I am frequently asked why a person would want to trade futures. I can think of numerous reasons. However it all boils down to hedging or speculating.

For those of you who are not aware of the futures market, a futures contract is an agreement between two people. The purchaser of the contract agrees to take delivery of a standardized amount of a commodity at a specific price and by a specific date. The standardized commodity might be corn, gold or a basket full of stocks. The seller of the contract agrees to make delivery of a standardized amount of a commodity, at a specific price and by a specific date.

Hedgers are people who are attempting to protect themselves. For instance, farmers producing a crop might consider selling a futures contract to lock in a price for their crop. A plastics manufacturer fearful that the price of petroleum might trade higher might consider purchasing crude oil futures as a way to partially hedge his costs for raw materials. Or mortgage bankers, concerned that interest rates might decline might consider buying 30-year treasury bond futures. The futures markets have many products and contracts that might offer users and producers protection from price swings in the cash markets.

People who anticipate a price swing in the markets and attempt to profit from it through the purchase or sale of futures contracts or options on those contracts would be speculators. For example, a person who thinks that inflation is rearing its ugly head might consider buying gold futures. A person who feels that the stock market is too high or too low might consider buying or selling any one of a number of stock index futures. The futures markets offer an e-mini S&P, an e-mini Dow Jones and an e-mini NASDAQ futures contracts just to name a few. The “e” in e-mini denotes that the contract is electronically traded on the internet. The “mini” in e-mini denotes that the contract is a smaller contract than the full size contract and consequently it might have a smaller margin. Traders should also note that there is a “mini” contract without the “e” that is pit traded as is the case for instance with the mini grains.

One of the main reasons people trade futures is leverage. Futures contracts are bought and sold on margin. Traders are able to control a large amount of a commodity or cash instrument with a comparatively small amount of capital. Margins are determined by the futures exchanges. They look at the size of the contract, the volatility of the market and other things to try to determine the risk involved. Margins may rise and fall as the volatility increase or decreases.

When a trader buys or sells a futures contract, they are required to put up the “initial margin” by the close of business. The following day the margin will revert to the “maintenance margin”. As the price of a futures contract rises and falls, profits and losses are added or subtracted from a traders account at the close of business. This is called “marked to market”. If a traders account balance drops below the “maintenance margin” level, at the close of business, then the trader is issued a “margin call”. At that point the trader has to decide whether to accept the loss and exit the position or to meet the margin call. To meet the margin call the trader would need to send funds that would bring his account balance back up to the level of the “initial margin”. On the other hand, profits from trades can be used as margin for newly established positions.

If you would like to trade futures contracts or options on those contracts, you need to open a futures trading account. This account can be opened with a Futures Commission Merchant or an introducing broker for that FCM. A “FCM” is a firm that is licensed by the U.S. Commodity Futures Trading Commission to solicit or accept orders for the purchase or sale of futures contracts.

Most FCM’s and Introducing Brokers offer three levels of service. At Extra Mile Trading LLC we offer those three levels of service.

Full Service. This is where you would receive assistance from a broker in identifying opportunities in the market and placing your orders.
Self Directed or Discount online trading. This is where you select your own trades and enter your own orders.
Managed Accounts. This is where a Commodity Trading Advisor has power of attorney over your account. He would identify opportunities in the market and enter and exit the trades for you.

If you would like more information on opening a futures trading account, on the futures markets or on Extra Mile Trading LLC, visit out website at www.extramiletrading.com. Or call Les Jones at 1 (866) 553-5225.

DISCLAIMER: FUTURES AND COMMODITIES TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. THIS NEWSLETTER IS STRICTLY THE OPINION OF ITS AUTHOR AND IS INTENDED FOR INFORMATIONAL PURPOSES AND IS NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION TO BUY OR TRADE IN ANY COMMODITY OR SECURITY MENTIONED HEREIN. INFORMATION IS OBTAINED FROM SOURCES BELIEVED RELIABLE, BUT IS IN NO WAY GUARANTEED. THE AUTHOR MAY HAVE POSITIONS IN THE MARKET MENTIONED INCLUDING AT TIMES POSITIONS CONTRARY TO THE ADVICE QUOTED HEREIN. OPINIONS, MARKET DATA AND RECOMMENDATIONS ARE SUBJECT TO CHANGE AT ANY TIME. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS.

eXtra Mile Trading, LLC wants you to know that there are substantial risks involved in trading futures. You should, therefore, carefully consider whether trading is suitable for you in light of your circumstances and financial resources. Traders should not rely solely on any one particular tool for investing/trading. Many unforeseen circumstances can occur which affect investing/trading and their outcomes. Investing, trading, and especially day trading carry with them substantial and significant risks. Investors/traders should be prepared to sustain a partial or COMPLETE loss of their trading capital. In some cases, losses can exceed initial investment. eXtra Mile Trading, LLC does not guarantee any trading results. Past results do not imply future performance.