Investing Futures and Options

investing futures

When you think about investing futures, you probably imagine people buying and selling contracts for commodities like wheat or corn, crude oil, gold or silver, currencies, US Treasuries, or stock indexes. But the futures market also includes something called options, which are contracts that allow you to speculate or hedge against changes in prices for a variety of other assets and markets.

A futures contract is an agreement to buy or sell a set amount of an asset at a specific time in the future. This is an investment instrument that is highly speculative in nature, with profits made or lost depending on the accuracy of the forecast. There are many things that can affect the price of the underlying asset, including political events, natural disasters, or supply and demand factors.

Investing in futures can be an effective way to diversify your portfolio, especially if you are looking for more exposure to specific sectors or markets. But remember that it is a risky form of investing, and you should only use money that you can afford to lose. When you begin trading, it’s important to start small and work your way up to larger positions over time.

You can trade a wide range of underlying assets with E*TRADE’s futures products, from agricultural commodities such as soybeans, sugar, coffee, and wheat to energy commodities like petroleum, natural gas, and electricity. There are even currency futures, which let you gain or lose exposure to the value of the euro, dollar, and Japanese yen, among others. And if you are concerned about the direction of interest rates, there are futures contracts for the prices of Treasuries and the 10-year US bond.

One of the reasons investing in futures can be so profitable is that it allows you to take advantage of leverage. That means that a small amount of capital invested in the right futures trade can generate significant profits. For example, if you shorted oil futures and the price of crude dropped, your profits could exceed your initial margin deposit in the account by a large amount.

The opposite is also true: if the price of an oil futures contract rises, you could lose a large sum of money quickly. This is why it’s essential to maintain adequate margin levels in your account at all times.

Because of their speculative nature, investing in futures requires a high level of knowledge and expertise. It’s a good idea to consult with a financial advisor before taking on this type of trading. In addition, the volatile nature of futures markets makes it difficult to predict a specific price outcome in advance. This can lead to losses for traders who do not properly manage their risk and follow a disciplined trading plan. In addition, because futures trade on exchanges that act as intermediaries between buyers and sellers, there is always the possibility of a counterparty defaulting on its obligations, resulting in financial losses for investors.