is offered on the Chicago Mercantile Exchange (CME) and can be traded from any part of the world through the Globex electronic trading platform. One oat futures contract is equivalent to 5,000 bushels of oats, and the price quotation is in cents per bushel.
There are many reasons to trade oat futures. You may want to speculate on its price movements, diversify your investment portfolio, or hedge your business against oats price fluctuations in the future.
Lumber Futures (L.B.)
Trading lumber futures (L.B.) is a simple way to participate in the lumber market. The CME (Chicago Mercantile Exchange) offers a contract on Random Length Lumber Futures, and it can be traded from any part of the world through the Globex electronic trading platform. A random length lumber futures contract is equivalent to 110,000 board feet (approximately 260 cubic meters) of lumber, and the pricing unit is in dollars per 1000 board feet.
If you have wood mills or produce lumber, you may use lumber futures to hedge against future price changes. As a trader or investor, you can trade the contract for speculative purposes or portfolio diversification.
Hard Red Winter Wheat (K.W.) Futures
The underlying asset for this futures product is the hard red winter (HRW) wheat, which is the largest of the U.S. wheat crops and the type mostly grown by Kansas farmers. Hard red winter wheat futures contracts are offered by the Kansas City Board of Trade (KCBT), which is now owned by the Chicago Mercantile Exchange (CME) Group, and it can be traded from any part of the world — both during and after regular market hours — via the CME Globex electronic trading platform. The contract is used as a benchmark for the international wheat market.
You can trade the Hard Red Winter wheat futures to speculate on price movements or diversify your portfolio. But if you’re a farmer, you may wish to use the futures contract to hedge your business against future price changes.
Feeder Cattle Futures
For this futures product, the underlying asset is Feeder cattle, which are calves that have reached a weight of about 600 to 800 pounds after weaning. They are steers and cows that are not needed for breeding purposes, so they are kept in a feedlot, where they are fattened with high-energy diets before slaughter. Feeder cattle futures contracts are actively traded because feeder cattle are necessary for the production of live cattle. The contracts are traded on the CME, and one contract has a value of 50 000 pounds with a tick size of $12.5.
Trading feeder cattle futures can become very profitable if you are a speculator. As an investor, you may use the contract to diversify your portfolio or hedge against inflation. If you are a cattle farmer, you may want to trade the contract to hedge against price changes in the future.
Lean Hog Futures
Lean hog futures are perfect for traders and hedgers who seek cheap and quick exposure to the lean hog market. Lean hog futures trade on the CME with a contract size of 40 000 pounds, with a tick size of $10. The lean hog futures market is offered on the CME and its Globex electronic platform.
Hog farmers may trade lean hog futures to secure a profitable price for their produce, while pork distributors and retailers may use the contracts to ensure a stable supply of pork. Even if you are not a farmer or distributor, you can trade the contract to speculate on the lean hog market or simply use it to diversify your portfolio.
Soybean Oil Futures
Soybean oil futures offer easy access to the soybean oil market. One soybean oil futures contract is equivalent to around 60,000 pounds of soybean oil. It can be traded on the CBOT and the Dalian Commodity Exchange.
You can trade the soybean oil futures contracts to profit from price changes, but you can also use it to hedge against inflation or diversify your investment portfolios. If you are involved in the production or distribution of soybean oil, you may want to use the futures contract to hedge against price changes in the future.
Trading cocoa futures is an easy and cheap way to gain access to the cocoa market. The cocoa futures contract is the world benchmark for the global cocoa market. The contract is traded on ICE and expires in the months of March, May, July, September, and December. One cocoa futures contract is equivalent to 10 metric tons of cocoa, and the tick size is $10.
Since it is an agricultural commodity, cocoa has intrinsic value, so it can be used to hedge against inflation. Cocoa futures provide an excellent opportunity for portfolio diversification. You can use the futures contract to speculate on cocoa prices.
Trading strategy: Patterns in Cocao Futures Trading Strategy
Soybean Meal Futures
The soybean meal futures contract is one of the most liquid and easy ways to access the soybean meal market. The contract can be traded on the Chicago Mercantile Exchange (CME) Group via its CME Globex electronic trading platform.
Trading the soybean meal futures contract can be beneficial. The market is volatile enough for speculative trading, and if your business requires soybean meal, you can use the futures contracts to ensure a stable supply of the commodity at a fair price. As an investor, you can use the contract to hedge against inflation or diversify your portfolios.
Trading strategy in Soy bean meal.
Coffee futures contracts are among the most actively traded soft commodities on the commodity exchanges. The contracts are traded on the ICE and the New York Mercantile Exchange (NYMEX), which is a member of the Chicago Mercantile Exchange (CME). You can trade them from any part of the world via the CME Globex electronic platform.
As world economies grow, especially the emerging economies in Asia, South America, and Africa, more people will use coffee to maintain alertness during working hours. The implication is that the demand for coffee will likely keep increasing, adding more liquidity in coffee futures contracts. Trading coffee futures contracts is the easiest way to play the coffee market. You can trade for speculative purposes or to diversify your portfolio or hedge against inflation.
Live Cattle Futures
This is a futures contract that tracks the price of live cattle. It trades on the CME and is one of the best ways to gain access to the live cattle market. Live cattle futures contracts are widely sold on commodity exchanges in the U.S. and Brazil. One contract is worth 40,000 pounds, which is around 18 metric tons, and the point value is $400.
You may trade live cattle futures to diversify a portion of your investment portfolio to commodities or hedge against inflation. The market is also volatile and liquid enough for speculative trading.
These are futures contracts that track the price of wheat. Wheat futures present the easiest way to trade wheat. The contracts are traded on the Tokyo Grain Exchange, Euronext, and the Chicago Board of Trade (CBOT), which is a member of the Chicago Mercantile Exchange (CME) Group. A wheat futures contract on the CBOT is equivalent to 5,000 bushels or about 136 metric tons.
The wheat futures market is easily accessible to retail traders, so you can use it to speculate on the price of wheat. Commodities like wheat offer you the chance to spread your investments across different asset classes, thereby reducing some systemic risk. As the global population increases, the need for food commodities such as wheat increases, pushing up the demand for the commodity.
Soybeans futures contracts are one of the most traded soft commodities in the world because the commodity can be used in so many ways. The Soybeans futures contract is traded on the CME and presents a perfect channel for traders or hedgers that seek exposure to the soybean market. One contract is worth 5,000 bushels of soybeans. You can trade the futures contract to diversify your investments to the commodity market or simply use it to hedge risk. If you are a speculative trader, you may trade to just profit from the price movements of the commodity since the market has enough volatility and liquidity.
For this futures product, the underlying asset is cotton, which has a lot of uses in clothing, vegetable oil, and livestock feeds. Cotton futures are great for traders or hedgers who want to gain exposure to the cotton market. The best way to trade cotton is through the futures contracts offered by the ICE and the CME Group.
There are several reasons to trade cotton futures. If you are a cotton farmer, you may want to use the futures contract to secure a reasonable price for your produce, and if you own a textile company, you may want to secure a contract that ensures a stable supply of raw materials at a fair price. As an investor or trader, you can trade cotton futures to diversify your portfolio, hedge risks, or simply speculate on price movements in the commodity. One contract of cotton futures is worth 50 000 pounds or around 100 bales of cotton.
Being a staple commodity for everyday life, corn futures contracts are actively traded on the commodity exchanges. One futures contract of corn is worth 5000 bushels of corn on the CME platform where it trades. Corn futures contracts are the best option for traders and hedgers who wish to gain quick and cheap exposure to the corn market.
As a result of the growing demand for corn, there is high liquidity in corn futures contracts, making it one of the most preferred agricultural commodities for speculative trading. You may also trade the contract to diversify your portfolio or hedge against inflation. Farmers come to the corn futures market to secure reasonable prices for their produce.
Rough Rice Futures
This futures contract tracks the price of rough rice. Short-term traders or hedgers who wish to gain exposure to the rough rice market will find that the futures contract is the best option on the market, compared to other available financial instruments. The rough rice futures are traded on the CME, and one contract is worth 2,000 hundredweights (CWT) or around 91 Metric Tons of rough rice.
The rising demand for rice due to the increasing global population makes rough rice futures an appealing market for traders and investors. The market is liquid enough for speculative trading, and you can also trade it to diversify your investments or hedge risks. If you’re a rice farmer, you may also use rough rice futures to secure a good price for your product.
Futures Market Guide
Also known as a futures exchange, the futures market is a marketplace for buying and selling futures contracts and options on futures contracts. A Futures contract is a standardized contract to buy or sell specific quantities of an asset at a presently agreed price, to be delivered at a specified time in the future. The market is standardized, and the risk of counterparty defaults is low.
The futures market is where farmers, corporations, and fund managers can hedge their businesses and investments against fluctuations in the prices of their assets. As a retail trader, you can also speculate on the market and benefit from price changes.
Korean KOSPI 200 Futures
The KOSPI 200 Index futures is a futures contract whose underlying asset is the KOSPI 200 Index, which consists of the 200 largest companies listed on the Korean stock market. The contract was introduced in 1996, and the point size is KRW 250,000.
You can use the contract to diversify your portfolios, as well as hedge your exposure in the Korean stock market. It also provides you with an opportunity to speculate on the Korean stock market. With the KOSPI 200 futures contracts, you can sell short and profit from downward movements in the market.
OMXS30: Trading the Swedish and Stockholm OMXS30 Futures index
The OMXS30 futures is an equity index futures in which the underlying asset is the OMX Stockholm 30 index (OMXS30), which consists of the stocks of the 30 largest companies in Sweden. This futures contract is one of the most traded equity index futures in the Nordic region. The OMXS30 futures contract is denoted in SEK, and the point size is Kr 100.
You can trade the OMXS30 futures contract to gain exposure to the Swedish equity market. The index futures offers an opportunity for speculation, diversification, and hedging.
Euro Stoxx 50 Futures
Introduced in 1998, the Euro Stoxx 50 futures contracts track the future price of the Euro Stoxx 50 index market, which is an equity index that consists of 50 European blue-chip companies. This futures contract is denoted in euro, and the minimum price fluctuation is €10. It offers an easy and efficient way to gain exposure to the European equity market as the index consists of some of the best and most stable companies in Europe.
You can use the Euro Stoxx 50 futures contract to hedge your exposure in the European equity market or just to diversify your investment portfolio. The market is highly liquid and has enough volatility for speculative trading.
Hang Seng Futures (Mini and Full Contract)
The Hang Seng Futures contract tracks the Hang Seng Index (HSI); it was introduced in 1986 by the Hong Kong Futures Exchange to increase interest in the HSI. In 2000, the Mini-Hang Seng Index Futures was introduced at one-fifth the size of the full contract to enable individuals with less capital to get access to the Hang Seng futures contracts. The minimum price fluctuation is HK$50.
As with most types of futures, you can trade the Hang Seng Futures contract to hedge risks in the equity market, diversify your investment, or simply speculate on price changes.
How to Trade Micro E-mini Futures (Symbol, Margin & Commission)
Launched by CME in 2019, micro e-mini futures aim to cut the capital threshold and allow smaller retail traders to enter the micro e-mini futures markets. They have 1/10th the size of the classic E-mini futures. Micro E-mini futures make it easier for traders with smaller accounts to discover the benefits of trading futures.
The advent of micro e-mini futures contracts is welcomed by many traders who previously have been excluded from the e-mini index futures markets due to the high capital requirements. With e-micro futures, you can afford to leave your trade overnight without risking too much. The micro e-mini futures sort of democratized the e-mini futures.
What are Futures contracts? – How does it work, and how do you buy it?
Futures contracts are financial derivative contracts that obligate buyers to purchase, and the seller to sell, an asset at a set future price on a specified date. The first futures contracts appeared in the Dutch Republic during the 17th century. One of the most known examples was the tulip futures contract that was traded during the Tulipmania in 1636.
Today, most futures contracts are standardized and traded at exchanges, enabling traders to speculate in the price of a variety of commodities, metals, grains, and indexes, while allowing major stakeholders in those commodities to hedge against future price fluctuations.
What are Lean Hogs? – Trading Great Swings with Lean Hog Futures
Lean hog is a type of hog (pork) futures contract that can be used to speculate on pork prices or hedge your exposure in the pork market. The contract is traded on the Chicago Mercantile Exchange (CME), where it was introduced in 1966.
Lean hog futures prices are widely used by U.S. pork producers as reference prices in marketing contracts for selling their hogs. China consumes nearly 50% of the world’s production of pork meat and has been the biggest importer of US pork meat for some years now.
Unfortunately, many new traders focus too much on their favorite markets and miss many chances to use diversify and achieve higher returns with lower risk. One great market that is often overlooked is the lean hogs market. It holds many edges that are worth investigating for your trading. Trading the lean hog futures offers you a way to diversify your portfolio. Remember that the more markets and strategies you trade, the better prepared you are for market turmoil and black swan events.
History of Futures Markets
Let’s begin by having a look at the history of futures markets!
Before Common Era
The origin of futures market dates back to the 18th century BC, when the sixth Babylonian king, Hammurabi, created the code of Hammurabi — a code that allowed the sales of goods at an agreed price, to be delivered on a future date. The contracts were usually put in writing, and there was always a witness to the contracts.
Later, in the 4th century BC, Aristotle wrote about the story of Thales, a man from Miletus who was good at forecasting olive harvest. Thales predicted that the olive harvest would be very good the following autumn and confidently used his prediction to secure future contracts for the use in olive presses.
He agreed with olive press owners to pay for use of their olive presses long before the harvest was due. Because the harvest was in the future and no one knew how the harvest would turn out, he was able to negotiate low prices — the olive press owners were willing to hedge against the possibility of a poor harvest and low demand for their presses.
Eventually, the harvest was plentiful as Thales had predicted, and there was a huge demand for the use of olive presses. As the demand for olive presses was more than the available olive presses, Thales was able to sell his contracts for the use of the olive presses at higher rates and made a lot of money.
In the modern era, it could be said that the first organized futures market started in Japan, at the Osaka Rice Exchange in the early 18th century. But there were elements of futures trading in the 16th century Royal Exchange in London. Then, traders were conducting businesses in coffee houses in London; they would draw a ring on the floor to serve as their trading floor.
In the early 19th century, the first futures market in the US was established in Chicago. Close to the cattle home and the farmlands in the Midwest, Chicago is naturally the center for the transportation, distribution, and trading of agricultural produce, so it makes sense that a market that would help farmers and merchants to hedge against price fluctuations would be situated in Chicago. Although forward contracts were already in place then, the rate of default was very high, necessitating the establishment of an exchange that would standardize the contracts and ensure full settlements.
So in 1848, the Chicago Board of Trade (CBOT) was established, and the first contract to trade on the new exchange was corn. Initially trading as forward contracts, it became standardized in 1865.
In 1874, the Chicago Produce Exchange was formed, but in 1898, it would be renamed the Chicago Butter and Egg Board. In 1919, the Chicago Butter and Egg Board was reorganized into the Chicago Mercantile Exchange (CME).
Meanwhile, a regional market was founded in Minneapolis in 1881, and in 1883, it traded futures contracts for the first time. It would later become the Minneapolis Grain Exchange (MGEX) — the only exchange that deals on hard red spring wheat futures. Around the same time, commodity futures exchanges were established in New York to handle trades in energy and metals contracts — the New York Mercantile Exchange (NYMEX) and Commodity Exchange Inc. (COMEX).
Across the Atlantic, in 1877, the London Metal Market and Exchange Company — London Metal Exchange — was established for merchants who deal on metals. Initially, only copper was traded on the exchange, but zinc and lead would later be added. It was closed during the Second World War but would open again in 1952, and with time, aluminum, nickel, and steel were added.
In the Indian subcontinent, futures trading started in Bombay and Calcutta in the 1870s. With the influence of the British Empire, Bombay Cotton Trade Association established a futures market in 1875 to trade cotton contracts. At about the same time, standardized opium futures contracts were already trading in Calcutta. With the establishment of the Calcutta Hessian Exchange in 1919, raw jute and jute goods futures contracts also started trading in Calcutta.
After the international gold standard was abandoned in 1971, the CME set up the International Monetary Market (IMM) division to provide futures contracts on foreign currencies like the British pound, Japanese yen, Canadian dollar, and Swiss franc. It marked the beginning of financial futures contracts. — futures contracts on financial products, such as currencies, stocks, and interest rates.
At present, there are futures contracts for stock indexes, single stocks, interest rates, volatility, bonds, and weather, in addition to commodities like agricultural produce, energy, and metals. Although futures trading started with agricultural produce and other commodities, the futures market now has gone beyond commodities. Financial product futures have outgrown the traditional commodities, trading more $1.5 trillion per day, as of 2005. These financial futures contracts play a huge role in the global financial system.
Initially, all futures exchanges were using the open outcry system(covered later), but with the advent of the internet, most, if not all, exchanges now adopt the electronic trading system. The electronic system started with the CME’s Globex trading platform in 1992, but now, every futures market has an electronic platform of some sort.
Functions of the Futures Market
Futures exchanges are organized in a way that provides vital economic functions. From stabilizing farmers’ income and corporate productivity to facilitating financial transactions around the world, futures play a major role in the world’s economy. The following are some of the functions of a futures market:
1. Market Value Discovery
The futures exchanges constitute a free market for trading expected future prices of both physical assets (commodities) and non-physical assets (financial securities), thereby helping the underlying industries to find the right price for the products. Thus, the futures market plays a role in the determination of the market value of the assets that trade on it.
Commodities prices are determined by the market forces of demand and supply on the futures exchanges and are communicated around the world. With the information about the present futures prices, stakeholders can estimate the future price of any given commodity, which can help them in making many political and economic decisions.
2. Providing Liquidity
The exchanges help to bring buyers and sellers together in one place so that trades can easily be made. A buyer doesn’t need to go looking for a willing seller before executing a trade, and neither does a seller have to search for a willing buyer first. The huge number of speculators in the market means that there are enough players to provide enough liquidity.
3. Standardized Marketplace
Apart from ensuring adequate liquidity, futures exchanges provide organized marketplaces with rules, regulations, and settlement procedures. First, the contracts are standardized, so every trader knows exactly what he’s dealing with. Then, there are criteria to meet before initiating a trade.
Furthermore, each exchange has a clearinghouse, which ensures that all transactions are fulfilled. The clearinghouse help to maintain stability in the market by settling all the changes in the traders’ accounts at the end of each trading day and acts as the other party in all transactions.
4. Risk Management
The futures market helps businesses, farmers, fund managers, and individual investors to manage risk involved in their various businesses or investments. These entities come to the futures market mainly to hedge their positions against fluctuations in the prices of their assets of concern.
In fact, the government of countries that rely a lot on the importation or exportation of certain commodities (crude oil, for example) also use the futures market to hedge against price fluctuations. In the same way, a fund manager or an investor who is worried about the effects of volatility on his portfolio will approach the futures market to protect his investment from adverse price movements.
5. Speculation Opportunities
There are some traders whose main aim is to benefit from changes in the prices of assets on the futures markets. These sort of traders don’t come to the futures market to hedge the positions they have elsewhere; they’re in the market purely for speculation, and they are called speculators.
Speculators are very important in providing adequate liquidity in the market. With enough liquidity, the bid-ask spread of those commodity prices is narrower, reducing fluctuations in the prices of those commodities. This way, the speculators help to stabilize prices.
How Futures Work
The primary purpose of the futures market is to provide a liquid and well-regulated marketplace where businesses can go to hedge against wide fluctuations in the prices of their assets of concern. To understand how futures work, we need to discuss a practical example.
Assuming the price of wheat in the futures market is $10 per bushel, and it costs a wheat farmer about $8 to produce a bushel of wheat. If this farmer thinks that the price of wheat may go down (below the $8 cost per bushel) by the time he harvests his wheat six months from now, he can use wheat futures to hedge against that perceived risk.
Let’s say that this farmer is expecting to harvest about 20,000 bushels, and a contract of wheat is 5000 bushels. He can sell four contracts of wheat futures, which are presently selling at $10 per bushel, and keep rolling the contract (see below) over until his harvest time. With this action, he has locked in $2 per bushel as profit. When the time comes, the exchange would ask him to deliver the asset to the buyer that needs the wheat.
The buyer can be a flour company which needs wheat for flour production. The wheat company must have believed that the price of wheat would go up, so it hedges against that by buying wheat futures to ensure wheat supply at a perceived fair price.
One interesting fact about the futures market is that the farmer and the flour company never look for who would take their trade — the exchange does that for them. In fact, it is even possible that each of them entered the trade at different times, and the exchange’s clearinghouse or a speculator (who closed his trades at some point) held the other end of the trade at some point during the life of the contract. When the flour company entered the trade, it was interested in taking delivery of the asset, so it held the trade till expiration, just like the farmer.
Trade Management in Futures
As you can see from the example, there three ways to manage a trade when you are dealing with futures:
- Offsetting the position before expiration
- Rolling over to the next contract
- Holding the contract till expiration
1. Offsetting the Position Before Expiration
Speculators always close their positions before expiration. They do this to avoid dealing with settling an expired contract, which might involve physical delivery of the asset. Closing a position implies taking an equal and opposite transaction. A four-contract long position in wheat is offset by going short four contracts of wheat.
2. Rolling Over to the Next Contract
Hedgers and speculators can keep a contract beyond expiration by rolling the position with another contract that is further in the future before the current contract expires. This is done by simultaneously offsetting the current position and opening a new one in the next contract month.
3. Holding till Expiration
For commodity hedgers who want to take or make delivery of the asset, contracts are held till expiration. Some speculators also mistakenly hold their contracts till expiration. For the most part, contracts held till expiration have to be settled either by physical delivery or cash settlement. However, those who don’t want physical delivery but, by one reason or the other, held till expiration, also have a way out — retendering.
Brokers often notify traders when the expiration date is approaching, especially if the contract is settled by physical delivery. But if knowingly or unknowingly, a trader finds himself in a position of dealing with a delivery, but wants to opt out, he can retender the asset by selling the contract. The trader will have to pay a fee for this though.
If a contract will be settled by physical delivery, it will be stated in the terms of the contract. The contracts that often require settlement by physical delivery include wheat, cotton, oil, livestock, and corn, but only about 2% of these contracts are actually delivered.
Usually, when a contract reaches expiration, the exchange will state the First Notice Day (the first day to assign delivery to the buyer) and the Last Trading Day (the last day the contract can trade). Between the First Notice Day and the Last Trading Day, the seller would have delivered the asset to the buyer.
Note that nearly all brokers liquidate your position for you, in case you held it through delivery. In other words, you don’t need to take delivery of the underlying asset!
Most contracts are settled with cash on expiration, and they include equity futures, volatility index futures, and other contracts that cannot be settled by physical delivery. For these types of futures, traders rarely hold till expiration — they either offset or rollover their positions before expiration.
Although commodity futures can be physically delivered, an exchange may adopt cash settlement or at least make cash settlement an option. Whatever settlement option that is available for a contract will be stated in the terms of the contract.
Setting the Settlement Price
On the expiration of a cash-settled contract, all open positions are automatically closed. The exchange will stipulate the settlement price for the contract. The settlement price is often based on price movement on the Last Trading Day. Every exchange has a clearinghouse that oversees the settlements.
For long trades, positions that were bought below the settlement price will be closed in profit, while positions bought above the settlement price would be closed in loss. The opposite is the case for short trades, and everything will reflect on the account balance.
Because futures contracts are marked-to-market, at the end of every trading day, the profits and losses for the day are settled. Traders whose margins are falling below the maintenance margin are required to boost their accounts. It is done like this each day until the contract expires.
It is worth noting that before being allowed to trade on a futures exchange, the trader has to deposit in his account with exchange an amount that covers the initial margin and, to some extent, the variation margin. It’s the variation margin that is used for the daily settlements.
Difference Between Futures contracts and Forward Contracts
Futures contracts and forward contracts are closely related because both represent an agreement to exchange the specified quantity of an asset on a future date, at a pre-agreed price. Despite their similarity, there are many areas in which they differ. Here are some of them:
Futures contracts trade on the exchanges which serve as secondary markets — with no direct involvement of the people who initiated the contracts. Whoever is interested in any particular contract buys or sells it on the exchange without knowing who is at the other end of the trade.
On the other hand, forward contracts trade over the counter, directly between the primary initiator and the counterparty. Thus, the market for forward contracts is the primary OTC market, where both parties deal directly with themselves.
For a forward contract to happen, the parties involved will have to find each other before they can agree on a deal. In other words, there’s no readily available counterparty when one wants to make a deal, so the fellow will have to actively search for someone who is interested in reaching a deal with him. For example, if a wheat farmer wants to have a contract for the sale of his produce, he needs to look for a wheat user who’s interested in the contract before a deal can be done.
Futures contracts, on the other hand, trade on several exchanges where buyers and sellers aggregate to make trades. And with the presence of speculators, liquidity is not an issue.
Parties to the Contract
In a forward contract, the contract is directly between the buyer and the seller of the underlying asset. That is, the seller does not only agree to sell the asset to the buyer on the agreed date but also has to make sure the asset is delivered to the buyer on the agreed date. The buyer is expected to make payment and take delivery of the asset.
The parties in a futures contract don’t directly interact with each other; instead, they interact with the exchange where they are making the trade. The contract is between each party and the exchange’s clearinghouse. In other words, when a buyer enters a trade, he enters a contract with the clearinghouse, so the exchange is on the other side of the trade until a seller comes along to take up the position — and the seller, in turn, enters a contract with the clearinghouse.
Flexibility of Contract
Futures contracts are standardized, with the terms of each contract fully specified. Generally, a futures contract specifies the following:
- The quantity of the asset that constitutes a single contract
- How the asset is measured
- The grade or quality of the asset — the octane number of gasoline, for example, or the karat of gold
- How the contract will be settled — cash settlement or physical delivery
- The currency in which the contract is quoted and the minimum unit of denomination
Forward contracts, on the other hand, are easily customizable since the parties are dealing directly with themselves. They can even alter the terms of their contract along the line.
Futures trading is well regulated, with rules guiding the process of trade entry, trade closure, rollover, and settlement on expiration. Traders are required to have a specified minimum amount before they can enter trades, and all through the life of a trade, the trader must maintain a certain minimum balance (maintenance margin). Furthermore, futures contracts are marked-to-market daily — meaning that daily imbalances are settled each day until the contract expires — and the final settlement is done over a range of dates.
On the other hand, because they trade over the counter, forward contracts are not regulated. Each party is left to find ways to protect his interest.
Since the exchanges, through their clearinghouses, are the counterparty to the trades in a futures market, futures contracts carry little or no risk of counterparty default. At the expiration of a contract, the exchange makes sure the contract is settled according to the terms of the contract, either with cash or by physical delivery.
A forward contract, on the other hand, has a high risk of either party pulling out of the contract. For instance, in a crude oil contract, the seller may not honor the deal if oil price at the time of delivery is much higher than the negotiated price, while the buyer may pull out of the deal if the price at the time of delivery is much lower than the negotiated price.
Open Outcry trading vs. Electronic Trading
Before the advent of electronic exchanges, where computers are used to match orders, futures exchanges relied on pit trading, or “open outcry trading”. Let’s discover what “open outcry trading” and “electronic trading” work.
Open Outcry (Pit Trading)
Open outcry, also called pit trading, is the old method of trading futures, whereby traders in the trading pits use verbal and hand signals to communicate orders to one another. A trading pit is the part of the trading floor where trading is conducted.
When a customer sends an order to a broker, the broker sends it to the trading floor of the futures exchange for that particular contract through an order clerk. The clerk relays the order to a floor broker who then makes the trade by communicating the order to other traders by shouting the order or using a hand signal. After the order is executed, the floor broker transmits the details to the clerk, and the clerk relays it to the receiving broker for documentation.
Because of the many steps involved in the process, the open outcry system takes some time to execute a trade order. Although the system has been replaced with electronic trading in several places, it is still popular in some exchanges in the US, where it is used together with electronic trading.
In this method of trading, sophisticated computers programs are used to match buy and sell orders for instant execution. Limit and stop orders are also queued in, awaiting execution when the price gets to their levels. The sell order with the lowest price assumes the current ask price while the buy order with the highest price becomes the current bid price. The difference between the ask and bid prices is known as the spread.
Advantages of Electronic Trading
Electronic trading has many advantages over the open outcry method, and here are some of them:
Faster execution: For electronic trading, trades are executed in seconds or milliseconds.
Less cost: The cost of trading is significantly reduced in electronic trading when compared to the open outcry method.
Convenience: Traders find electronic trading more convenient, as they can place and monitor their trades from the comfort of their homes.
Greater volume: With the availability of electronic trading, more retail traders have access to the market, thus, increasing the volume of trades.
Advantages of Pit Trading
However, pit trading also holds some advantages, which all stem from the fact that it’s a gathering of people that mirrors the sentiment of the market:
- Pit trading makes it possible for traders to see each other and determine the level of fear and greed in the pit. An experienced trader could then use this information to better his edge in the market.
- The noise level could help pit traders determine how volatile the market is
Now that we’ve covered nearly all information on futures markets we wanted to include, let’s have a look a very adjacent topic, namely clearinghouses. They play a very important role and support the futures exchanges and their operations!
The Role of Clearinghouses
In the futures market, the clearinghouse is the department whose main function is to make sure that both parties in a contract — the buyer and seller — honor their obligations. The clearinghouse functions as a middleman between a buyer and seller in order to see to it that every part of the transaction, from contract opening to settlement, runs smoothly.
Every exchange has a clearinghouse that takes care of the trades on the exchange. While some exchanges — for example, CME Group, ICE, and Eurex — have their own in-house clearinghouses, others contract a clearing firm to handle the trades on their exchanges. Nasdaq Futures Exchange, and Cboe Futures Exchange, for example, use the services of the Options Clearing Corporation(OCC), a derivative clearinghouse that services over 16 exchanges.
The main roles of a clearinghouse include:
- Counterparty guaranty
- Daily settlement
- Supervision of asset delivery on contract expiration
- Contract performance oversight
The clearinghouse ensures that when a seller puts in a sell order, the order is executed promptly. It does that by assuming the counterparty position — it buys the seller’s contract and selling it to the buyer. So the clearinghouse acts as a counterparty for every trade placed on the exchange, thereby ensuring the execution of those trades.
Another important role of the clearinghouse is to ensure that the traders’ accounts are marked to market at the close of each trading day, settling all the changes in the accounts. Accounts that require additional margin are informed to post the margin before a particular time on the next business day.
Supervision of Asset Delivery on Contract Expiration
If a contract is to be settled by physical delivery, it is also the job of the clearinghouse to supervise the delivery of the underlying asset when the contract expires. The clearinghouse ensures that the seller delivers the asset to the buyer and that the buyer completes the payment and takes delivery of the asset.
Contract Performance Oversight
The clearinghouse also monitors all the contracts, from when they’re opened to when they’re liquidated either before expiration (closed out by the corresponding parties) or at expiration (settled). It takes the trading data and reports them accordingly.
Open interest: What is it?
Also known as open commitments, open interest is the total number of outstanding contracts that are open and actively trading on an exchange. It represents open contracts that have neither been closed out by the corresponding parties nor settled at expiration.
For a contract to be opened, there must be a seller of the contract and a corresponding buyer or vice versa, and from the moment the seller or buyer opens the contract, that contract is considered open until it is settled at expiration or the traders in the contract close it out by taking the opposite of their initial positions. So open interest is the totality of open buy or sell contracts and not the total of buy and sell orders.
Unlike the equity market where the total number of outstanding shares of a stock to be traded is fixed, in the futures market, the number of contracts that are open for trading can change each day since new contracts can be created whenever a new set of traders (a buyer and seller) open a trade (new contract), and existing contracts can be liquidated through expiration settlement or when an existing set of traders close out their positions.
In other words, in the futures market, if a new buyer buys a contract from a new seller (or an already existing seller who wishes to increase his position), a new contract is created, and the open interest will increase.
On the other hand, when an existing buyer sells a contract to an existing seller (both parties are closing out their position), the contract is liquidated, and the open interest will decrease. Then, if an existing buyer sells his position to a new buyer or an existing seller buys from a new seller, the existing trader has simply passed of his position — no contract has been created or liquidated, and the open interest remains unchanged.
How Open Interest Differs From Trading Volume
Although some people confuse open interest with trading volume, they actually mean different things. To understand the difference between the two, let’s make give a practical example:
On August 23rd, trader A, who already holds 20 contracts (an existing buyer), sells his 20 contracts to trader B, who is just entering the market (new buyer). In this transaction, the 20 contracts were simply passed off to trader B, so new contracts aren’t created. The open interest will remain the same, but the trading volume for the day increases by 20 contracts.
What Does Open Interest Tell You?
Open interest tells you the way money is flowing in the futures market. It shows whether more money is coming into the market or money is flowing out of the market. When the open interest is increasing, it indicates that new money is flowing into the market, and when the open interest is decreasing, money is flowing out of the market.
Open interest may be used to gauge the momentum of an existing price trend in the underlying asset since a rising open interest can indicate an increasing interest in the asset with extra money flow into the market. So if there is a rising trend in S&P 500 Index in the stock market and the open interest in S&P 500 futures is increasing, the trend is more likely to continue as more money is flowing into the market.
Similarly, in a downward trend, if the open interest is rising, the price decline may likely continue. Other the other hand, if the open interest is declining when there’s an upward or downward price trend, the trend may be coming to an end. However, an increase or decrease in open interest does not, on its own, tell anything about the direction of future price movements.
Types of Futures Market
Whether it is corn, wheat, crude oil, DJIA, or 10-year U.S. Treasury Note, there is a futures market for any type of asset. Although it all started as a way for farmers to secure the sale of their produce before harvest, futures trading has since gone beyond agricultural produce to now include other asset classes, such as energy, metals, equity, interest rates, and foreign exchange.
These are futures contracts in which the underlying asset is either agricultural produce, agro-based product, or livestock. With about 17% market share, agriculture-linked futures contracts are the second largest in the commodity futures sector, after energy futures. They are mostly traded on the CME, though, other exchanges do offer agriculture futures to some extent.
Agriculture futures can be grouped into:
Grain futures include:
- Corn futures
- Soybean futures
- Wheat futures
- Livestock futures include:
- Cattle futures
- Pork futures
While forestry futures include rubber futures and cotton futures.
Farmers come to the futures market to secure reasonable prices for their farm produce so as to protect them against future price fluctuations. At the same time, companies that use agricultural products as raw materials and some big retail distributors use the market to ensure a constant supply of the products. However, some traders in the agriculture futures market are there solely for speculation.
An energy futures contract represents an agreement for the future delivery of an energy-related product at an agreed price. In other words, it is a type of futures contract in which the underlying asset is an energy product. The asset may or may not be physically delivered on the set date, depending on the terms of the contract.
The common energy products that are traded on the futures market include:
- Crude oil
- Heating oil
- Natural gas
These products are the most commonly traded commodities in the commodity futures sector. The ICE is a major marketplace for these futures contracts, and the same is true for NYMEX of the CME Group.
Producers of those energy products come to the futures market to secure acceptable prices for their products, while the major users (countries and companies) use the contracts to secure an adequate supply of the products at reasonable prices. There are also speculators that trade the contracts for financial benefits alone.
For this type of futures, the underlying commodities are metals. Here, a contract between a buyer and a seller is for the delivery of a specified quantity of the metal involved at a future date.
Some of the popular futures contracts under this group include
Precious metals like:
Base metals like:
And alloys like steel futures.
COMEX and the London Metal Exchange are some of the major marketplaces for metal futures.
These contracts are very popular for speculative purposes, as traders seek more opportunities to make money. The contracts are also useful in protecting miners and producers against volatility in price and help the users to secure a steady supply of the products at reasonable prices.
Currency Futures (Forex)
Also known foreign exchange futures, currency futures are those futures contracts in which foreign exchange rates are the underlying assets. With more than $5 trillion traded on a daily basis, forex is the biggest market in the world, and foreign exchange futures constitute a major part of the volume traded each day.
The forex futures market, just like other futures markets, attract speculators. In fact, the speculators help to maintain adequate liquidity in the market. Apart from speculation, companies use currency futures to hedge against large fluctuations in the foreign exchange market. For instance, if a European firm is expecting a large sum in U.S. dollars in the next nine months, it may buy a futures contract to hedge against any deterioration in the U.S. dollar.
EUR/USD futures is one of the most traded contracts in this market. Other popular pairs include:
These pairs involve the currencies of the major economies in the world.
Interest Rate Futures
Interest rate futures contracts are futures contracts in which the underlying asset is a security that pays interest. An interest rate futures contract represents a contract between a buyer and a seller for the future delivery of an interest-paying asset, but the parties involved can lock in the price of the asset at the present.
Common interest-bearing assets, which serve as the underlying security in this type of futures include Treasury bills (like the Treasury bill futures on the CME) and Treasury bonds (Treasury bond futures on the CBOT). Other common securities are:
- Treasury notes
- Certificate of deposits
- Corporate bonds
- Rate swaps
- Bond market indexes like the Barclays Index, and foreign governments’ bonds like the German bonds.
Just like other types of futures, interest rate futures are used for speculation and hedging, as changes in interest rates will normally affect those assets. Some of the most highly traded interest rate futures include:
- two-year Treasury futures
- five-year Treasury futures
- 10-year Treasury futures
- 30-year Treasury futures
10-year German bond futures is also very popular, as well as the Eurodollar.
Equity futures contracts gained entry into the futures market in the 1970s, and have in recent years expanded quickly as equity investors look for ways to hedge against market volatility and speculators look for more speculative opportunities. With the introduction of the E-mini S&P and other mini-contracts, traders with small accounts have the benefit of trading with a small margin. Another important benefit is that equity futures trade almost round the clock, so they can provide a window on the overall direction of the capital market.
This type of futures often has, as its underlying asset, an equity index. Some equity indexes that are tracked by futures are:
- S&P 500 Index
- DJIA, NASDAQ 100 Index
- Russell 2000 Index
- DAX 30 Index
- FTSE 100 Index
- Euro Stoxx 50 Index
- Nikkei 225 Index
- India’s Nifty 50 Index
The S&P 500 Index futures, FTSE 100 Index futures, Nasdaq-100 Index futures, E-mini S&P, and Nikkei 225 Index futures are some of the most traded equity futures in the world.
Aside from the equity indices, there are futures contracts on some of the most highly liquid individual stocks. These type of futures are called single-stock futures, and examples include Amazon, Apple, Goldman Sachs, IBM, and Google.
The Five biggest Futures Markets
There are billions of futures contracts traded in different parts of the world every year. The majority of these contracts trade in the five biggest exchanges in the world. These five exchanges are located in North America, Southern Asia, and Europe, and they include:
- The CME Group
- National Stock Exchange of India
- Intercontinental Exchange
- The Cboe Global Markets
- The Eurex Exchange
The CME Group
With billions of contracts traded each year, the CME Group is easily the biggest futures market in the world. The group is made up of the Chicago Mercantile Exchange (formerly Chicago Butter and Egg Board), Chicago Board of Trade (CBOT), Commodity Exchange Inc. (COMEX), New York Mercantile Exchange (NYMEX), Kansas City Board of Trade (KCBT), and the NEX Group.
The CME Group was created in 2007 by the merger between the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade. It would later acquire the NYMEX Holdings — the holding company of the COMEX and NYMEX — in 2008, and again in 2012, it bought the KCBT, which deals majorly on hard-red winter wheat. The NEX Group was acquired in 2018.
With its headquarters in Chicago, the group has several offices in the major cities around the world, including London, Washington, New York, Houston, Tokyo, Sao Paulo, Alberta, Beijing, Sydney, and Hong Kong. Through its Globex electronic trading platform, the CME Group gives traders access to the futures market nearly 24 hours a day.
The group, through its many subsidiary exchanges, offer a wide range of products across many asset classes, such as equity index futures, interest rate futures, energy futures, metal futures, currency futures, and agricultural produce futures. The metal futures mostly trade at the COMEX market, the agricultural produce futures trade at the CME, while its energy futures trade mostly at the NYMEX.
National Stock Exchange of India
Incorporated in 1992, the National Stock Exchange of India (NSE) is the biggest financial market in India and the biggest futures market in Asia. It started off as a stock market, but it later introduced futures exchange and trades huge volumes of futures contracts each year. The exchange has its headquarters in Mumbai, the biggest commercial city in India.
Trading started on the NSE in 1994 when equity and debt securities were listed on the exchange. But futures contracts wouldn’t start trading on the exchange until the 12th of June 2000 when the Nifty 50 index futures contract was launched on the exchange. Nifty 50 index is a broad market index that tracks the 50 most capitalized stocks on the NSE.
The NSE futures market grew very fast, and in 2011, futures contracts on the U.S. S&P 500 Index and Dow Jones Industrial Average (DJIA) were introduced on the futures exchange. A few years later, futures on the U.K. FTSE 100 and the Japanese Nikkei 225 were also introduced.
Apart from the index futures, other futures contracts, such as interest rate futures, currency futures, and single stock futures are also traded on the NSE futures exchange. In addition, bullion and energy futures started trading on the NSE futures exchange in 2018.
Backed by some of the biggest players in the energy industry, Jeffery Sprecher established the Intercontinental Exchange (ICE) in May 2000 to offer an efficient and transparent electronic trading platform for energy commodities. The company is based in the US, but through acquisitions, it has expanded to different parts of the world.
In 2001, it acquired the London-based International Petroleum Exchange (IPE) — the leading open-outcry energy futures in Europe. From 2003, the ICE partnered with the Chicago Climate Exchange to host its electronic platform, and since 2005, all of its energy futures became fully electronic.
The ICE acquired the New York Board of Trade (NYBOT) and ChemConnect in 2005, Winnipeg Commodity Exchange (WCE) in 2007, Creditex in 2008, European Climate Exchange in 2010, and the NYSE Euronext in 2013. Through the acquisition of the NYSE Euronext, the ICE gained ownership of the London International Financial Futures Exchange (LIFFE).
In 2008, ICE partnered with Canada’s TSX Groups Natural Gas Exchange, extending their services to clearing and settlement of physical OTC natural gas contracts. Presently, ICE operates more than 23 regulated exchanges and six clearinghouses in different parts of the world.
The ICE started with energy futures, but with its acquisition of several exchanges around the world, the ICE now offers many other futures contracts, such as equity index futures, foreign exchange futures, agricultural product futures, and interest rate futures. However, energy futures remains the most popular product on the ICE market.
The Cboe Global Markets
Previously known as CBOE Holdings, the Cboe Global Markets consists of the Chicago Board of Options Exchange (CBOE), BATS Global Markets, and the Cboe Futures Exchange (CFE). Through the CFE and the BATS Global Markets, this company offers a wide range of assets to traders all over North America and Europe, including the popular volatility index products.
The CFE offers an all-electronic trading service that operates the open access market model with its dedicated market makers and market participants providing the necessary liquidity. Trading started on the futures exchange in 2004.
The majority of the futures contracts on the exchange are based on volatility indexes, with the VIX Index (the volatility index of the S&P 500 Index) being the most popular one. Other volatility indexes available on the exchange include:
- Volatility indexes on other U.S. equity indexes, such as the NASDAQ-100 Volatility Index (VXN), DJIA Volatility Index (VXD), and Russell 2000 Volatility Index (RVX)
- Volatility indexes on Non-U.S. equity ETFs, such as the EFA ETF Volatility Index (VXEFA)
- Volatility indexes on interest rates, such as the 10-year U.S. Treasury Note Volatility Index (TYVIX).
- Volatility indexes on commodity-related ETFs, such as Gold ETF Volatility Index (GVZ)
- Volatility indexes on single stocks, such as Equity VIX on Amazon (VXAZN)
All trades on the Cboe Futures Exchange are settled by the Options Clearing Corporation (OCC), the clearinghouse for the CBOE.
The Eurex Exchange
The Eurex Exchange, often called the Eurex, is a Europe-based futures market that offers futures contracts on several European products. Being a subsidiary of Deutsche Borse AG, it is headquartered in Eschborn, near Frankfurt am Main in Germany. The Eurex Exchange is the biggest futures and options exchange in Europe, and trading on its marketplace is fully electronic.
In fact, the Eurex was created to replace the trading pit and open outcry system in the Deutsche Borse. The Deutsche Borse AG partnered with the SIX Swiss Exchange in 1998 to develop an electronic trading system, and this gave rise to what is now known as the Eurex. But in 2012, the Deutsche Borse AG acquired all of SIX’s shares in the Eurex and became the sole owner of the exchange.
Euro Stoxx 50 Index futures and DAX 30 Index futures are some of the most popular futures contracts that trade on this marketplace. Other popular contracts on the exchange include German bond futures, Swiss bond futures, foreign exchange futures, and commodity futures.
In addition to the trading platform, the exchange also provides contract clearing and settlement services via the Eurex Clearing, which takes care of the settlement of contracts on expiry and serves as a central counterparty for trades on the platform.
The futures market is where farmers, corporations, and fund managers can hedge their businesses and investments against fluctuations in the prices of their assets. It offers better protection to them because the market is standardized and the risk of counterparty defaults is low. Speculators also use the futures market to look for more money-making opportunities.
Here is our archive with articles about other tradeable futures markets.