Alert

Looking for even more trade ideas? Sign up for Alpha Boost, a FREE email from quiet foundation!

Futures Trading Fundamentals: Where Do I Start?

Nov 17, 2015

By: Sage Anderson

We are happy to present content from a recent episode of Where Do I Start which featured a review of key fundamentals in futures trading.

Futures programming on the tastytrade network is sponsored in part by the CME Group, a preeminent global futures exchange located in the United States.

A future is of course a financial product obligating the buyer/seller to purchase/sell an asset (commodity or financial instrument) at a predetermined future price and date.

Futures are standardized to trade on an exchange and may require the physical delivery of an asset or settlement in cash (both types exist).

Futures contracts may be used for speculative purposes or for hedging. For example, farmers may use futures to lock in a price for their crop by selling a futures contract representing a portion of their crop. Alternatively, a trader might establish a speculative position based on their expectation for future price movement.

On Where Do I Start, hosts Pete Mulmat and Katie McGarrigle review some of the most important concepts traders need to keep in mind when embarking on the futures trading journey.

First, the standardized nature of futures contracts is a critical factor to keep in mind. This structure means that each and every futures trade establishes an agreement on the following terms:

  • Quantity
  • Quality
  • Delivery Point
  • Delivery Date and Time

So why are traders drawn to futures?

One big reason is that the market is available to traders on a 24-hour basis. This flexibility allows traders to react to important breaking news instantly in the futures market, which can be imperative for portfolio managers hedging larger exposure in other products.

Some other reasons that traders use futures products include:

  • Efficient Use of Capital
  • Access to non-correlated returns (6 different sectors)
  • Options-like mechanics (familiarity)

An important differentiation between futures and other products like stocks and ETFs is that futures margin is referred to as "good faith money," or Performance Bond. Performance bond means that both sides of the transaction have deposited money to ensure they can maintain their responsibility in the contact.

There are several other important terms that traders starting in the futures arena need to be keenly aware of:

Initial Margin: Amount of money required per contract to initiate a futures position.

Maintenance Margin: Minimum balance that must be maintained at all times (dropping below this level results in a margin call).

The amount of maintenance margin differs across products in the spectrum of futures. The level of maintenance margin will vary because certain products are more volatile, or possess a higher absolute price - all of which increases the net risk of the trade.  The higher the risk of the futures product, the higher the initial and maintenance margins.

Notional value is another key concept to understand when trading futures. This is the total dollar value a trader has at risk in any given position. In stocks, notional value is calculated by multiplying the number of shares bought or sold times the execution price.

The notional value of a future is calculated in a similar manner - multiplying the price by the contract size/multiplier.

For example, "/CL" is an oil future that represents 1,000 barrels per contract. If "/CL" is trading at a price of $44.89, then you would multiply $44.89 x 1,000 to get the notional value of 1 contract in "/CL."

In this case, the notional value of one contract in "/CL" is $44,890.

The Where Do I Start series is an excellent place to learn more about futures trading. We invite you to not only watch the entire episode covered in this blog post, but also to watch new episodes that air on the tastytrade network Monday through Friday. The team will be covering additional fundamental aspects of trading futures as well as specific examples and strategies that traders can apply within their own portfolios.

If you have any questions, comments, or suggestions we hope you will contact us at support@tastytrade.com

Thank you for being a part of the tastytrade community!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.


tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.

© copyright 2013 – 2021 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.