Futures For YouQ&A
Futures For YouInside The Futures World
Want to find out how the futures markets really work? Carley Garner is the senior strategist for DeCarley Trading, a division of Zaner Group, where she also works as a broker. She authors widely distributed e-newsletters; for your free subscription, visit www.DeCarleyTrading.com. Her books, Currency Trading in the Forex and Futures Markets, A Trader’s First Book on Commodities, and Commodity Options, were published by FT Press. To submit a question, post your question at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.
SO MANY CHOICES
Which futures markets should I focus on, and which should I avoid?
Ultimately, the key to fluid and reasonable price action is liquidity. As we all know, even in the deepest and most commonly traded markets there will be temporary lapses in judgment that cause pricing to enter ridiculous territory. Nonetheless, such abhorrent pricing happens far more frequently in thinly traded futures markets. As a result, traders should fight the urge to play exotic markets; instead they should stick to those with efficient price discovery.
Ideal commodity markets: Futures markets with attractive liquidity include Treasuries (10-year notes and 30-year bonds), eurodollars, certain stock indexes (emini S&P and emini NASDAQ), crude oil, grains (corn, wheat, and soybeans), and the euro.
Viable commodity markets: Commodity markets that are liquid, but should be seen as venues to trade a little more sparingly are alternative stock indexes such as the S&P Midcap, the Russell 2000, the full-sized S&P and NASDAQ.
Similarly, natural gas and unleaded gasoline markets tend to be more treacherous than crude oil; this is particularly true in the option markets in which traders typically face substantial spreads between the bid and the ask.
In the grain complex, traders sometimes enjoy the relatively lower volatility in soy byproducts (soybean meal and soybean oil). These futures and options contracts are viable candidates for futures traders but are on the thin side. Further, option traders would want to keep any position in either of these products at a minimum. Should the “going get tough”, it might be difficult for the market to efficiently price options causing traders to be forced into unfortunate fill prices.
The major currency futures contracts are liquid markets; specifically, the yen, the British pound, the Canadian dollar, and the Aussie see in excess of 100,000 contracts traded on a daily basis. Options written on currency futures are not always highly liquid, but they are certainly tradable, and the CME provides very capable market makers to help in the price-discovery process. In our view, the euro futures and option contracts are the preferable vehicles in the currency complex because they typically see twice the volume of the aforementioned currency products.
When it comes to currency speculation, we also like the Dollar index traded on the Intercontinental Exchange. The Dollar index is far less liquid than the previously mentioned currencies, but it is appealing simply because it is an index that is based on the trade of its more liquid counterparts. Accordingly, the dollar index futures contract isn’t necessarily susceptible to the irrational and erratic moves a similarly thin contract might be. This is because its value is more mathematical and less arbitrary than other futures contracts. In fact, the dollar index is a great product for those looking for a more conservative alternative to currency trading. After all, it is a diversified index, it has a lower margin requirement than most of the other currencies, and it has a tendency to move a little slower. Simply put, it is the ETF of the futures markets!
Commodity markets that are better off left alone: Sometimes the markets with the most allure are the exact markets traders should stay away from. Before the CME delisted pork belly futures for lack of interest, it seemed to be the market that beginning traders were most interested in. Perhaps it is due to the movie Trading Places, or maybe they just like bacon. Either way, it was a pathetically illiquid market with substantial trading obstacles in the form of wide bid/ask spreads and unpredictable price movement.
The “new” pork belly futures contract is lumber. Lumber is the epitome of a commodity market; it is something that all of us are aware of and use on a daily basis. It is also a commodity that seems to be predictable with the help of housing trends, and economic expansion. Nonetheless, if you decide to trade in this market, you are stacking the odds against yourself. There are only a few market makers pricing lumber; they spend most of the day waiting for orders to come in. There are typically less than 1,000 contracts traded per session, and this opens the door for temporarily irrational price changes. In other words, this is an environment in which stop orders are likely to get hit, and playing without stop orders might mean financial suicide. Conversely, there is not a viable option market to offer hedging opportunities. Bluntly, this is one market that is generally better left untouched.
Stay away from copper, particularly in the option market. Copper options have very few players, making it nearly impossible to trade profitably. It isn’t uncommon for the spread between the bid & ask for a particular option to be a penny in premium, which is equivalent to $250. Simply put, once you entered an option trade, you would immediately be in the hole by about $250. To make a profit, you would have to recoup the bid/ask spread. It is difficult enough to trade profitably; the last thing traders want is to give the market a head start.