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How To Use The Futures Market To Hedge A House Price Purchase

IndependentInvestor — Tue, 02 Feb 2010 15:49:48 +0000

Buying or not buying a house can be one of the biggest financial decisions that someone could ever make, and it’s probably the first big non-career decision that most people do make (unless they are putting off starting a pension). Either you can stay out of the market, and risk watching house prices going up and pricing you out, or you could jump in and find that you own an asset with a declining value, a loan worth more than the house and a number of years ahead of being tied to a house which becomes too small.

In either case the downside is fairly large. It’s also the case that you could be forced to do something that you believe is going to actually put you at a disadvantage but you have to do this any way as the alternatives of getting it wrong on the other side are fairly large. Most of us have friends who bought a house not because they thought that prices would go up but because they feared that they would never get on the property market if they did go up.

This is where spread betting, contracts for difference and futures can make a big difference. Essentially it is possible to treat them as an insurance premium.

Hedging is when you put money predicting that what you fear will come about. You can fully hedge your anticipated loss or (and this is somewhat cheaper) you can partially hedge your loss so that the money will at least mean that you are still standing financially.

If you are currently renting on the basis that house prices are going to go down, or are stretching yourself to buy one the idea that property prices will eventually resume their upward trend, a leveraged hedge bet or futures contract the other way will be a way to take out some of the financial uncertainty and protect against the worst consequences.

In the next post we will look at the alternatives for how to do this.

How To Play The Futures Market Through Your Pension

IndependentInvestor — Tue, 26 Jan 2010 15:35:59 +0000

It sounds like a nightmare. Why would anyone want to put their pension on the futures market? Yes you could retire rich, but the chances are higher that you will be headed for the poorhouse. It really does not sound like a good idea.
We will have another post later on this week about what your investment lifetime looks like and how you should deal with futures, contracts for difference and spread bets as part of that, by the way you can’t put spread bets into your pension. However what you must remember is this, your pension is an investment vehicle, admittedly one that has a number of restrictions designed for you to think of it (rightly) of your pension savings as a long term project. Even in a long term project the most speculative investments have their place.
There is really one vehicle that you can use to put futures or contracts for difference in to your pension plan if you are a UK taxpayer and that is the Self Invested Pension Plan, or SIPP. The SIPP was set up in the 1980s by the reforming Chancellor of the Exchequer, Nigel Lawson. It can, theoretically, take in just about any quoted and a number of non-quoted investments. These include futures and contracts for difference. You will need to be careful as a number of SIPP providers do not like dealing with these, and some exchanges have stopped trading them (for example IG Index won’t trade CFDs in SIPPs). So you will need to look for a full service SIPP provider.
SIPPs tend to charge in a different way to the way in which other pension funds charge. SIPPs will charge for the underlying transaction and administrative actions, while pension funds tend to charge a flat fee based on the size of your pension pot.
Another use for futures within a SIPP is as a hedge, and that’s a subject that really needs its own post.

The Concept of Futures Trading

IndependentInvestor — Sun, 10 Jan 2010 15:21:19 +0000

Even though the name itself implies about futures trading, in very simple way futures trading is basically the practice of trading that includes buying and selling of a particular commodity with standardized quality at an expiration period and pre-determined market price. Apart from its name factor, when you will have the exposure and experience with direct securities like bonds and stocks, it will be an easy learning for you.
Always remember that the futures contracts are traded on a different platform than these direct securities, particularly in the futures exchange. That’s how the commodity being traded is a tangible asset. The commodity is in sharp contrast with direct securities such as warrants, bonds and stocks, which are evidenced only by paper but cannot be touched per se. In the futures market, the things such as sugar, crude oil and precious metals are being traded.
Moreover, you need to know that futures contracts are one kind of derivative contracts and are highly leveraged; hence, it’s highly risky. The very small changes in the underlying value of the commodity can greatly influence the value of the contract itself.
Futures trading do not operate in a few hundred dollars but on hundreds of thousands of dollars. Therefore, if you only have a few thousand dollars to spare which is your only life savings, then, before investing in the futures market, you must think again.
So, even before you dream of raking in the big bucks on your first futures contract, it is always very important to obtain the basics of futures trading. Try to use your trading system to your advantage as it will assist in making trading decisions which is based on quantitative analysis rather than the emotions like pride, fear and greed.
You need to protect yourself at all times, which can signify using sell or buy stops to limit losses within your comfort zone and utilizing buying puts as heading strategies. You have to stay focused as futures trading demands focus on what is important, that is definitely profit. In fact when you are on the futures exchange, the lesser you get distraction, the better for your decisions would be.
To get the success you have to be open enough to new ideas. Remember, no trader is so familiar about the market that he can afford to ignore new trends, new issues and new information. Being flexible with your positions as the market changes is always beneficial. If you want, you can always go for a financial advisor and a futures trader; they will help you to carry out the transactions in your behalf. Moreover, keep in mind that it is your money at stake; therefore, you have the right and also the responsibility to exert final control over it.
Finally, it can be said that futures trading can be a very profitable business when you support yourself with the necessary information, exposure and experience. Futures trading basically depend on your investment style and profit goals. So, plan your moves well for your future.

Stock Options Trading

IndependentInvestor — Wed, 20 May 2009 13:15:44 +0000

Concept of the Stock option trading was brought in 1970’s, and it then became very popular in 1980’s. But market losses at 1990 caused stop in this kind of trading, recent concept of the electronic trading or online trading made them popular once again to public.

Stock options are the options that make use of the stocks as fundamental instrument. Like all kinds, stock options are defined by using some related phrases, which are unique to the options trading markets. The Strike Price, as well known as the Exercise Price, is common word that is used to describe the stock options.

Strike Price is a fixed price where owner of the option will buy (‘call option’) or else sell (‘put option’) an underlying commodity. Call option and put option is a right to buy and sell about 100 shares of particular stock correspondingly.

It is not permitted to own puts and calls indefinitely. Expiration time also ranges from 1 month to 3 years, and lots of points in time and in between. All these periods will depend on which type of stock that they represent.

There are many risks coming with this stock options trading. One main risk is that customer is been obligated to trade in a strike price. That is, in case customer would like to purchase underlying stocks, then he should do that on strike price although an actual market price is lower than that. In the same way, customer has to sell all his stock at strike price although an actual stock market cost is far much higher. Only money, which is needed to open the trade, is deposit funds as well known as margin or else collateral. Main advantages as well include immediate dealing, Gearing, Interest & Dividend Adjustments. Most of the traders do not buy or else sell the breakouts and that is precisely why it is such powerful method. Direct exposure to commodities markets –value of all your investment may rise & fall in the direct proportion to price of an underlying commodity. Will you trade yourself or else will you use a robot in order to help you trade. The CFD trading robots have got some disadvantages & advantages; it depends on your profile, thus feel free to examine CFD Robots in a market. So educate yourself first, which does not necessarily mean spending thousands on courses, there are great educational sites, which give you lots of information free.