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.

Keith Gilabert, "Is the economic crisis coming to an end?"

Is The Economic Crisis Coming to End?

 By Keith Gilabert,(originally posted 02/22/10)

When I was invited to speak at the prestigious PMRA Conference on Integrating Performance and Risk into the Investment Chain at the Waldorf Hotel in London, England, I sensed a lot of arrogance. I don't think anyone had any idea of how brutal the forthcoming economic crisis would be. I do recall that many large and well respected money managers were buying billions in mortgage backed bonds as a hedge. In 2007 the hedge fund industry had over $2 trillion in assets.

Today that number has been cut in half due to the implosion of these bonds that were designed in theory to protect value. The most recent S&P/Case-Shiller Home Price Index shows that home prices today are comparable to levels seen in 2003, down approximately 33.5% from the all-time highs of 2006 prior to the recession. I believe based on recent data that the economic crisis is not over and that we will see a further 10% decline in housing prices for 2010. Why do I say that? It's because the high-end housing market where home values are between $1,000,000 to $5,000,000 have not rolled over like the lower end markets. I find it suspicious that "Joe the plumber" loses work and then eventually his home to foreclosure but the plastic surgeon in Beverly Hills is still hanging on to all his toys.

Last time I looked around LA, I didn't see many soccer moms getting nose or boob jobs. These insecure souls are the bread and butter of the aesthetics industry and guess what... all these soccer moms are married to "Joe the plumber". According to the data I compiled, I expect to see the next leg fall over the next six months and the top end market that seems immune will start showing some cracks.


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.

Keith Gilabert on BofA Foreclosure Rentals

Keith Gilabert for BentleyForbes Analytics - Bank of America has stated they may rent back foreclosures to former owners.  I think this is a terrible move by BofA because if the owner couldn't make the mortgage payment, what makes you think this person will make rent payments.  Keep in mind, to get foreclosed on this borrower has to default by not making a single payment in 9 months.

In my humble opinion, if a person cannot make mortgage payment in 9 months what makes you think they can make a rent payment??

I think the appropriate move for BofA would be to stop floating bad loans and purge their mortgage portfolios of all the non-performing assets and start with a clean slate.

The banks have been holding this ghost inventory of homes hoping the housing market improves but it hasn't and it won't.   The US economy has not created any jobs or industry in the last 4 years.  There is no catalyst for wealth so were is the consumer going to find the money to buy a home? The housing market has dropped 10% in 2011 on average and will drop another 10% in 2012.  I think the housing market may stop falling by the end of 2013.  I am in no rush to buy and with patience of capital you can find a good deal out there if you're thinking of buying a home.