Trading futues contracts

[Grahamp]

Fees are per contract. If you use a discount broker like IB you will have extremely low costs ($1 per contract commission) but you’ll have to enter trades yourself etc.

Don’t listen to brokers advice about direction of a market. If they knew they wouldn’t be a broker. They can be helpful for which market, which month, how to roll or do a spread etc.

If you are starting out in corn that is a good slow market to start with. Most people overleverage themselves by a factor of 5 or more in their future account. Initial and Maintenance margins shouldn’t even concern you because you have much more in your account than either of those.

Corn is actually a good market to learn on simply because the contract value is so small but the moves aren’t too bad so there is a bit of volatility. For example a corn contract right now is around 17,000 USD. So if you went long a Dec corn contract today and you had 17000 in your account you would never have a margin call. Corn could go to 0 and you would still be ok (we’ll I guess down 17k isn’t too good but you get what I am saying) Obviously on the short side you can lose to infinity.

I would say you should have $10000 per corn contract in your account. This should let you trade in comfort and try to capitalize on whatever inefficiency you are trying to take advantage of.

So say you have the belief that corn is going to rally through May. You could buy 1 contract and hold through your premise and then if by the end of May you are proven either right or wrong and you can take off. If I am not mistaken initial margin on corn is around $2000. Many new traders will interpret they can “buy” 5 contracts with a $10,000 account. A 40 cent move blows your account up. Or perhaps you have to sell before you would like to simply because you are unable to maintain the position. I am not necessarily advocating huge stops or hold forever, but you will trade far better with a large buffer.

However as a final warning I’ll leave you with the words of futures brokers everywhere

“Futures traders are all terminal, our only job is to keep them happy until they are gone.”

[Braveheart]

I’ve never traded on the board, thinking of it.

How many contracts in one trade should a rookie do?

Thanks for any replies.

If your not hedging, don't trade anything.

[farming101]

Thanks for all replies, are broker fees based on per contract or per trade?

Per contract.

[shtferbrains]

Autists Get a Margin Call


Paste that in your browser.

Margin call is what scares all of us amretuers out of futures and options.

If somebody can make that live it made my day.

[MBgrower]

I'd suggest sticking with hedging, not trading futures, you'll never make money trading futures. if you want to trade, do it in the stock market and stick with good solid companies that pay dividends. Sitting here waiting for the market to bottom out, then its go time.

[farmaholic]

I'd suggest sticking with hedging, not trading futures, you'll never make money trading futures. if you want to trade, do it in the stock market and stick with good solid companies that pay dividends. Sitting here waiting for the market to bottom out, then its go time.

I have the utmost respect for the guys who manage their own savings portfolios rather than having the leaches skim the cream. I'm getting tired of the lazy passive investing of places we pay to "advise" and "manage" our portfolio.

Serenity now!!!!

Sorry samhill, I may have sidetracked your thread.

[blackpowder]

Teach me BP.

what strike price should I pick and how much is the call worth?

I've only done it a few times ages ago.
I'm too disorganized and lazy.
There are some good books.
Didn't Andy Sirski write a lot of Grainews articles regarding same.
The idea is premium collection creating income. When the time comes, you have to decide to buy your calls back or let your stock get "called" away.
Only some stocks have options on them.
Not complicated. Good luck.

[farmaholic]

Farma 7.9 is a nice dividend in these turbulent times

The oil and natural gas still have to flow

Good luck to all !

True, but TFSA lost about 20% of its value. Since the dividend is per share, as the share price rises(hopefully) the dividend rate(%) drops if the dividend stays the same.

I just hope they can maintain the current dividend.

Enbridge.

[TechAnalyst]

I’ve never traded on the board, thinking of it.

How many contracts in one trade should a rookie do?

Thanks for any replies.

I believe in beginning with an end in mind. If your long term goal is to use trading for risk management, options are likely your best tool. You can avoid some of the pitfalls mentioned above, yet still profit if you're right. It is also about the only way to trade significant volumes without six figure margin accounts.

As an example, July corn is $3.40/bu today. You can buy a July $3.50/bu corn call (giving you the right but not the obligation to own July corn at $3.50/bu) for $.11/bu x 5,000bu or $550 plus about $70 commission. The $620 will be your maximum cash outflow on the trade, no margin calls to worry about.

If corn is $3/bu on June 26th (date the option expires), you let it expire worthless and lose your $620 total.

If July corn is $5/bu because of input or weather issues, you can exercise the option or more often, sell it for $1.50/bu profit (5-3.50 strike price), $7,500 US$ on the 5,000bu contract less the initial $620 outlay.

As has been mentioned, you likely want to start small. Depending on how much you are willing to risk, try not to use any more than 10% of the total on any given trade. Then even if you have more losers than winners, you can still be profitable.

Hope that helps...

[errolanderson]

Trading is another tool in your marketing toolbox.

There are times when signing a cash contract may be your strongest strategy. There are times when using your commodity trading account is the tool of choice. A farm market plan is usually a blend of both. When basis levels are weak and wide, hedging, sell the futures or scale in put options is an effective strategy.

Recently, cattle feeders hedging their fat or feeder cattle have made their entire winter feeding profits through the short cattle hedges. Feeding cattle for next to nothing this winter was propped-up and covered by their hedge positions. That was the feeding profit.

New crop canola pricing via put options guard a floor price without production or delivery obligations.

Futures trading is a marketing tool, but must be respected. To speculators, futures trading can kick your ass. Anyone ****y with futures will learn a lesson of market respect. But it is a valuable risk management tool for those that can manage positions and watch that basis.

[Oliver88]

What is an example of a call option or future contract to protect a farm against a rise in diesel fuel prices?

[mbratrud]

I’ve never traded on the board, thinking of it.

How many contracts in one trade should a rookie do?

Thanks for any replies.

Are you using as a hedge or are you speculating?

[TechAnalyst]

What is an example of a call option or future contract to protect a farm against a rise in diesel fuel prices?

This may be one of the most complex hedges (regarding considerations) that one can establish. That said, this exceptional situation we find ourselves in certainly makes it worth looking into.

The first question to answer likely is - should I? Given the extreme volatility, it could be quite expensive to put on and maintain a hedge strategy. Whether a futures or options position is used, the volatility adds to the financial commitment. If Covid19 is actually reducing world consumption by 20 mil barrels of oil per day, there should be more concern about running out of storage space than there is about prices rising. Even the 10mb/day cut in production that was floated today would likely just slow the build in supplies. The best move may be to just monitor the situation and keep your tanks full as long as prices stay low. Once it looks like the world figures out how and when to start returning to normal, then consider the strategies that follow.

There are a few difficulties to consider,

The proper futures contract, Ultra Low Sulfur Diesel-ULSD (HO), is large – 42,000 US gal or 159,600 litres

It has very few options trading (still doable), no mini sized contract, priced in US$

Crude oil futures contracts can be used but they too are a very large 1,000 barrels

They have significantly better options liquidity but prices can move independently of ULSD

They do have a mini contract of 500 barrels (roughly equivalent to 80,000 litres of diesel)

In either case there can be large fluctuations in the basis (futures price less local pump price) given the processors being in Western Canada, selling refined products in Can$.

The cost of carry is large with petroleum products (storage, insurance, etc) so deferred contracts trade at a premium at any given time. For example, May HO is $1.0081/gal while July HO is trading at $1.0601 and November at $1.1845/gal. Over time, if there is nothing to increase the spot price, those deferred contracts drop in value to the cash price (as the remaining cost of carry declines). As such, going out too far in the future to protect yourself locks in the higher value, not what you are attempting to accomplish.

The best way to look at the process is it will be imperfect but it still can be well worth while.

Back to the original question, given the volatility, I would recommend using July HO options. They expire June 25th so would provide protection until the tanks are filled prior to harvest, close enough. For reference, July HO was $2.07/gal on Jan 8th, $0.9823 on Wednesday, and $1.0601 today.

You can buy a July $1.30 call today for $.0615 x 42,000gal or $2,583 US plus $70 commission

In the simplest terms, that should protect about 70% of the price decline in your cash prices since the start of the year on 160,000 litres.

Given most farms wouldn’t come close to that level of use, any move in price over $1.30/gal (July futures) would actually work in your favour – you would be over insured.

You can lessen the cost by going with a higher strike price (poorer protection) as well.

The alternative is to simply buy a mini Crude oil futures. Keep in mind, there would be a very significant margin requirement here and even a move back below $20/bl from the current $25 would result in a loss of $2,500 (presumably offset by lower cash fuel prices should the futures stay down there). I would suggest this for those comfortable with futures trading only given the current volatility.

Sorry about the length…

[samhill]

Thanks much for all replies, a wealth of info from here. I’ll study the mechanics a little more, and think I’ll try options in corn to begin, May not make much but will get some experience as suggested.

I know, “ Experience is what you get when you get what you don’t want.”

[farming101]

Good explanation Tech, I would go with the call option of ULSD. Maybe try to work a CAD cross hedge into it too. Need not be in the markets. Start up a USD acct. Regardless, all this price protection requires your money or demands risk up front. The markets are like life, the test is given first, then the lesson