The growth and innovation of commodity market futures has been very beneficial to the traders who use them. There are more options available for market participants than before. Figuring out which commodity market futures and their relative contracts that are best for you is a matter of preference and understanding. One of the greatest advancements in futures trading has been the implementation and growth of electronic trading. Trading open outcry market futures requires the use of a floor broker. Brokers can be expensive and inconvenient. The related clearing costs from electronic trading may be much smaller. If you are set on trading open outcry markets, there are a number of cities to choose from. Chicago and New York are the first places that come to mind, but there are also trading floors in: Kansas City, Memphis and Atlanta. Users of these markets, open outcry and electronic alike, employ a number of different strategies.
The most common form of trading other than putting on simple long and short positions is spreading. Spreading trades utilizes many different ways for the type of end result you are looking to possibly achieve. A couple of definitions you’ll need to know for trading spreads are contango and backwardation. Contango is when the back month market futures are more expensive than the front month’s contracts and backwardation is the opposite situation. Depending on the commodity, when a market is in contango or approaching contango, it’s usually a bearish sign. Markets in or approaching backwardation are usually bullish.
Regardless of particular strategy, a spread is a simultaneous long and short position. An intra market spread consists of trading two contracts in the same market. Using oil as an example of an intra market spread would be to go long the July contract and short the September contract. If the market is in backwardation, this spread is profitable when the difference in prices increases. Intra market spreads are usually good ways to reduce risk exposure while still maintaining a position. An inter market futures spread similar to an intra market spread, but straddles two or more different commodities. Oil and gold are correlated commodities. Let’s say I think that crude oil is going to outperform gold going forward, but I’m not sure of the general direction. Going long gold and short oil is a way to trade the trend without having to worry about which direction the market moves. These are basic examples of spreading, but learning how to take advantage of them is a good aspect to understand as a trader of commodity futures market contracts.
Trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.
