Three Common Misconceptions About Trading Futures and Options
Aug 23, 2018
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I like independence. One aspect of independence is the ability to protect my futures price without relying on the elevator. I am not criticizing anyone that protects price solely through the buyer. Rather, I want to share common misconceptions that prevent one from considering futures and options trading.
The following are three misconceptions I’m hearing with new marketers:
Only producers hedge. If you share risk in the grain price, you are a hedger. That means landowners receiving a share of the bushels, for rent, are in fact hedgers.
Example, I recently met a landowner that used futures contracts to hedge his price. The farmer spot-priced his share at harvest to the elevator. So a gain or loss in the futures contract was offset by the futures delivery price. Basis price was at risk, but the farmer appreciated the flexibility to search a delivery point instead of the landowner locking in a delivery point through a forward contract.
You must trade often. In reality, you don’t have to day-trade to be successful. Sure, it can be rewarding to stay on top of trends and technical signals, but each trader is different.
Why do I think nonstop trading is such a prevalent stereotype? Because those that love talking about trading are the ones that are most aggressive. Being aggressive often means trading nonstop.
What’s a “slow” trade? Buying puts, for example, which are typically held near expiration. Another idea is to do a straight hedge until it’s offset at harvest.
It’s too expensive. A trading account is notorious for an exact measurement of profit and loss. Not trading at all could be just as costly, but that doesn’t come with a calculated statement. Plus the profit or loss is calculated in the lump sum, rather than in a per-bushel figure. Pennies are not as threatening as dollar signs.
For example, Forward contracting at the local buyer may cost 5-10 cents. This isn’t free. You’re paying for their margin call, transaction fees, and interest. You’ll also have an “imaginary” opportunity cost if the market rallies. I’m not saying it’s unfair or bad to trade with the local buyer. I forward contract on a large share of my production. I just want to point out that trading independently isn’t more expensive in my experience.
In summary: Hedgers don’t necessarily drive the tractor, day-trade, or take on excessive risk. Risk management comes in many shapes and forms. Futures and options aren’t for everyone, but don’t be intimidated to give them a look.
Along with the potential for profit, there is always a risk of losing money when trading futures and options contracts.
Email Katie at firstname.lastname@example.org