Futures For You
| INSIDE THE FUTURES
WORLD
Want to learn how the futures markets really work? Dan
O'Neil, a principal at online futures and forex broker Xpresstrade (www.xpresstrade.com),
responds to your questions about today's futures markets.
To submit a question, post your question to our website
at http://Message-Boards.Traders.com. Answers will be posted there, and
selected questions will appear in a future issue of S&C. |
Dan O'Neil |
HURRICANE SEASON
We've been hearing more about the upcoming hurricane season because
of last year's record damage. Obviously, severe weather can wreak havoc
in some commodity markets. What are a few futures markets to look at in
terms of potential storm-related shocks?
While nobody likes to think about profiting from a natural disaster
that up-ends so many lives, the fact is that many commodity markets have
long been subject to the ebbs and flows of weather. In fact, weather is
one of the challenges that many commodity producers face, and futures and
options contracts were designed largely to help producers manage and mitigate
such risks. In many of these markets, weather-related action just naturally
opens up opportunities for speculators as well.
As another hurricane season bears down on the southern coastal US, activity
in orange juice, one of the true weather markets, figures to give traders
a daily dose of volatility. Frozen concentrated orange juice (FCOJ) futures
have always been subject to a variety of supply-side pressures, but a recent
price climb to levels not seen in 15 years, combined with the severity
of the past few hurricane seasons, make the outlook for the remainder of
2006 particularly intriguing for speculators. While other factors such
as disease and processing capacity can also affect FCOJ pricing, the major
determinant of short- and long-term supply has been and continues to be
weather.
In recent years, Florida grove concerns like frosts and freezes have
taken a back seat to the violent storms and their potential for widespread
devastation. As evidenced by the destructive Atlantic hurricane season
of 2005, which included the highest number of hurricanes and tropical storms
on record and the most Category 5 hurricanes in history, the world's weather
patterns are growing more unstable, and the annual six-month storm season
is being watched more closely than ever by Sunshine State produce growers
and experienced futures traders.
Savvy traders looking for high-risk/high-reward opportunities can address
the possible effects of the upcoming hurricanes on Florida's orange crop
by participating in the FCOJ futures market at the New York Board of Trade
(NYBOT). FCOJ futures trade in the traditional open-outcry pits of the
NYBOT, and over many years, juice has consistently been among the most
perilous commodities to navigate. But it's precisely this turmoil that
can lead to an abundance of speculative opportunities for both bulls and
bears, and for this reason, juice futures (and options) have always been
popular among individual traders. Just as hurricane season promises volatility
and unpredictability, FCOJ traders should be prepared to weather an often
chaotic and uncertain market.
WEATHER AND ENERGIES
Hurricane Katrina also demonstrated the power of these strong Gulf storms
to cause disaster on the nation's energy production. While most of the
recent action in the energy markets has centered on crude oil and the unsettled
situation in the Middle East, the refining capacity of the Gulf bears watching
in relation to another important market -- unleaded gasoline. The most
common, straightforward means of getting into the gasoline game is via
futures contracts traded on the New York Mercantile Exchange (NYMEX). Small
investors can utilize the power of leverage offered by futures contracts
to enjoy magnified profits when favorable price fluctuations (remember,
however, that leverage is a double-edged sword).
One of the pitfalls of futures contracts for new investors is often
the inability to define and maintain a clear investment strategy when the
market begins to move. Given the sizable position that can be controlled
for a relatively small outlay - for example, a single NYMEX unleaded gasoline
contract covers 1,000 barrels, or 42,000 gallons -- even minor price movements
can result in substantial account swings, causing nervous traders to abandon
sound goals and strategies. While the potential for large gains in the
futures markets is ever present, so too is the risk of loss, and therefore
an honest assessment of risk tolerance is advisable before taking this
particular plunge.
Aspiring energy traders who like the concept of futures but might not
have the stomach for piloting a vessel whose slight turns of the wheel
can result in such shifts of direction may want to ply the unleaded gasoline
waters in a smaller, more nimble craft known as an emini futures contract.
Fully electronic and trading virtually 24 hours per day, the emini unleaded
gasoline contract features the attributes its name implies; it is an electronic
version of the traditional unleaded gasoline futures contract. Emini unleaded
gasoline contracts are identical to the full-fledged NYMEX contracts, except
at half the size.
This miniaturization allows investors to enjoy the same liquidity and
price transparency of the industry-standard NYMEX market but helps to limit
the initial investment and inherent risk. The smaller capital requirement
and risk exposure often results in a corresponding benefit for those new
to the commodities markets as well, as trading decisions can be based on
rational strategic assessments, without the anxiety and distractions associated
with sizable equity swings.
Return to August 2006 Contents
Originally published in the August 2006 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved.
© Copyright 2006, Technical Analysis, Inc.
