Here I explain the basic concepts of futures trading
Futures trading is a form of investment that involves buying and selling contracts that obligate the parties to buy or sell an underlying asset at a future date and at a specified price. Below, I explain the basic concepts of futures trading:
Futures contract
- A futures contract is an agreement between two parties to buy or sell an underlying asset at a future date and at a specified price.
- Futures contracts can be on financial assets, such as stocks, indices, or currencies, or on commodities, such as metals, energy, or agricultural products.
Types of futures contracts
- Delivery contracts: These contracts require physical delivery of the underlying asset on the expiration date.
- Cash contracts: These contracts are settled in cash on the expiration date, without physical delivery of the underlying asset.
Futures positions
- Long position: A long position involves buying a futures contract with the expectation that the price of the underlying asset will increase.
- Short position: A short position involves selling a futures contract with the expectation that the price of the underlying asset will decrease.
Margin and leverage
- Margin: Margin is the amount of money required to open and maintain a futures position.
- Leverage: Leverage is the ability to trade with more capital than one actually has in the account, which can increase potential gains but also the risk of losses.
Settlement
- Settlement is the process of closing a futures position on the expiration date.
- Settlement can be in cash or through physical delivery of the underlying asset.
Advantages of futures trading
- Flexibility: Futures contracts offer flexibility in terms of position size and expiration date.
- Leverage: Leverage can increase potential gains.
- Diversification: Futures contracts can be used to diversify an investment portfolio.
Risks of futures trading
- Risk of losses: Futures trading carries a significant risk of losses, especially if leverage is used.
- Volatility: Futures markets can be highly volatile, which can result in significant losses.
- Liquidation risk: If the account balance falls below the maintenance margin, positions may be automatically liquidated.
WARNING, trading with leverage can lead to bankruptcy. Invest with caution.
Luis Ceballos Bisamon
