Futures are financial instruments that are primarily used to hedge against price fluctuations of a commodity, a currency, the stock market, etc. They are also used by professional and private traders and speculators to profit from corresponding price movements. They are also used by professional and private traders and speculators to profit from corresponding price movements. Futures have built-in leverage, which can result in large profits (but also losses) with a relatively small investment.
Futures are standardized forward contracts traded on futures exchanges and are a type of contract between the buyer and the seller. The buyer of a futures contract undertakes to buy the underlying asset at a predefined price at a point in the future. The seller of the futures contract undertakes to deliver the underlying asset at the agreed time and at the agreed price.
The underlying can be, for example, a commodity, a currency, bonds, etc. Futures can be bought and sold on each trading day. An actual delivery of the underlying (the commodity) need not be feared if trading is done for purely speculative purposes, since a long position (purchase of the future) and a short position (sale of the future) can be closed at any time by a corresponding counter transaction.
What are the different futures?
At Captrader you have access to the most important futures exchanges and can thus trade all common futures. These are usually classified into the following categories:
- Metals (e.g. Gold, silver)
- Currencies (e.g. EUR, GBP)
- Equity indices (e.g. S&P 500, DAX)
- Bonds (e.g. Bund Future, T-Bonds)
- EnergyRaw materials (bswp. Crude oil, Natural gas)
- Agricultural commodities (e.g. corn, soybeans)
- Meat (e.g. Live Cattle, Lean Hogs)
- Softs (e.g. coffee, sugar)
Why do futures exist?
Forward contracts have been in place for several hundred years and had the original purpose of making the buying and selling of grain and other commodities more efficient. If a farmer can sell his crop (or part of it) before it is sown, and if a commodity trader or food manufacturer can buy the raw materials he needs at an agreed price before they are produced, this increases the efficiency and predictability of your business for everyone involved.
While the terms of a forward transaction were initially negotiated between the parties themselves, this was later followed by standardized contracts that simplified trading and were settled and supervised via futures exchanges.
Trading in futures became increasingly popular and so, over the years, more and more futures were admitted to trading. Market participants felt the need to hedge not only against fluctuations in commodity prices, but also against currency fluctuations, price losses on the stock markets, etc. Thus, a large number of different futures are tradable today.
Who trades futures?
In addition to market participants who hedge the risks of their transactions on the futures markets, the prospect of (supposedly) quick profits has always attracted speculators to the trading floor (or in front of the computer).
The U.S. futures markets are supervised by the CFTC (Commodity Futures Trading Commission). Any market participant that exceeds a certain position limit must report current positions to the CFTC on a weekly basis. The CFTC divides market participants into the following groups:
- Commercials/Hedger
- Non-Commercials/Large Speculators
- Non-Reportables
The commercial market participants (Commercials) still form the financially strongest group in the trading of many futures contracts and thus not infrequently cause price movements. The non-commercials or large speculators are all those market participants who exceed the position limit but are not classified as commercials, i.e. institutional traders/speculators. The difference between the total open interest and the Commercials and Non-Commercials results in the remaining group of non-reportable market participants (Non-Reportables). These include private traders, but also hedgers who are below the position limit.
The current positioning of the Commercials, Non-Commercials and Non Reportables are published weekly by the CFTC in the so-called COT Report.
Contract details
Each future has contract details (also: contract specifications), which are specified by the exchange. These clearly regulate
- which underlying it is
- to which quantity a contract refers
- until when a contract can be traded
- at what times the contract can be traded
- when the delivery date is
- which delivery months there are
- where and how the delivery is to be made
- if/what price limits are available
- etc.
The contract details of each futures can be viewed on the website of the respective exchange.
The most important contract details for futures traders can also be called up in the Trader Workstation. To do this, simply double-click on the corresponding icon in the overview window. (Alternative: right-click > Financial Instrument Info > Description).
Leverage through margin
Futures are financial instruments that have a leverage effect. For the purchase (long) or sale (short) of a future, not the full equivalent value of the contract has to be spent, but only a fraction of it.
The gold future, for example, has a multiplier of 100, which means that one contract moves the equivalent of 100 troy ounces. At a gold price of 1700 USD, this value is 170 000 USD. In order to trade a gold future, a security deposit must be made, the so-called margin. In the gold future, this currently amounts to approx. 1/10 of the contract value; in other words, there is a 10-fold leverage effect. Futures are therefore instruments that should only be used by traders with the appropriate knowledge, experience and risk awareness. The margin must be deposited by the buyer and seller of the futures
The respective margins can be found on the website of the exchanges. These are the minimum margin requirements. You can see the actual margin in the Trader Workstation when you open an order screen before placing a buy or sell order. The actual margin may differ from the minimum margin set by the exchange.
It should also be noted that there are different types of margins:
Initial Margin
The initial margin is the amount that must be deposited when a position is opened.
Maintenance Margin
The maintenance margin (also: holding margin) is lower than the initial margin and is the minimum amount that must be deposited in order to be able to hold an open trade. This means that the difference between the initial margin and the maintenance margin is a kind of buffer that can be used to cover book losses. If the maintenance margin is not reached, a margin call is made. This means that a margin call must be made in order to meet the initial margin again. If this is not possible, a trade can be forcibly liquidated by the broker.
Variation Margin
Variation margin (also known as variation margin) is the amount that must be paid if the maintenance margin falls below the initial margin in order to meet the initial margin again.