Futures For You
| INSIDE THE FUTURES
WORLD
Want to learn how the futures markets really work? Dan
O'Neil, a principal at online futures and forex broker Xpresstrade (www.xpresstrade.com),
responds to your questions about today's futures markets.
To submit a question, post your question to our website
at http://Message-Boards.Traders.com. Answers will be posted there, and
selected questions will appear in a future issue of S&C. |
Dan O'Neil |
FUTURES ON BASE METALS
I've been trading gold and silver for years, but lately my attention's
been drawn to the nonferrous metals. I've read that metals like aluminum,
zinc, and nickel have been moving higher. How can I trade these products?
While gold, silver, and other precious metals grab all the headlines,
industrial metals like copper, aluminum, lead, tin, nickel, and zinc have
been racking up big gains, too. Strong growth and unexpected demand shocks
from China and other emerging economies, combined with supply disruptions
and delays in bringing new production online, are driving metal prices
higher. Anytime a market or sector is trending higher, you can be sure
that opportunistic traders will sit up and take notice.
The New York Mercantile Exchange's COMEX division remains the leader
in trading futures on precious metals. But if you're interested in the
nonferrous metals, the preeminent marketplace is the London Metal Exchange
(LME). The LME's origins can be traced as far back as the opening of the
Royal Exchange in 1571. This is where metal traders first began to meet.
However, it was in 1877 that the London Metal Market and Exchange was formed
as a result of Britain's industrial revolution.
Only a few online futures brokers offer access to the LME and its lineup
of futures on industrial metals. That's because the LME has a few important
quirks that make it different from almost every other major futures exchange.
For starters, the LME is most famous for its open-outcry trading between
"ring-dealing" members, which takes place on the market floor. The LME
uses a "ring," with the traders sitting at fixed points around the circle.
Trading takes place throughout the day, with each LME contract traded in
specific five-minute periods. This isn't the continuous, ongoing trading
action that you're probably accustomed to.
Also unusual is the LME's expiration calendar. Unlike other commodity
markets, which are usually based on monthly contract expirations, LME metal
futures contracts run on a daily basis for a period of three months. This
means that there are daily contract expirations. After the three-month
date, the daily prompts for forward trading are reduced to weekly and then
monthly contracts out to 15, 27, or 63 months forward. Many retail futures
traders will find this kind of expiration cycle to be unique, if not downright
confusing.
For traders who can get past the LME's idiosyncrasies, however, the
exchange's nonferrous metals can be exciting. Markets like copper, nickel,
zinc, and aluminum may be worth a look. The trading whizzes at Credit Suisse
First Boston seem to think so - they issued a report earlier in 2006, claiming,
"Despite the strong moves in metals already, the market is likely to be
further surprised with potential prices spikes ... [and] long-term commodity
assumptions need to be revised up significantly." Take a look, and see
what you think.
GROWTH IN COMMODITY OPTIONS
I'm an experienced equity options trader, and I'm interested in
trading options on commodities, including gold, crude oil, and soybeans.
How will be my background as a stock options trader help me make the leap
to options on futures?
Great question, because with so many commodities in the midst of powerful
bull markets -- while the stock market has been comparatively unexciting
-- many active traders are turning to our markets in search of opportunities.
There are some important distinctions between securities and futures, but
you'll be pleased to know that, by and large, virtually all the fundamental
principles of options are the same, whether you're trading options on Google
or gold.
Trading in options on futures has expanded and in more recent years,
volume growth has accelerated. Institutional and retail traders alike are
increasingly embracing futures options as tools to add leverage, manage
risk, diversify portfolios, and enhance current income. Traders are increasingly
recognizing the flexibility and control that options afford them, too.
For just about any time horizon, market outlook, and risk/reward appetite,
there's a suitable options trading strategy.
What kinds of commodity options can you trade? Most futures contracts
are optionable; generally, if there's a futures contract on a commodity
or financial instrument in which you're interested, options will be available,
too. There's options activity in metals, energies, grains, livestock, currencies,
stock indexes, interest rates, and tropical softs, like coffee, sugar,
and cocoa.
Most options on commodity and financial futures still trade in traditional
open-outcry pits, but it's likely you're going to see more electronic trading
to come. A few options on futures are already electronic, such as CME's
options on emini Standard & Poor's 500 futures and CBOT's options on
100-oz. gold futures. The move toward electronic trading will improve speed,
transparency, accuracy, and efficiency -- which in turn will bring additional
market participation, more liquidity, and tighter pricing. The prospects
for options on futures look bright.
If you're migrating to commodity options trading from stock options
trading, you should find that most of your skills are transferable. You'll
have to get up to speed on the futures markets, but all of your options
knowledge will still apply.
Originally published in the June 2006 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved.
© Copyright 2006, Technical Analysis, Inc.
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