Introduction to Futures

1. The Trading Pitt – 2/2/2011 Introduction to Futures

2. Futures as Commodities • Developed as a way to hedge out price risk • Producers worried about falling prices • Short Hedges • Consumers worried ab0ut rising prices • Long Hedges • Gains on Spot and futures offset • Can lose in the basis by hedging in the wrong month (one month rises more than another month)

3. Special Aspects of Futures • Expiration Dates • Contract Size • Tick Size • Prices Limits • Floor Trading vs. Globex • During Market Hours floors control volume • Globex electronic trading • Reportable Positions • Discounted to interest rates

4. Spread Trading and Curves • Intermarket Spreads • Between • IntramarketSpreads • Normal Backwardization • Front month is at a discount to later months • Incorporates Carrying Cost and Financing • Contango • Inverted Curve – Front Month price is higher than future months “high demand”

5. Directional Trading • Long • Buy Low, Sell High • Short • Sell High, Buy Low • Strips • Position across multiple contracts at today’s prices • Not a very effective continuous contract

6. Options on Futures • Synthetic positions • Risk Profile Change • Calendar Spreads • Range Plays • Short Volatility • Long Volatility • Straddles, Strangles

7. Arbitrage Opportunities with Futures • Across Different Contracts • Mini vs. Full Size Contracts • Buy X Mini’s Sell 1 Full Size • Across Exchanges • Oil NYMEX vs Oil ICE Europe • Spot Vs. Futures Markets • Spot and Futures Price should converge closer to expiration

8. Index Futures vs. Cash Markets • Index Futures trade 23 hours • Gaps that result in equities are usually the result of index futures moves • Economics • Futures can trade above • Arbitrage • Buy Index Futures Sell a Basket of Stocks

9. Spot Vs. FX Futures

10. CME Competition • Cme challenge limits are filled if market trades at limit price • No queue • Use limits only unless you absolutely need a position.