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Published Jul 24, 21
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Instead of first buying a futures contract, you first sell a futures contract. If, as expected, the price declines, a profit can be realized by later purchasing an offsetting futures contract at the lower price. The gain per unit will be the amount by which the purchase price is below the earlier selling price.

In the hope of profiting, you deposit an initial margin of $2,000 and sell one April live cattle futures contract at a price of, say, 65 cents a pound. Each contract is for 40,000 pounds, meaning each 1 cent a pound change in price will increase or decrease the value of the futures contract by $400.

Spreads are one example. A spread, at least in its simplest form, involves buying one futures contract and selling another futures contract. The purpose is to profit from an expected change in the relationship between the purchase price of one and the selling price of the other. As an illustration, assume it's now November, that the March wheat futures price is presently $3.

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15 a bushel, a difference of 5 cents. Your analysis of market conditions indicates that, over the next few months, the price difference between the two contracts will widen to become greater than 5 cents. To profit if you are right, you could sell the March futures contract (the lower priced contract) and buy the May futures contract (the higher priced contract).

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15 Bu. 5 cents, February, Buy March wheat, Sell May wheat $3. 20 $3. 3515 cents $ . 10 loss$ . 20 gain Had the spread (i. e. the price difference) narrowed by 10 cents a bushel rather than widened by 10 cents a bushel the transactions just illustrated would have resulted in a loss of $500.

These, however, are beyond the scope of an introductory booklet and should be considered only by someone who well understands the risk/reward arithmetic involved. Now that you have an overview of what futures markets are, why they exist and how they work, the next step is to consider various ways in which you may be able to participate in futures trading.

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That is, they manage their own futures trades in much the same way they would manage their own stock portfolios. Others choose to rely on or at least consider the recommendations of a brokerage firm or account executive. Some purchase independent trading advice. Others would rather have someone else be responsible for trading their account and therefore give trading authority to their broker.

There's no formula for deciding. Your decision should, however, take into account such things as your knowledge of and any previous experience in futures trading, how much time and attention you are able to devote to trading, the amount of capital you can afford to commit to futures, and, by no means least, your individual temperament and tolerance for risk.

This can help you make the right decision about whether to participate at all and, if so, in what way. In no event, it bears repeating, should you participate in futures trading unless the capital you would commit its risk capital. That is, capital which, in pursuit of larger profits, you can afford to lose.

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You should also understand that, because of the leverage involved in futures, the profit and loss fluctuations may be wider than in most types of investment activity and you may be required to cover deficiencies due to losses over and above what you had expected to commit to futures. This involves opening your individual trading account and--with or without the recommendations of the brokerage firm--making your own trading decisions.



Some, for example, have extensive research departments and can provide current information and analysis concerning market developments as well as specific trading suggestions. Others tailor their services to clients who prefer to make market judgments and arrive at trading decisions on their own. Still others offer various combinations of these and other services.

Whichever course you choose, the account itself will be carried by a Futures Commission Merchant, as will your money. Introducing Brokers do not accept or handle customer funds but most offer a variety of trading-related services. Futures Commission Merchants are required to maintain the funds and property of their customers in segregated accounts, separate from the firm's own money.

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And, as mentioned, clearly understand how the firm requires that any margin calls be met. If you have a question about whether a firm is properly registered with the CFTC and is a Member of NFA, you can (and should) contact NFA's Information Center toll-free at 800-621-3570 (within Illinois call 800-572-9400).

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