Advantages of Futures Market | Blink Capital Management

What are the Advantages of Futures Market?

One of the main advantages of the futures markets is the ability to go Short, allowing you to profit from falling prices. Therefore, it’s possible to gain from both the upside and the downside of the markets.

Going ”Long” means that you are buying a futures contract to seek profit from its potential price increase. Going ”Short” means that you are “selling” a futures contract to seek profit from its potential price decline (after which you have to “buy” what you had sold in order to close your position).

Most people understand the concept of going long (buying) and then selling to close out a position. However, some have a challenge understanding shorting (benefiting from a down move) and then buying it later to close out a position.

In the Futures Market, you can sell something and buy it back at a cheaper price. Think of this logically, if you buy something at $1 and sell it at $10, you have a $9 dollar profit. But, in the future, you can sell something at $10 and buy it back at $1. Either way, it is a gain of $9.

Understanding Short Sell

Advantages of Futures Market. Let’s expand on the shorting side a bit; when you buy a futures contract as a speculator, you are simply playing the direction.

When a commercial buyer purchases a futures contract, they are “locking in a buying price” with the intention of buying the actual commodity at a later time.

When a commercial seller is going “short” a position (as in the case of a farmer selling short corn or wheat futures), they actually intend to sell the physical commodity at a specified delivery date, using the short position as a means to “lock-in” a sales price.

But when a retailer buys or sells a futures contract, they are simply playing the direction for a potential profit with no intention of actually buying or selling the physical commodity.

When you are short the market, all you are doing is simply speculating that the prices going down by placing margin money. If you buy back the contract after the market price has declined, you are in a position of profit.

Liquidity

Since the futures market concerns the global macroeconomic environment, it is trading nearly 24/5. Worldwide events are happening around the clock and the futures markets must allow speculators, hedgers and commercial players around the globe to adjust their positions at any time. As a futures trader, you can choose your preferred trading hours and your markets. One thing that you should keep in mind is that even though futures markets offer almost 24/5 access, their liquidity may be different during different periods of the trading day.

Example

For example, the stock indices on the CME are typically most active between 6:00 PM to 12: 00 AM in Pakistan as it coincides with New York Stock Exchange hours. These hours also present the best opportunity to trade Oil and Gold. This is not a rule, because during certain periods these markets could be very volatile depending on economic releases and events across the globe. You may be outside the United States and unable to catch the entire US session, but you have the opportunity to trade other markets such as the German Eurex, the Japanese Osaka, or the Australian markets--all of which carry major international indices. Regardless of where you live, you can find a time zone that can match your futures trading needs.

Diversification

Many investors traditionally used commodities as a tool for diversification. Futures can indeed help you diversify your portfolio as different commodities have varying correlations to the securities markets. Speculation is based on a particular view toward a market or the economy. You can develop a view about a stock, but you can also develop a view about Gold, Copper, Silver and Platinum. You can have a negative view or a positive view about any commodity, and you can go long or short any market depending on your view. If you need professional assistance to navigate the futures markets, you can work with a CTA (Commodity Trading Advisor) at BCM, specializing in specific futures commodities markets.

Hedging

Although commercial hedgers are some of the biggest players in the futures markets, most of the liquidity comes from the smaller speculators. For instance, the rough Rice market may be traded by “commercials,” but because of the lack of smaller speculators, it is not liquid enough to trade, particularly in the short term. Although you may have next to zero interest of need for a hedging account, it’s important to know what hedgers do, and that because of their size, they have a greater capacity to move illiquid markets such as Lumber, Rice, and Sugar.