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Speculating, Spreading, and Options in the Future Market

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Title: Speculating, Spreading, and Options in the Future Market


1
Speculating, Spreading, and Options in the
Future Market
  • Stocks and Commodities
  • 2003-2004

2
Overview of Speculating
  • Speculators assume risk
  • Assume the risk of hedgers therefore adding
    capital to the market
  • Speculators add liquidity
  • Buy low, Sell high
  • Usually never take delivery of the commodity
  • Spreaders
  • Watch the market rather than the commodity.

3
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4
LeverageA speculating strategy
  • Attractive to speculators
  • It enables speculators to control the full value
    of a futures contract with relatively little
    capital.
  • Example
  • Trader buys a soybean contract (5000 bushels) at
    6.50 a bushel (32,500 for the contract)
  • The required margin might be 1400 (app. 4 of
    the contract value or about 28 cents per bushel)
  • A security deposit to ensure contract performance.

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6
Basic Speculating Strategies
  • Speculators need to know the most current market
    conditions as well as to watch changing events
    and shifting market attitudes
  • And be totally attuned to what is happening
    within and outside the market.

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8
Using Spreads in Future Markets
  • Another opportunity to profit in future markets
  • Refers to the simultaneous purchase and sale of
    two different futures contracts
  • When establishing or putting on a spread, a
    trader looks at the price relationship between
    contracts rather than the absolute price levels.
  • The contract that is viewed as cheap is
    purchased, while the contract that is viewed as
    expensive is sold.

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10
Reasons for Trading Spreads
  • Lower risk
  • Hedged nature
  • Less risky than positions
  • Protectionlosses from one side of the spread are
    more or less offset by gains from the other side
    of the spread
  • Attractive margin rates
  • Spread margin rates are generally lower than
    those for outright positions

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12
Options on Futures Contracts
  • Like futures, options provide price protection
    against an adverse price move
  • But unlike futures hedgers,option hedgers are not
    locked in to a specific floor or ceiling price,
    and can take advantage of a market trend.
  • Options were introduced in October 1982 on the
    CBOT
  • Options can be traded, too.

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14
Definition of an Option
  • An option provides a choice. The buyer of an
    option acquires the right, but not the
    obligation, to buy or sell an underlying
    commodity under specific conditions in exchange
    for the payment of a premium

15
Option Strategies
  • Call Option
  • Gives the buyer the right to buy a futures
    contract at a fixed pricebelieving that futures
    prices will rise by at least enough to pay the
    premium.
  • Put Option
  • Is an option to sell a futures contract at a
    fixed pricebelieving that future prices will
    decline by enough to pay the premium

16
Types of Commodities Markets
  • Agriculture Markets
  • Grains, Oilseeds, Livestock
  • Metals
  • Gold, silver, copper, platinum, palladium
  • Forest, Fiber, and Food
  • Lumber, cotton, orange juice, sugar, cocoa,
    coffee
  • Energy
  • Crude oil, heating oil, gasoline, natural gas
  • Financial
  • Debt instruments, stock indexes, currencies
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