Lakefront Futures & Options Takes The Pain Out Of Commodities Investing
by Jon Marcus
June 2008
This is a sponsored article. Investor Concepts is not responsible for the claims made by this article. Please seek the advice of financial professionals before making any investment.
These days, one cannot go more than a few minutes without realizing that prices on just about everything are at unbelievably high levels. Just open a newspaper or turn on the television and you will almost definitely hear about a new record high for gasoline prices. Walking into a grocery store these days is much different than it was even two or three years ago.
Prices for vegetables, dairy products, meat and poultry, and just about everything else you can imagine are at the highest levels they have been in years. How about the gentleman who wanted to buy his wife a brand new gold bracelet? He should have done it a few years ago before gold tripled in value! The bottom line is that commodities of all varieties are in extremely high demand. From a consumer standpoint, that means lots of spending to purchase the items we need to live. From an investment standpoint, that means a lot of opportunity.
The commodity markets have garnered much attention over the course of the last two or three years. Mergers between two of the world's biggest futures exchanges, the Chicago Mercantile Exchange and the Chicago Board of Trade, coupled with the popularity of electronic trading have put commodity investing at the forefront of the trading community. The biggest reason, however, that commodities dominate business headlines these days is the price volatility that the futures markets have shown. Never in the history of the markets have so many prices been at so many historically high levels.
The examples from the beginning of this article are merely the tip of the iceberg, so to speak. How can an individual participate in the futures markets? That is what this article intends to show.
The first thing to consider when it comes to trading futures and options on futures is that they are extremely volatile. They are highly leveraged investments that should only be traded with risk capital, as an investor can lose all of their capital and often times more than the original investment. Futures trading is risky and is not suitable for everyone. That being said, the flipside to this high risk scenario is that with such high risk there is the potential for a very high reward when a trader is correct in their analysis.
Once your account is established and funded, you will be able to place trades. You can place them electronically or through a broker. Depending on your level of experience, you may place trades however you wish.
Placing trades through a broker by phone would probably be the best way to go about trading if you are new to commodity markets. The upside is that you will be able to place orders with a professional who will help you to place your trade correctly. The downside is that it may cost more than placing it yourself electronically. If you are experienced, you can always place your trades on your firm's trading software and then double check with your broker if you have any questions. Establishing an account is a fairly easy process, but it is not one to take lightly.
As we discussed earlier in this article, commodity prices are extremely volatile right now and prices are at historically high levels in many markets. This climate makes for some awfully large daily ranges and some very unpredictable price movement. That can be a very scary arena for futures trading. Purchasing options, in our opinion, offers a much better way of entering, and maintaining a position in the markets.
There are two types of options: call and put. A call option is defined as the right to buy a futures contract at a specified price. A put option is the right to sell a futures contract at a specified price. The cost of each option, call or put, is referred as the premium. The most that an option buyer can lose on any given cut or call is limited to the premium, while the gains are unlimited. That is one major benefit to trading options.
One other important item to consider is the cost of entering these futures markets these days. As volatility increases, the exchanges have seen fit to raise the margin it takes to hold futures contracts, and in some instances they have tripled or quadrupled over the past several months.
With options, however, customers still only need to pay the premium to enter the market. Some options cost as low as $500 or $1000 depending on the strike prices and the expiration date, so one can still enter the markets at a relatively low entry price.
There is much to cover when discussing and learning options, much more than we could cover in this article. If you would like more information on trading options or would like to learn some more complex options strategies, please visit our website at www.lakefrontfutures.com.
In the meantime, grain prices are at historically high levels. We believe that these markets have explosive potential over the course of the next few months. As we write this article, farmers in the Midwest are preparing to enter their fields and begin planting their 2008 crop.
This year, because of the high demand for corn and the lower supply numbers, the need for a successful growing season is crucial for global demand. That is why it is of utmost importance for the crop to be planted on time so it has ample time to grow and once in the ground, the summer weather needs to cooperate.
What about soybeans, wheat and oats? All of these markets are under the same type of scrutiny as corn. How will these markets react? As an investor, what are your options and how can you profit from all of this uncertainty? It is an exciting question and one in which we ask ourselves daily, if not hourly.
The bullish investor would see that the market has been trending higher for the last few years and that this year would be no exception. They would look at this news and see an opportunity to purchase call options and wait and see if we experience another drought during the summer. Do you see the ever-present hand of supply and demand at work in the commodities markets? Understanding supply and demand is essential to effective commodities trading.
If we do experience another drought, and US corn crops come in lower than expected during the fall, prices would most likely continue their upward trend, and quite possibly in a dramatic fashion.
The bearish investor would look at the same scenario and see it as the perfect time to buy puts. The corn market has rallied to all-time highs, and the chance for excellent summer weather is just as good as having poor weather. A market correction in this market will most likely occur with a bumper crop.
Another explosive market is crude oil. Prices as of this writing are approaching $120.00 per barrel causing a gallon of gas to reach $3.97 this week. Prices seem to have no end due to increasingly high consumer demand.
Buying calls is an excellent way to not only defend against higher prices, but to profit from them. The investor who believes that this market has reached its peak can purchase put options to get short the market.
Many investors are looking to hedge their stock portfolios. With so much global uncertainty and the jitters that the stock market faces each day, how can one hedge their 401Ks and outside stock investments? Many customers ask us how this can be done without liquidating their stocks. Purchasing put options on the Dow, S&P, or NASDAQ are an excellent way to take some of the worry out of your long stock position. With excellent liquidity and standardized contracts, options on stock indices provide savvy investors with a protection method that most individuals don't know about, but should.
These are but three examples, three very basic examples, of how options on futures can provide investors with affordable and practical methods of participating in a potentially explosive trading arena. For more information about commodity trading and to schedule a complimentary consultation, please call one of Lakefront's friendly brokers. There is no obligation and all of our knowledgeable and well-trained brokers will happily answer all of questions: