TRADER JOHN SAYS:
The long and the short of it, when you BUY you are LONG and when you SELL you are SHORT.
COMMODITY FUTURES are contracts between BUYER and SELLER to BUY or SELL (deliver) a given quantity of a commodity at some time in the future.
Commodities are traded in set quantities and quality per contract.
FLOOR TRADERS buy and sell these contracts and their OPTIONS in "open cry" in the trading pits of various EXCHANGES.
Trading is now carried on electronically as well and after hours via the GLOBEX an electronic exchange, WORLD WIDE.
Contracts expire on given months three or four (or more) times a year, so too with the Yen these months are: March, June, September and December.
So if a rise in prices is expected you would BUY one (or many) contracts.
And if a drop is expected you would SELL one (or many) contracts.
Every transaction, long or short, requires both a buy and a sell to be complete.
For a long position you would buy and hopefully, sell at a higher price.
For a short position you would sell and again hopefully, buy at a lower price.
Buy low sell high! Sell high and buy low!
There are three ways prices can go: UP, DOWN and SIDEWAYS.
It is obvious that when prices are moving sideways a position will not yield much profit. But what about the OPTIONS?
Theoretically the risk in commodity trading is unlimited. One way to limit risk is to buy options. An option is bought and sold at a premium. The buyer pays a premium (up front) where the overall risk is no greater than the amount paid in premium. The seller or grantor of the option collects the premium paid for the option and assumes the inherent risk of the contract. The buyer of an option buys the right but not the obligation, to exercise the option i.e. the right but not the obligation, to buy or sell a given contract at a certain price some time in the future. That certain price is called the "strike price". These are listed in increments. The further away from the price of the commodity that the strike price is above, in the case of a call, or below, in the case of a put, at the time the option is bought, the lower the premium.
There are two types of options and various combinations signifying options strategy.
A CALL option is a bullish instrument. If you expect prices to rise you would buy a call at a strike somewhere above the current price of the commodity depending on how much premium you'd wish to pay. As prices rise the value of a call option increases. When the price of the commodity is equal to the strike price, the option is said to be "at the money" and when the price of the commodity is above the strike, the option is said to be "in the money" at which time the seller or grantor ( one who underwrites the option) could be exercized against. However as prices fall so the option will decrease in value. The grantor will be safe, making a profit and you would be losing money.
A PUT option is a bearish instrument. If you expected prices to drop you would buy a put at a strike somewhere below the current price of the commodity. As prices drop the value of a put will increase. In either case the buyer is "long" a call or a put and the grantor is "short" a call or a put. A characteristic of options to be noted, is that their value deteriorate with time. Time erosion at the early stages of a contract period is slow but towards termination increasingly fast until they expire worthless.
Options are listed at the CME. Go to:Options
For more on Options go to:bulletin board
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In discussing trends, short-term covers 9-10 days, long- term 45-50 days. Day traders are in and out the same day and weekly traders, for the purposes of this page, are in and out in a week or two. Anything over 50 days is considered to be a very long-term, monthly or seasonal trend.
| Up-trending market. |
Down-trending market. |
| Buy calls. Buy contract. Sell puts. |
Sell calls. Sell contract. Buy puts. |
Neutral market: i.e. prices moving sideways within a channel, sell calls above and puts below the channel. Should prices break out, then liquidate (buy back) the option that is threatened.
The following is: Courtesy Of Michael Sorba
Quantum Financial Services (Canada) Ltd.
The types of orders most commonly used are briefly described below:
1. THE MARKET ORDER: The market order is the most frequently used order. In most instances it assures you of getting a position and eliminates "chasing" a market to get in or out of a position. The market order is executed at the best possible price obtainable at the time the order reaches the trading pit.
2. LIMIT ORDERS: The limit order is an order to buy or sell at a designated price. Limit Orders to buy are placed below the market while limit orders to sell are placed above the market. Since the market may never get high enough or low enough to trigger a limit order, a trader may miss the market if he uses a limit order. Even though you may see the market touch your limit price several times, this does not guarantee or earn you a fill at that price.
3. OR BETTER: "OR BETTER" is a commonly misunderstood order type.
ONLY USE "OR BETTER" IF THE MARKET IS "OR BETTER" AT THE TIME OF ENTRY TO DISTINGUISH THE ORDER FROM A STOP. This order does not cause the pit broker to work harder. It is always the floor broker's job to provide you with the best possible price. If an order is truly "or better," then this designation assures the broker that you have not left "stop" off the order. In many instances, unmarked "or better" orders are returned for clarification, potentially costing you valuable time in the pit, and possibly a fill. Orders that are not "or better" when entered only serve to use the pit broker's time upon receipt as he checks to see whether or not the order deserves a fill.
Sometimes, using the "or better" designation before the opening is helpful in assuring the executing broker that your order is meant to filled.
4. MARKET IF TOUCHED (MIT): MITs are the opposite of stop, orders.
Buy MITs are placed below the market and Sell MITs are placed above the market. An MIT order is usually used to enter the market or initiate a trade. An MIT order is similar to a limit order in that a specific price is placed on the order. However, an MIT order becomes a market order once the limit price is touched or passed through. An execution may be at, above, or below the originally specified price. An MIT order will not be executed if the market fails to touch the MIT specified price.
5. STOP ORDER: Stop orders can be used for three purposes:
a. To minimize a loss on a long or short position,
b. To protect a profit on an existing long or short position, or
c. To initiate a new long or short position.
A buy stop order is placed above the market and a sell stop order is placed below the market. Once the stop price is touched, the order is treated like a market order and will be filled at the best possible price.
PLEASE NOTE: WHILE STOPS AND MITs ARE NORMALLY ELECTED ONLY WHEN THE SPECIFIC PRICE IS TOUCHED, THEY CAN BE ELECTED WHEN THE OPENING OF A MARKET IS SUCH THAT THE PRICE IS THROUGH THE STOP OR MIT LIMIT. IN THIS CASE, YOU CAN ROUTINELY EXPECT THE FILL TO BE MUCH WORSE THAN THE ORIGINAL STOP OR BETTER ON THE MIT. THIS APPLIES TO STOP ORDERS AND MIT ORDERS PLACED BEFORE THE OPENING OF TRADING.
6. STOP LIMIT ORDERS: A stop limit order lists two prices and is an attempt to gain more control over the price at which your stop is filled. The first part of the order is written like the above stop order. The second part of the order specifies a limit price. This indicates that once your stop is triggered, you do not wish to be filled beyond the limit price. Care should be taken when considering stop limit orders especially when trying to exit a position because of the possibility of not being filled even though the stop portion of the order is elected.
There is no Stop Limit order without a second price. If your order cannot be filled by the floor broker immediately at the Stop price, it becomes a straight limit order at the stop price.
7. STOP CLOSE ONLY: The stop price on a stop close only will only be triggered if the market touches or exceeds the stop during the period of time the exchange has designated as the close of trading (usually the last few seconds or minutes).
8. MARKET ON OPENING: This is an order that you wish to be executed during the opening range of trading at the best possible price obtainable within the opening range. Not all exchanges recognize this type of order.
9. MARKET ON CLOSE (MOC): This is an order that will be filled during the period designated by the exchange as the close at whatever price is available. PLEASE NOTE: A FLOOR BROKER RESERVES THE RIGHT TO REFUSE AN MOC ORDER UP TO FIFTEEN MINUTES BEFORE THE CLOSE DEPENDING UPON MARKET CONDITIONS.
10. FILL OR KILL: The fill or kill order is used by customers wishing an immediate fill, but at a specified price. Our floor broker will bid or offer the order three times and return to you with either a fill or an unable, but it will not continue to work throughout the session.
11. ONE CANCELS THE OTHER (OCO): This is a combination of two orders written on one order ticket. This instructs our floor personnel that once one side of the order is filled, the remaining side of the order should be canceled. By placing both instructions on one order, rather than two separate tickets, you eliminate the possibility of a double fill. (This order is not acceptable on all exchanges.) PLEASE NOTE: A CANCEL/REPLACE OF AN OCO ORDER WITHIN FIFTEEN MINUTES OF THE CLOSE OF TRADING WILL NOT ROUTINELY BE ACCEPTED. CANCELING BOTH SIDES DURING THIS PERIOD AND REPLACING WITH EITHER MOC OR MARKET ORDERS MAY BE ACCEPTED, BUT CANNOT GUARANTEE AGAINST A DOUBLE FILL.
12. SPREAD: The customer wishes to take a simultaneous long and short position in an attempt to profit via the price differential or "spread" between two prices. A spread can be established between different months of the same commodity, between related commodities or between the same or related commodities traded on two different exchanges. A spread order can be entered at the market or you can designate that you wish to be filled when the prices difference between the commodity reaches a certain point (and premium). For example: BUY 1 JUNE LIVE CATTLE, SELL 1 AUGUST LIVE CATTLE PLUS 100 TO THE AUGUST SELL SIDE. This means that you want to initiate or liquidate the spread when August Cattle is 100 points higher than June cattle.
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Do not gamble.
Do not be greedy. Never try to reach the absolute top or the absolute bottom in an effort to squeeze the last cent out of a move.
Develop a trading plan. Set goals and targets and when you have reached them, withdraw.
Never chase the market-let it go-there will be another opportunity coming along.
It is better to be out of the market wishing you were in than in the market wishing you were out.
Divide your capital up into four or five lots. Trade with a quarter or a fifth of your capital at a time. Hold the rest in reserve.
Never meet a margin call-liquidate your position instead. If you read the market correctly, you should never receive a margin call.
If you make two consecutive loosing trades, STOP, and analyze what you are doing wrong.
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