Articles
Adjusting to Changing Grain Market Conditions
All the Reasons Why Limiting Loss is Important
Sold Puts Versus Long Futures and the Benefits for Both
Leverage Makes Account Balances Disappear in a Hurry
The Serenity of Knowing What You Don’t Know
FAQs
What is the total potential risk of a BOUGHT option on the futures market? A: When buying an option your total risk is the cost of the option itself which is called premium. The reason being because as the purchaser of the option you are giving yourself the “option” to take a futures position at a set strike price but not the obligation. Therefore, your total risk in the purchase of an option is the cost of the option itself. If exercised though, a futures position is taken and risk becomes much greater if not unlimited.
What is the total potential risk of a SOLD option on the futures market? A: The risk of selling an option (or writing an option) is potentially unlimited. That is because in return for the premium paid to you for the option, you are giving the buyer the right to take a futures position at a set strike price. If that option is indeed exercised by the purchaser at a later date, the seller is then taking the opposite futures position with much greater risk of asset movement against them.
What influences the decision making of a FUNDAMENTALS trader in commodities? A: A fundamentals trader makes decisions primarily but not solely based on underlying economic factors such as supply and demand, production levels, government policy, weather, and global trade. Their emphasis is on how all of these factors combine to predict future price movement.
What influences the decision making of a TECHNICALS trader in commodities? A: A technicals trader makes decisions primarily but not solely based on chart analysis and studying data points, historical price fluctuations, and trade volume to identify likely future price movement rooted in the notion that markets often mimic or repeat similar past behaviors or patterns
Does the projected USDA season average price received by producers factor in basis? A: Yes, the average price is based on actual transactions and reflects what farmers are paid at the point of sale, typically at the local level. It’s a broad, national average that captures the cash price farmers receive, which inherently includes the effects of local market conditions—such as basis.
Glossary
Basis: the difference between the cash price of a commodity and the futures price of the same commodity
Basis Contract: an agreement to lock in the basis cost of a commodity while leaving the futures price open
Bear Market: a market of traded instruments or commodities in which prices are falling for a sustained period
Broker: an individual or firm that charges a fee or commission to enter buy or sell orders on behalf of or for a client
Bull Market: a market of traded instruments or commodities in which prices are rising for a sustained period
Call: an option contract providing its owner the right (but not obligation) to buy a security or commodity at a specified price within a specified amount of time
Cash Commodity: the actual physical, deliverable good such as corn, soybeans, or wheat
CBOT: the Chicago Board of Trade, where a variety of instruments, securities, and commodities such as corn, soybeans, and wheat are traded on an electronic exchange
Cost of Carry: total expenses incurred when holding a commodity such as corn for future delivery such as storage, insurance, and interest costs on loans used to finance production of the commodity
Day Order: a trade order good only until the close of trade on the day the order is entered
Forward Contract: a binding agreement between a producer and a buyer to deliver a specific quantity and quality of a physical commodity such soybeans at a predetermined price and time
Futures Contract: a standardized, exchange traded agreement to buy or sell a particular commodity for delivery at an agreed date in the future that is transferrable
Hedge: an investment made such as a trade placed on an exchange used to protect against fluctuating values of physically held or produced goods
Hedge-to-Arrive (HTA) Contract: an agreement to lock in the futures price of a commodity while leaving the basis to be set closer to delivery date
Intrinsic Value: the immediate profit an option holder would realize if the option was exercised at that time, representing the difference between the current value of the asset and the strike price of the option
Introducing Broker (IB): a broker dealer, such as Hedge Plus, that does not hold customers’ money or securities but introduces customer accounts to a clearing broker-dealer for the placement of market trades
Market Order: an order or trade that is to be executed immediately at the best available price
Open Interest: the total number of futures positions both long and short that have not been offset to close the position and avoid delivery
Option: the right held by the purchaser to buy or sell a futures contract at a specified price within a specified time
Premium: the amount of cash that an option purchaser pays the option seller
Resistance Level: the technical analysis term that denotes the top of a commodity’s trading range over a period of time
Safrinha Corn: the second corn crop planted in Brazil that comes after the soybean harvest
Support Level: the technical analysis term that denotes the bottom of a commodity’s trading range over a period of time
Time Value: the amount a trader or hedger pays for an option above its intrinsic value reflecting the amount of time left before expiration of the option