A Guide To Trading Derivative Futures

By Keith Gilabert

In the stock trading industry, I know a lot of traders that have made lot of money from the futures markets. In 1996, we had a 26 year-old trader make $600,000.00 in one month trading Dell futures with only $40,000.00 initial investment.  It is only in this arena where people who have limited capital can actually make substantial profits in a short period of time. But at the same time, this involves a lot of risks and may cost you significant losses.

Futures have often been associated with having a bad reputation.   However, many experts argue that futures trading is only as risky as you want to make it. And if you take on good strategies and give yourself the proper exposure, then this can hedge your portfolio and expose you to substantial upside.

Despite the bad reputation derivatives have gotten in the past, every major portfolio manager utilizes derivative futures to protect against losses.  Even the most successful investor in history Warren Buffett uses derivatives.

What Are Futures?

Futures are standardized and transferable contracts that require a buyer to purchase or sell a stock at a specific price and time. This contract gives the buyer the obligation of purchase, and the seller the obligation to deliver the specific asset traded.

The difference between futures and options is options give you the right where futures are an obligation.

How And Why Are Futures Traded?

Trading futures began with commodities such as coffee, cocoa and oil. These kinds of trades offer a wide variety of markets and it can be traded at a low cost and you do not have to take physical delivery of the goods.

Another advantage you have with futures is that it can be traded in both up and down markets. A traditional stock mutual fund will hold stocks even if the market is falling.  With futures you can protect your downside and the futures contract will sell the underlying security if it breaks below the contract price.  This is similar to a stop-loss but it does not sell your stock on a dip in the market.

With this system, traders are able to profit regardless of what direction the market trends are going. This is the main reason why most traders are only concerned if the market is moving at all, instead of which direction it is actually going.

In futures trading, a trader’s only concern is to follow the trend regardless of the direction. If prices move in the right direction, up or down then the trader will be able to profit. If the market stays flat, then a trader would experience some losses if not a complete loss of the premiums he paid.

Trading futures can be very promising, but it involves a lot of many risks as well. But even if you are well experienced in trading stocks and have a good understanding of the driving trends in the market and behaviors and strategies required to trade successfully, there is still no guarantee you will do well.

Now if you still want to engage in futures trading, make sure that you do your research and prepare yourself with the necessary knowledge and skills to successfully execute transactions.

Remember, you can make a ton of money but there is a substantial probability that you can lose your investment.

About Keith Gilabert

Keith Gilabert has worked side-by-side with equity and derivative specialist developing trading programs. In 1998 Keith  Gilabert developed a trading strategy to boost performance of managed portfolios.   The trading strategy returned a staggering 27% year over year return.  In 2002 while the market finished down over 30%, Gilabert’s strategy returned 15% net of all fees.  You can find him on Google+ and Twitter.