Futures Trading Educational Resources
Understanding Commodity Futures Trading...
Who trades commodity futures and options and why?
The first group of participants in the commodities and options markets are commercial and institutional users of the commodities they trade. For example, a company or individual who holds an asset such as coffee, corn, soybeans, U.S. Treasury bonds, or a portfolio of stocks, wants the value of that asset to increase. That person also wants to limit, if possible, any loss in value. The company or individual may use the commodity markets to take an opposite position that can minimize the risk of financial loss from holding those assets when and if their price changes. This is form of futures trading is called “hedging.”
Other participants are speculators who hope to profit from changes in the price of the futures contract. A speculator buying a contract or call option, or selling a put option, hopes to profit from rising prices, while a speculator selling a contract or call option, or buying a put option, hopes to profit from declining prices. Because, unlike a hedger, a speculator does not own the underlying commodity, the components of the underlying index, or other product, losses in the market are not offset by gains in the cash market, and speculators can lose substantial amounts.
Individuals do participate in the markets. An individual who owns or runs a business might participate as a hedger. Or, an individual with a substantial and diversified portfolio of investments might speculate using futures and/or options trading.
Insignia Futures & Options offers both Speculative and Hedge accounts to accommodate your investment objectives and strategies.
Can commodities trading meet my investment goals?
Futures and option trading is inherently complex and risky, and it is not appropriate for all investors. You should know how much you potentially can lose and honestly evaluate if you can afford to lose it in view of your financial resources and investment goals. An Insignia Futures & Options representative is available to discuss your investment objectives and goals to help you determine if futures and options trading is right for you. If you decide you have the resources and the reasons to invest in futures, you should also determine the extent to which you plan to rely on your own trading decisions and/or if you desire assistance by working with an Insignia Futures & Options broker. We offer custom trading account plans to accommodate your trading needs; Self-Directed, Traders Advantage and Managed Futures. Like other financial markets, futures and options markets are cyclical and gains may not be immediate. Finally, remember that, because of the leveraged nature of futures, losses can be more than your original deposit.
How do I go about trading futures or option contracts?
In the United States, futures contracts and options on futures contracts must be executed on or subject to the rules of a commodity futures exchange. But you, as an individual, cannot trade directly on an exchange. A commodity futures brokerage firm must trade on your behalf. As a fully registered commodity futures broker with the Commodity Futures Trading Commission (CFTC) and member of the National Futures Association (NFA), Insignia Futures & Options can accommodate all of your trading needs.
How do I open an account with Insignia Futures & Options?
You may open an Individual, Joint, Business, Trust or IRA futures trading account with Insignia Futures & Options. A new trading account application will need to be submitted and can be accessed on our New Accounts web page. Once your account application has been processed and your account is funded ($500.00 minimum), your account will be activated and ready to begin trading. Depending on your level of trading experience and/or investment objectives, you will choose the account plan that best suits your needs. Our Self-Directed plan is designed for the experienced trader who needs no assistance with their trading or investment objectives and is able to place his or her commodity futures & options trades confidently and without the need for advice from a futures broker. Our Traders Advantage plan is designed for all levels of traders seeking a personal relationship with a futures broker. As a Traders Advantage client, you will receive our trade recommendations based upon our proprietary trading strategies. You will work one-on-one with a futures broker to fully assist you with all of your trading and market education needs. Our Managed Futures Account plan is designed for the investor who wants a “hands-off” approach to investing in the commodity futures markets. Through a managed futures account, all aspects of trading and managing your account are handled for you by a CTA (Commodity Trading Advisor).
What are my contractual obligations?
When you enter into a commodity or option contract through your trading account, you are required to make a payment referred to as a “margin payment” or “performance bond.” This payment is small relative to the value of your market position, providing you with the ability to “leverage” your funds. Because trading commodities and option contracts is leveraged, small changes in price, which occur frequently, can result in large gains or losses in a short period of time.
Each day, Insignia Futures & Options will calculate the current value of contract positions held in your account. If the equity in your account has declined in value to the “maintenance margin level” (approximately 75% of the amount required to enter into the trades originally), you are required to provide more margin money to restore the initial margin level (this is called a “margin call”). This eliminates the need to make repeated margin calls when daily price changes are relatively small.
If you fail to meet a margin call within a reasonable period of time, which could be as little as 5 minutes depending on market conditions, we may close out your positions to reduce your margin deficiency. If your position(s) were liquidated at a loss, you would continue to be liable for that loss.
Understanding Your Risks & Other Aspects of Futures Trading...
What is a risk disclosure document?
Because trading in commodities and options is appropriate only for certain individual investors and businesses, the Commodity Futures Trading Commission (CFTC) requires that you are provided with a disclosure document that describes the risks involved. The document provides you with an opportunity to carefully consider whether futures and options are appropriate for you in light of your experience, objectives, financial resources, and other circumstances. We must receive a signed and dated acknowledgment from you that you have received a disclosure document before Insignia Futures & Options can accept any funds from you. These disclosure documents are provided to your in our new account application.
How does risk affect my returns?
Your returns may change radically at any time because futures and options are subject, by nature, to abrupt changes in price. Commodity prices are volatile because they respond to many unpredictable factors: weather, labor strikes, inflation, foreign exchange rates, government monetary policies, etc. And, because your position is leveraged, even a small move against your may result in a large loss, including the loss of your entire initial margin payment and liability for additional losses. We invite you to contact an Insignia Futures & Options representative to fully discuss your trading objectives and to learn if trading commodity futures & options is right for you.
Are there strategies for reducing risk?
In an individual account, there are certain types of orders (such as “stop-loss” orders or “stop limit” orders), which are designed to limit losses to certain amounts. However, these orders may not be effective in limiting losses because market conditions may make it impossible to execute your orders at a reasonable price. Strategies using combinations of positions, such as “spread” and “straddle” positions, may be as risky as taking simple “long” or “short” positions. Through our Trader Advantage account plans, you will have the opportunity to discuss your risk objectives with a futures broker to aid you in determining and meeting your trading needs.
Do options carry less risk than futures?
Not necessarily. If you are considering investing in futures options, you should familiarize yourself with the types of options (puts or calls) and the risks associated with each. You should calculate the extent to which the value of the options must increase for your position to become profitable, taking into account the premium and all transaction costs. You should also understand that certain market conditions (such as lack of liquidity), market rules, or the pricing relationships between the underlying commodity and the option may increase risk.
Do the risks vary between puts and calls?
The purchaser of an option (known as a “long” call or being “long” a put) can do the following with an option position. The purchaser may “exercise” the option if it is profitable, or allow the option to expire if it is not profitable. If the option is on a futures contract, the purchaser will acquire a futures position with associated liabilities for margin if the option expires “In The Money”. If a purchased option expires worthless, you will incur a total loss of your investment, which will consist of the option premium plus transaction costs.
Selling, or shorting, an option generally entails considerably greater risk than purchasing options. Although the premium received by the seller is fixed, the seller may sustain a loss well in excess of that amount. The seller will be liable for additional margin to maintain the position if the market moves unfavorably. The seller will also be exposed to the risk that the purchaser will exercise the option, obligating the seller to either settle the option in cash or to acquire and deliver the underlying interest. If the position is “covered” by the seller holding a corresponding position in the underlying interest or a future or another option, the risk of loss may be reduced, but the loss may still exceed the premium received. If the option is not covered, the risk of loss can be unlimited.
A “Before-You-Trade” Checklist
Before you begin to trade commodities, have you…
1) Clearly identified your financial goals, including the amount of risk and loss you can sustain?
2) Determined how much assistance, if any, you need from a commodities futures broker in making trading decisions?
3) Checked the registration status and disciplinary history of the broker you’ve selected with the National Futures Association?
If you have answered “Yes” to the three questions above, then you are ready start. Click Here to begin the simple process of opening your new futures trading account.
The Benefits of Investing in Commodity Futures in Adverse or Recessionary Economic Times...
A very common but often overlooked investment vehicle can be found in the commodity futures markets. Many studies have shown a diversified investment portfolio, which includes commodity futures, will perform better than a portfolio made up exclusively of stocks and/or bonds.
In times of poor economical conditions, commodity futures can provide investment opportunities as well as alternatives to investing in a dropping stock market.
As an example, in certain economic down turns, commodity prices tend to rise. Commodities such as Sugar, Coffee and Crude Oil will typically see a rise in prices during the onset of an economic downturn. Commodities such as Soybeans, Gold and Lean Hogs tend to rise towards the end of a poor economic cycle.
Overall, the agricultural markets tend to be most beneficial markets to invest or trade in during recessionary times.
Another way savvy investors utilize commodity futures is to trade stock index futures to either hedge their stock portfolios and/or outright speculate by taking short positions. Unlike the strict regulations found when shorting or day trading stocks, commodity futures have no such restrictions. Short positions may be entered just as easily as Long positions. Additionally, the $25,000 account minimum requirement for day trading stocks does not apply to commodity futures trading nor are there any additional trade limits or regulations (outside of the normal commodity futures margin & CFTC position reporting requirements).
When inflationary times arise, we may see a rise in the precious metals such as Gold, Silver and Platinum among other select commodities.
Insignia Futures & Options has the experience and expertise to assist you in a well-rounded investment portfolio. Contact our offices today to discuss the benefits of investing in commodity futures.
How Are My Funds Protected?
The commodity industry remains one of the most stringently regulated industries in the United States. We will outline some of the protection devices designed for you, the client. You may also contact us to request a copy of “The Story Behind The Financial Integrity of the U.S. Futures Markets”, published by the National Futures Association (NFA).
All futures commission merchants and brokerage houses are regulated by the Commodity Futures Trading Commission and the National Futures Association. Every firm that conducts business with the public as a Futures Commission Merchant must have and maintain sufficient capital to meet its financial obligations to its customers. These requirements are subject to continuous audit and stringent enforcement.
All customer funds are kept in a customer segregated funds account, which is separate from the bank account of the futures commission merchant and the brokerage firm. Funds can be used only for the purposes the customers intended and can at no time be commingled with the firm’s funds or the funds of the firm’s principals. Compliance is strictly enforced and regulators possess the power to take such immediate action as is considered necessary to protect the security of customers’ money. Under current bankruptcy laws, in the event of a counter-party failure, clients may recover only a pro rata share or none of their assets.
Transfer of Market Positions
Should a firm be determined to be in a financial situation that could potentially jeopardize the safety of its customers’ funds, it can be directed to immediately cease operations and transfer all open customer positions in the market to a firm, which is financially sound. This is to ensure that adequately margined positions with a troubled firm will not be liquidated at a time when the customer may not wish for them to be liquidated.
These and other protective safeguards support the financial integrity of the futures markets. For additional information, please feel free to contact us for your copy of the NFA publication.
We offer personalized futures and options trading coaching & education for beginner traders through our Traders Advantage account plan…
The Benefits of Investing in Managed Futures...
What are the Benefits to Investing in Managed Futures?
If you’ve considered investing in commodity futures to diversify your portfolio or would like to take advantage of rising/falling prices of a certain commodity but didn’t feel you have the expertise to do it yourself, then a managed futures program may be perfect for you.
A managed futures program is very similar to a mutual fund in that you simply invest funds into the program and all of the trading and account management is handled for you by a registered CTA (Commodity Trading Advisor). A CTA is an experienced commodity futures trading professional who will handle all aspects of the account; from market strategies to risk management. As an investor of a managed futures program, you will have full transparency as to the status of your account at all times. You will be able to view your account balances and current trade positions in real time.
In return for his services, a CTA normally collects a management fee and an incentive fee. Management fees are typically 1.8% to 2.5% of the total account value and are collected quarterly. Incentive fees typically range from 20% to 30% and are only payable on new, net profits achieved in the managed account program. If no new profits are made in a given month, no incentive fee is collected by the CTA thus giving him “incentive” to manage the account profitably.
Many financial advisors will recommend a managed futures program to their clients looking to diversify their portfolio. A typical asset allocation of 10% to 20% in managed futures is recommended to achieve a well-balanced portfolio. Over the past 30 years, the amount of funds allocated to managed futures investments has skyrocketed to over $130 Billion. The popularity of managed futures investments seems to be rapidly increasing as more and more investors become aware of the benefits associated with them.
Yes, there is a reason for the growing popularity of investing in commodity futures. For the first time in over 60 years, the stock market has had a 3 year decline in returns, and the market has not achieved its highs set in 1999. As the result of the recent poor economic conditions, corporations continue to fail striking fear in the markets, and hence, increasing the volatility of the equities markets.
Investing in commodity futures is generally uncorrelated with the equity markets. Many professionals in the financial industry believe this makes investing in commodity futures an effective diversification strategy.
Insignia Futures & Options has the experience and expertise to assist you in a well-rounded investment portfolio. Contact Us today for more details on investing in managed futures.
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