Futures Trading Explained | PB University LITE 26/50

Futures Trading Explained

I’m Meta Matt, Director of Education and welcome to PB University LITE! This is a 50 Class Trading 101 Series geared towards both new and veteran traders alike! We go over everything from Trading Psychology, Technical Analysis, and Options Trading to Commodity Trading, Forex, and more!! This 50 Class series is not designed be taken in order, it is instead designed for traders to browse and pick which classes interest them. I will include the list of classes at the bottom of this page.

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A futures contract is a legally binding agreement between two parties to buy or sell a specific asset at a predetermined price on a specific future date. The underlying asset can be a commodity (e.g., oil, corn, gold), a financial instrument (e.g., stock index, bond), or a currency.

Futures contract: Obligation to buy or sell the underlying asset at the expiry date.

Options contract: Right, but not obligation, to buy or sell the underlying asset at a certain price by a certain date.

Futures contracts generally involve greater risk than options contracts because the buyer or seller is obligated to complete the transaction. Unlike options contracts, where a premium is paid upfront, there is no upfront premium for futures contracts.Instead, an initial margin is required as a deposit to enter into a futures contract. This margin serves as collateral to ensure fulfillment of the contract.Profits or losses are realized based on the difference between the initial margin and the market value of the contract as it fluctuates

Why Trade Futures?

• Speculative trading: Profit from price movements of the underlying asset.
• Arbitrage trading: Exploit price discrepancies between different markets.
• Spread trading: Capitalize on the price relationship between two or more futures contracts.
• Hedging: Mitigate the risk of price fluctuations in the underlying asset.
• VIX trading: Speculate on the volatility of the stock market using VIX futures contracts (contracts based on the VIX index, which measures stock market volatility).

Purpose of Futures

• Price discovery: Futures markets play a role in establishing market prices for underlying assets through supply and demand.
• Risk management: Hedging with futures contracts allows producers and consumers to manage the risk of price changes in the underlying asset.
• Speculation: Futures markets enable speculation on the future price movements of various assets.

Key Components of a Futures Contract

• Underlying asset: The commodity, financial instrument, or currency being traded.
• Contract size: The standardized quantity of the underlying asset represented by the contract.
• Expiration date: The date on which the contract matures and delivery or settlement occurs.
• Contract price: The predetermined price at which the underlying asset will be bought or sold on the expiration date.

Real-World Examples of Futures Contracts

• Agricultural producers can use futures contracts to lock in a selling price for their crops in advance, mitigating the risk of price drops.
• Oil companies can use futures contracts to manage the risk of price fluctuations in oil.
• Investors can use futures contracts to speculate on the future price movements of stocks, currencies, or interest rates.

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PB University LITE Class List

1) Trading Terminology
2) Stock Market Indices
3) Common, Preferred, and Penny Stocks
4) Diversification of Assets
5) Fundamental Analysis Made Easy
6) Technical Analysis Made Easy
7) Risk Management In The Market
8) Portfolio Management
9) How To Follow Market News
10) Trading Psychology
11) Options Explained
12) The Greeks In Options Trading
13) How To Short Sell Options
14) Covered CALLS
15) Spread Trading
16) Online Brokers for Options Trading
17) Implied Volatility Calculators & Tools
18) Protective PUTS
19) Iron Condors
20) Straddles
21) Reading Level 2
22) Taxes
23) Trading Psychology Techniques
24) The Art Of Trading
25) Becoming A Jedi In The Stock Market
26) Futures Trading Explained
27) Commodity Trading 101
28) Regulatory Environments
29) How To Become A Millionaire
30) $100K In 100 Days
31) Wash Sale Rule
32) Behavioral Finance Part 1
33) Behavioral Finance Part 2
34) 5 Charting Indicators
35) Fair Value Gap
36) Insider Trading and Market Manipulation
37) Stock Chart Types
38) Moving Averages 101
39) Base vs Precious Metals
40) Electricity Trading 101
41) Trading Brokers 101
42) 5 Trading Strategies
43) 85% Trading Rule
44) Are Win Rates A Scam?
45) Futures Trading 101
46) ATR Indicator Strategy With The Greeks
47) MACD Indicator 101
48) Bollinger Bands Indicator 101
49) Wedges, Triangles, Flags and Pennants
50) RSI Divergence 101

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