MARKETS AND VOLATILITY - SECTION IV - CHAPTER 25 - Futures

1. Module - 42
Futures
CMT LEVEL - I

2. What is Futures?
•Futures are financial contracts obligating the buyer to
purchase an asset or the seller to sell an asset and
have a predetermined future date and price.
•A futures contract allows an investor to speculate on
the direction of a security, commodity, or a financial
instrument.
•Futures are used to hedge the price movement of the
underlying asset to help prevent losses from
unfavorable price changes.

3. What is Futures?
• Futures—also called futures contracts—allow traders to lock in a
price of the underlying asset or commodity. These contracts
have expirations dates and set prices that are known up front.
• However, there are many types of futures contracts available for
trading including:
• Commodity futures such as in crude oil, natural gas, corn, and
wheat
• Stock index futures such as the S&P 500 Index
• Currency futures including those for the euro and the British
pound
• Precious metal futures for gold and silver
• U.S. Treasury futures for bonds and other products

4. Futures Contract Components
• Long Position - a buyer of futures contracts. A long position is the
number of purchase contracts held by the buyer.
• Short Position - a seller of futures contracts. A short position is the
number of sales contracts held by the seller.
• Trade Volume – the number of transactions executed for a
particular time period. The purchase by the buyer and sale by the
seller of one futures contract equals a volume of ONE (Purchases
and sales are not double counted.)
• Open interest – the number of futures contracts that exist on the
book of the Clearinghouse. One purchase and sale, involving two
transacting parties – constitutes an open interest of ONE. The
number of purchase and sale contracts is always equal.

5. Futures Contract Components
• Closing Price – the fair value price trading near the end of the
trading session, as determined by the exchange.
• Futures Expiration– the last trading day of futures contract.
• OTC Markets – Over the Counter markets involving bi-lateral trades.
OTC markets are largely unregulated –OTC trades are not cleared
and may not be marked to market.
• Marked to Market – a process whereby long and short positions are
revalued to reflect their settlement price.
• Contract Size - This refers to the amount or quantity of the
commodity represented by each futures contract.
• Contract Value - Contract value is the current price of the futures
contract multiplied by the contract size.

6. Futures Contract Components
• Tick Size - Tick size is the minimum price fluctuation for a futures
contract. Different futures contracts have different tick sizes.
• Contract Month - Futures trade for a variety of months. The exchange
sets the months for each contract with input from the underlying
industry.
• Basis - Basis is the differential between the cash price for a physical
commodity and its nearby futures price.
• Backwardation - the condition in a futures market in which futures
contracts are trading at successively lower prices over a particular time
span
• Contango - the condition in a futures market in which futures contracts
are trading at successively higher prices over a particular time span (the
opposite from backwardation)

7. Challenges for Technicians
• Tick Size - Tick size is the minimum price fluctuation for a futures
contract. Different futures contracts have different tick sizes.
• Contract Month - Futures trade for a variety of months. The exchange
sets the months for each contract with input from the underlying
industry.
• Basis - Basis is the differential between the cash price for a physical
commodity and its nearby futures price.
• Backwardation - the condition in a futures market in which futures
contracts are trading at successively lower prices over a particular time
span
• Contango - the condition in a futures market in which futures contracts
are trading at successively higher prices over a particular time span (the
opposite from backwardation)

8. Futures Trading
COMMON MISTAKES
•Not Sticking With Your
System
•Not Protecting Yourself
•Not Staying Focused
•Not Being Open to New
Ideas
Qualities of Good Futures
Traders
•Independent Thinkers
•Strong Analysts
•Active Learners
•Handy With the Tools of
Their Trade