Commodities refers to a range of exchange traded commodities like metals, energy commodities, grains, oil seeds, etc. Click here to have the specifications of various commodities.
Most investors trade in commodity futures and options to earn money. Futures contracts will eliminate the need to take physical delivery of commodities, if positions are closed out well in advance of First Notice Day, eliminating unnecessary delivery burdens.
DIFFERENCES BETWEEN FORWARD, FUTURES AND OPTIONS
Forward Futures Options Contract Future agreement that obliges the buyer and seller Future agreement that obliges the buyer and seller Future agreement where the seller is obliged, but the buyer has an "option" but not an obligation Contract Size Depending on the transaction and the requirements of the contracting parties. Standardized Standardized Expiry Date Depending on the transaction Standardized Standardized. American style options can be exercised at any time. European style options can only be exercised at expiry. Transaction method Negotiated directly by the buyer and seller Quoted and traded on the Exchange Quoted and traded on the Exchange Guarantees None. It is very difficult to undo the operation; profits and losses are cash settled at expiry. Both parties must deposit an initial guarantee (margin). The value of the operation is marked to market rates with daily settlement of profits and losses. The buyer pays a premium to the seller. The seller deposits an initial guarantee (margin) with subsequent deposits made depending on the market. The underlying asset can be used as guarantee. Secondary Market None. It is difficult to quit the operation; profit or loss at expiry. Futures Exchange. Operation can be quit prior to expiry. Profit or loss can be realized at any time. Options Exchange. Operation can be quit prior to expiry. Profit or loss can be realized at any time. Institutional Guarantee The contracting parties Clearing House Clearing House Settlement Cash settled. Contracts are usually closed prior to expiry by taking a compensating position. At expiry contracts can be cash settled or settled by delivery of the underlying. When a long position is exercised it may be settled by delivery or cash settled. A long position which is out-of-the-money is usually cancelled prior to expiry.
Where are the commodities markets located?
Below is a list of some of the commodity exchanges where futures contracts are being traded.
City / Country
Name of Exchange
New York / USA
New York Mercantile Exchange (NYMEX & COMEX)
Gold, Silver, Copper, Aluminium, Platinum, Palladium, Crude Oil, Unleaded Gasoline, Heating Oil, Natural Gas, Propane
New York / USA
Coffee, Sugar & Cocoa Exchange (CSCE)
Coffee, Sugar, Cocoa
Chicago / USA
Chicago Board of Trade (CBOT)
Soybeans, Bean Oil, Soy Meal, Corn, Wheat
New York / USA
New York Cotton Exchange (NYCE)
Cotton, Orange Juice
London / UK
International Petroleum Exchange (IPE)
Brent Crude Oil, Gas Oil
London / UK
London Metal Exchange (LME)
Base Metals Index futures (LMEX)
How do investors make money by trading in commodity futures?
Investors take advantage of movements in commodity prices in order to gain profits. Below is a general description of trading outright commodity futures contacts.
For instance, an investor thinks that Crude Oil can go higher due to certain fundamental or technical reasons, which he/she believes will play a vital role in effecting supply or demand of crude. He/she then decides to buy one crude oil futures contract by placing an order through the brokerage company that he/she is associated with. Let us assume the crude futures was bought at a rate of $29.10 / barrel, and the price rose to $30.10 / barrel in a couple of days time. He/she then decides to sell the futures contract at $30.10, which will fetch a profit of $1000.
At another occasion, an investor thinks that crude can go down soon. He/she then decides to sell one crude oil futures contract. Let us assume the crude oil futures was sold at $30.10, and the price dropped to $29.10 in a few days time. This will again result in a profit of $1000. In this way, investors make money both in a rising and a falling market.
What will happen if prices move against existing positions?
Unlike other conventional investments, financial markets are characterized by a higher risk element. Investors adopt various risk management techniques to limit losses as well as to protect profits. Futures traders also use options contracts to control their exposure to risk.
In other words, there exists a variety of trading strategies and techniques which can be used to control one's exposure to unfavorable price movements.
DISCLAIMER: The risk of loss exists in futures trading. The purpose of this report was to give a better understanding of COMMODITY FUTURES contractS. Besides using the contract to capitalize on the rise or fall in the Dow, it can be extremely useful in helping hedge an existing stock portfolio. Consult your broker for more information or send your request here.
*Past performance is not necessarily indicative of future results.
Please be advised that apart from what has been described above, investors use various other trading strategies combining futures and options which are appropriate for different market conditions. Click here to go to Advanced Trading Strategies.
Commodity Futures Trading Info Center
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