1)What
is an option?
2)In what markets are commodity options available?
3)What are the advantages of trading futures over stocks?
4)What protective measures are in place to assure the financial stability of the commodities industry?
5)Is there a chance someone will deliver 40,000 pounds of live cattle to my front door?
What is an option?
An option is an agreement between a buyer and a seller that gives the buyer the
right, but not the obligation, to require the seller to perform specified responsibilities. There are two types
of options: calls and puts. The call buyer has purchased the right but not the obligation to buy, or go long, a
futures contract at a certain price (the strike price) on or before the expiration date. The put buyer, conversely,
has purchased the right but not the obligation to sell, or go short, a futures contract at a certain price on or
before its expiration. The amount of money that a call or put option buyer pays for the option is referred to as
the option premium. The goal of the option buyer is for the option to increase in value so that it can be liquidated
for a profit.
Sellers, or writers, of options receive the premium for granting the option to an
option purchaser. The goal of the option seller is for the option to expire worthless enabling him or her to retain
the premium.
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In
what markets are commodity options available?
| GRAINS |
LIVESTOCK |
SOFTS |
| Corn |
Feeder Cattle |
Cocoa |
| Oats |
Live Cattle |
Coffee |
| Soybeans |
Lean Hogs |
Orange Juice |
| Soymeal |
Pork Bellies |
Sugar |
| Soybean Oil |
1 |
Cotton |
| Wheat |
1 |
Lumber |
| METALS |
ENERGY |
CURRENCIES |
| Copper |
Crude Oil |
Australian Dollar |
| Gold |
Heating Oil |
British Pound |
| Platinum |
Unleaded Gas |
Canadian Dollar |
| Silver |
Natural Gas |
German Mark |
| 1 |
1 |
Japanese Yen |
| 1 |
1 |
Swiss Franc |
| 1 |
1 |
US Dollar Index |
| INTEREST RATES |
INDEXES |
| Eurodollar |
S&P 500 |
| Treasury Bonds |
Dow Jones |
| Treasury Bills |
NYSE Composite |
| Treasury Notes |
NASDAQ 100 |
| Municipal Bonds |
E-Mini |
| 1 |
CRB |
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What
are the advantages of trading futures over stocks?
1. Diversification
A stock investor may attempt to diversify by investing in different industries. The investor might establish positions
in the utility, pharmaceutical, defense, and technology sectors in an attempt to diversify a portfolio. However,
if the Dow drops 250 points in a day and decliners lead advancers by a 10 to 1 margin, is the stock investor truly
diversified?
The futures investor, on the other hand, does have the ability to effectively diversify a portfolio. The futures
markets are divided into different complexes: metals, grains, currencies, energies, livestock, interest rates,
softs, and indexes. These groups are not totally interrelated. A dramatic move in silver should not effect
wheat prices and a large rise in the SP500 should not effect cotton.
2. Margin
In order to open a stock account to sell options most firms require a minimum deposit of $50,000. Our market is
much more investor friendly, enabling the novice and small investor to trade. An investor can open a futures account
with $5,000. The margin to sell an option might be as low as $200 in some instances.
3. Economic integrity
Companies traded on the stock exchange can and do go bankrupt; commodities traded on the futures market cannot.
Commodities are durable, consumable, or financial goods. A constant economic supply and demand relationship exists
for commodities which determines their prices, potentially creating some unique opportunities.
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What protective measures are in place to assure the financial stability of the commodities
industry?
Trading volume in futures contracts and options on futures on U.S. markets
has risen to more than 500 million contracts annually. And the dollar value of
futures contracts traded currently exceeds severalfold the dollar value of common stocks
traded on all U.S. stock exchanges.
A requisite for this growth hasbeen the financial integrity of futures markets. While
trading in futures contracts obviously involves risks related to price changes, market participants
have historically had little reason to be concerned about the security of their funds. Customer losses due to the insolvency of a futures brokerage firm have been
virtually non-existent. Indeed, such losses have totaled less over 50 years than the Securities Investor Protection Corporation
has paid, on the average, to reimburse customers of the securities industry for member firm insolvency losses each year.
For anyone considering participation in the nation's futures markets, the
reasons behind this continuing and impressive record of financial soundness
are worth knowing about.
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Is there a chance someone will deliver 40,000 pounds of live cattle to my front door?
You will not trip over cattle on the way to get your mail. Accidental delivery to
your front yard cannot occur. Delivery takes place in the form of a warehouse receipt. Before delivery of any commodity
can occur, payment or financing terms must be arranged and accepted. Then delivery instructions must be made with
method of shipment, delivery date and place of delivery. Rest assured you will not receive a wake-up call from
mooing cows.
