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Monday, 2 November 2009
Easy Steps to trade in Top 4 Commodities F&O
I’m going to open the door to a “secret society” for you today.
It’s a world shrouded in deep myths and folklore that include stories of people losing their homes, or having 5,000 bushels of soybeans dumped on their front lawn.
I’m talking about the commodities world, of course.
But despite these tall tales, commodities aren’t necessarily dangerous investments. Not if you know what you’re doing and take adequate precautions. Rather, the “secret society” stuff comes from the belief that the sector is a murky one that many investors simply don’t understand. Just the mere sound of “commodity futures and futures options contracts” was enough to send people running for cover…
However, nothing could be further from the truth when dealing with commodities. And over the past few years, we’ve seen great changes in the financial world that have opened the doors to this “secret society.”
Step Out of Your Comfort Zone… Don’t Be Afraid of Futures & Futures Options
I’ll tell you what I’ve told my friends and acquaintances over the years: Don’t be scared of commodity futures and futures options, they’re essentially little different than stock and stock options. If you know how to trade stocks and stock options, then there’s no difference from futures and futures options.
For example, if you can buy and sell IBM (NYSE: IBM) shares and IBM options, then why can’t you buy and sell sugar futures and sugar options? There is no difference. As long as you have an idea of where an investment (be it IBM or sugar) might move to and its underlying fundamentals, then what is there to be scared about?
Here’s the problem as I see it (based on my 18 years of experience in the commodities sector): Most people just don’t know enough about the underlying fundamentals of commodities – how/why soybeans, cocoa, cotton, or live cattle trade in a certain way. The majority of people know stocks and that’s that. They don’t like change and are fearful to step out of their comfort zone.
But all commodities that are available to trade on various U.S. exchanges are highly regulated. They have strict rules, which are efficient and assure the integrity and safety of your capital.
So if you’re looking to add some great potential gains to your portfolio, then consider what commodities can do for you…
Four Commodities… Four Explosive Moves
Want some examples of how explosive the world of commodities can be? Just look at these moves for oil, natural gas, gold and silver over the past year…
How would you have liked to hop aboard some of those moves?
Oil: When it started rising in 2007 and topped in 2008, it encompassed a staggering $90,000 move if you’d held just one contract. And the freefall that ended last March brought in an unheard of $110,000 for anyone being bearish.
If you’d held 10 contracts during those moves, you could have seen gains of over $1 million! And that’s just one direction. Double it if you went both ways.
Natural Gas: The move up in the summer of 2007 to the top in 2008 encompassed an $85,000 move, while the drop back down to the lows hit just two weeks ago and saw an even larger haul of $110,000. And this was for holding just one measly little contract. Imagine if you had 100 contracts.
Gold: From the gold chart below, you can see the trend higher from 2002. But even if you got onboard as late as 2006, the move could still have netted you $45,000.
Silver: A bullish position taken in 2006 would have scored $60,000 on just one contract. And if you’d hopped on the bear train near the highs in the spring of 2008, you could have pocketed another $65,000 just six months later.
This is some serious money folks.
And the great thing about commodities is that it’s normal for them to cycle from highs to lows and then back again. This gives you opportunities to profit on the way up and the way down. Moreover, it’s in contrast to the stock market, where most moves are biased to the upside.
Now, if you want to profit today…
Three Reasons Why You Should Trade These Four ETFs
Due to the changes that have taken place in the commodities world, regular investors have a chance to take part in the sector without leaving the comfort of a stockbroker.
We’re talking about commodity-related exchange-traded-funds (ETFs), which mimic the moves of the underlying asset. So you can use them to play some of the most popular and active commodity markets.
For example, if you’d like to go for oil, natural gas, gold, and silver, consider these ETFs:
* Oil: United States Oil Fund (NYSE: USO)
* Natural Gas: United States Natural Gas Fund (NYSE: UNG)
* Gold: SPDR Gold Shares (NYSE: GLD)
* Silver: iShares Silver Trust (NYSE: SLV)
If you want to gain exposure to the often lucrative commodities world, here’s why you should trade these ETFs…
1. Simple: ETFs trade like stocks, so you can buy and sell them as you would with shares of any other company from a regular stock brokerage account. So you don’t even need to get involved with commodity brokers, futures, or futures options contracts.
2. Options: The ETFs also have options available, which offers you more leverage and can reduce your risk.
3. Liquidity: Because all four of these ETFs are the largest ones available for their respective commodities, there is enough volume to be able to get in and out quickly and safely.
Next time, I’ll show you one of my favorite ways to use an options strategy to execute a bullish commodity trade. But in the meantime, check out those ETFs above.
Good trading,
Lee Lowell
Editor’s Note: Not many investors have access to their own “pit trader.” But having spent six years “in the pits” as a market maker at the NYMEX, Lee Lowell is one of the rare few who is truly able to give investors an insider’s perspective on how the commodities world works – and the forces that drive prices. Now, this analyst and former trader gives ordinary investors the same insights that he gained from his years on the trading floor in his Instant Money Trader letter. For more details, check out this link.
The Investment U Blackboard:
~ Bring Out The Oil Bears
Monday saw another volatile day of trading in the oil market, with one statement from the Centre for Global Energy Studies was enough to send the bears sprinting for the exits: “There will be little or no sustained upward pressure on oil prices until global economic recovery is firmly established and reviving oil demand begins to draw down bulging oil inventories. Even next year, prices are unlikely to rise much unless clear signals emerge that the world is pulling out of recession in a sustainable fashion.”
Result? The price per barrel sank by over $3 at one point. Adding to the edginess was this week’s G20 summit in Pittsburgh on Thursday, plus the Federal Reserve’s latest monetary policy meeting on Tuesday and Wednesday.
It’s a world shrouded in deep myths and folklore that include stories of people losing their homes, or having 5,000 bushels of soybeans dumped on their front lawn.
I’m talking about the commodities world, of course.
But despite these tall tales, commodities aren’t necessarily dangerous investments. Not if you know what you’re doing and take adequate precautions. Rather, the “secret society” stuff comes from the belief that the sector is a murky one that many investors simply don’t understand. Just the mere sound of “commodity futures and futures options contracts” was enough to send people running for cover…
However, nothing could be further from the truth when dealing with commodities. And over the past few years, we’ve seen great changes in the financial world that have opened the doors to this “secret society.”
Step Out of Your Comfort Zone… Don’t Be Afraid of Futures & Futures Options
I’ll tell you what I’ve told my friends and acquaintances over the years: Don’t be scared of commodity futures and futures options, they’re essentially little different than stock and stock options. If you know how to trade stocks and stock options, then there’s no difference from futures and futures options.
For example, if you can buy and sell IBM (NYSE: IBM) shares and IBM options, then why can’t you buy and sell sugar futures and sugar options? There is no difference. As long as you have an idea of where an investment (be it IBM or sugar) might move to and its underlying fundamentals, then what is there to be scared about?
Here’s the problem as I see it (based on my 18 years of experience in the commodities sector): Most people just don’t know enough about the underlying fundamentals of commodities – how/why soybeans, cocoa, cotton, or live cattle trade in a certain way. The majority of people know stocks and that’s that. They don’t like change and are fearful to step out of their comfort zone.
But all commodities that are available to trade on various U.S. exchanges are highly regulated. They have strict rules, which are efficient and assure the integrity and safety of your capital.
So if you’re looking to add some great potential gains to your portfolio, then consider what commodities can do for you…
Four Commodities… Four Explosive Moves
Want some examples of how explosive the world of commodities can be? Just look at these moves for oil, natural gas, gold and silver over the past year…
How would you have liked to hop aboard some of those moves?
Oil: When it started rising in 2007 and topped in 2008, it encompassed a staggering $90,000 move if you’d held just one contract. And the freefall that ended last March brought in an unheard of $110,000 for anyone being bearish.
If you’d held 10 contracts during those moves, you could have seen gains of over $1 million! And that’s just one direction. Double it if you went both ways.
Natural Gas: The move up in the summer of 2007 to the top in 2008 encompassed an $85,000 move, while the drop back down to the lows hit just two weeks ago and saw an even larger haul of $110,000. And this was for holding just one measly little contract. Imagine if you had 100 contracts.
Gold: From the gold chart below, you can see the trend higher from 2002. But even if you got onboard as late as 2006, the move could still have netted you $45,000.
Silver: A bullish position taken in 2006 would have scored $60,000 on just one contract. And if you’d hopped on the bear train near the highs in the spring of 2008, you could have pocketed another $65,000 just six months later.
This is some serious money folks.
And the great thing about commodities is that it’s normal for them to cycle from highs to lows and then back again. This gives you opportunities to profit on the way up and the way down. Moreover, it’s in contrast to the stock market, where most moves are biased to the upside.
Now, if you want to profit today…
Three Reasons Why You Should Trade These Four ETFs
Due to the changes that have taken place in the commodities world, regular investors have a chance to take part in the sector without leaving the comfort of a stockbroker.
We’re talking about commodity-related exchange-traded-funds (ETFs), which mimic the moves of the underlying asset. So you can use them to play some of the most popular and active commodity markets.
For example, if you’d like to go for oil, natural gas, gold, and silver, consider these ETFs:
* Oil: United States Oil Fund (NYSE: USO)
* Natural Gas: United States Natural Gas Fund (NYSE: UNG)
* Gold: SPDR Gold Shares (NYSE: GLD)
* Silver: iShares Silver Trust (NYSE: SLV)
If you want to gain exposure to the often lucrative commodities world, here’s why you should trade these ETFs…
1. Simple: ETFs trade like stocks, so you can buy and sell them as you would with shares of any other company from a regular stock brokerage account. So you don’t even need to get involved with commodity brokers, futures, or futures options contracts.
2. Options: The ETFs also have options available, which offers you more leverage and can reduce your risk.
3. Liquidity: Because all four of these ETFs are the largest ones available for their respective commodities, there is enough volume to be able to get in and out quickly and safely.
Next time, I’ll show you one of my favorite ways to use an options strategy to execute a bullish commodity trade. But in the meantime, check out those ETFs above.
Good trading,
Lee Lowell
Editor’s Note: Not many investors have access to their own “pit trader.” But having spent six years “in the pits” as a market maker at the NYMEX, Lee Lowell is one of the rare few who is truly able to give investors an insider’s perspective on how the commodities world works – and the forces that drive prices. Now, this analyst and former trader gives ordinary investors the same insights that he gained from his years on the trading floor in his Instant Money Trader letter. For more details, check out this link.
The Investment U Blackboard:
~ Bring Out The Oil Bears
Monday saw another volatile day of trading in the oil market, with one statement from the Centre for Global Energy Studies was enough to send the bears sprinting for the exits: “There will be little or no sustained upward pressure on oil prices until global economic recovery is firmly established and reviving oil demand begins to draw down bulging oil inventories. Even next year, prices are unlikely to rise much unless clear signals emerge that the world is pulling out of recession in a sustainable fashion.”
Result? The price per barrel sank by over $3 at one point. Adding to the edginess was this week’s G20 summit in Pittsburgh on Thursday, plus the Federal Reserve’s latest monetary policy meeting on Tuesday and Wednesday.
How to trade hot commodities?
Soaring commodity prices are driving the cost of food, gasoline, airplane tickets and just about everything else we want to buy to new heights.
As consumers, besides for cutting back on purchases, there's little we can do about this state of affairs. But for investors, rising commodity prices offer an opportunity to make some money. I'll get into specifics in a minute, but first some background.
Demand or speculation?
Commodities include corn, coffee, wheat, soybeans and almost all other agricultural products; crude oil, natural gas and heating oil; copper, lead and other industrial metals; gold and silver; and livestock.
Many commodities are trading near record prices. Why? Some blame growing demand from emerging markets. Others blame speculators. Still others blame the diversion of corn crops to ethanol production.
This question isn't merely academic. If speculators are the driving force, commodity prices are in bubble space and sooner or later will come crashing back to earth. However, if the reasons are more fundamental, prices are probably headed higher.
Try your hand via ETFs
If you buy the fundamental argument, you can use exchange-traded funds, or ETFs, to profit from rising commodity prices.
This is a relatively new opportunity. Most commodity ETFs have been available for less than two years. Before that, futures contracts were the only way to invest directly in commodities. But futures are short-term bets and too risky for most individual investors.
Another alternative is to buy shares of companies involved in the corresponding industry. For instance, you could buy an oil driller to gain from rising energy prices. But that doesn't always work. Often, related industry stocks don't follow commodity prices.
As consumers, besides for cutting back on purchases, there's little we can do about this state of affairs. But for investors, rising commodity prices offer an opportunity to make some money. I'll get into specifics in a minute, but first some background.
Demand or speculation?
Commodities include corn, coffee, wheat, soybeans and almost all other agricultural products; crude oil, natural gas and heating oil; copper, lead and other industrial metals; gold and silver; and livestock.
Many commodities are trading near record prices. Why? Some blame growing demand from emerging markets. Others blame speculators. Still others blame the diversion of corn crops to ethanol production.
This question isn't merely academic. If speculators are the driving force, commodity prices are in bubble space and sooner or later will come crashing back to earth. However, if the reasons are more fundamental, prices are probably headed higher.
Try your hand via ETFs
If you buy the fundamental argument, you can use exchange-traded funds, or ETFs, to profit from rising commodity prices.
This is a relatively new opportunity. Most commodity ETFs have been available for less than two years. Before that, futures contracts were the only way to invest directly in commodities. But futures are short-term bets and too risky for most individual investors.
Another alternative is to buy shares of companies involved in the corresponding industry. For instance, you could buy an oil driller to gain from rising energy prices. But that doesn't always work. Often, related industry stocks don't follow commodity prices.
How Commodities Trading Works??
Do you think gold prices will go up further?
Are you sure that crude oil prices are going to fall?
Have you heard that the soya crop this year is bad and will result in soya prices going up?
If you believe that these predictions have a good chance of coming true and are willing to bet some money on them, you could try your hand at playing the commodity futures market.
In How to trade in Futures, we spoke about stock futures. Here we talk about commodity futures.
The commodity markets have changed a lot from the poky, little hole-in-the-wall trading offices in narrow streets next to crowded markets where traditional dhoti-clad merchants used to trade.
Brand new commodities exchanges---the main ones are NCDEX and MCX---have been set up and these are fully computerised.
More and more stock brokers are setting up commodity brokerages as well, and trading volumes in commodity futures is widely predicted to rival the volume of derivative transactions (futures and options) on the stock exchanges.
What's more, you can also trade online.
Why commodities trading?
Well, let's suppose you want to buy gold because you believe that the price of gold will rise.
You could then buy gold ingots, store them, wait for them to go up in price, and then sell them at a profit.
But, you have to be sure that the gold you buy is pure, you have to find a place to store it, you have to provide the security, transport it to vault and other such hassles.
A far better way to invest in gold would be to buy gold futures from the commodities exchange.
How do you do that?
When you buy a Gold Futures contract, you undertake to do three things.
1. Buy the amount of gold specified in the contract.
2. Buy it at the price specified in the contract.
3. Buy it on the expiry of the contract. This could be after one month, two months, three months and so on. Of course, if you sell the Gold Futures contract before it expires, then you don't have to worry about actually buying the gold.
Let's say you buy the Gold Future contract at say Rs 7,200 per 10 gm.
Your hunch comes true and the gold prices rally to Rs 8,000 per 10 gm.
You can sell the Gold Futures any time before expiry of the contract.
Gold and other commodity futures prices are quoted on the commodity exchanges in exactly the same way in which stock prices or stock futures prices are quoted on a daily basis in the stock markets.
How it works
Just like stock futures (Read How to trade in Futures to understand how futures work).
When you buy a Futures, you don't have to pay the entire amount, just a fixed percentage of the cost. This is known as the margin.
Let's say you are buying a Gold Futures contract. The minimum contract size for a gold future is 100 gms. 100 gms of gold may be worth Rs 72,000.
The margin for gold set by MCX is 3.5%. So you only end up paying Rs 2,520.
The low margin means that you can buy futures representing a large amount of gold by paying only a fraction of the price.
So you bought the Gold Futures contract when it was Rs 72,000 per 100 gms.
The next day, the price of gold rose to Rs 73,000 per 100 gms.
Rs 1,000 (Rs 73,000 – Rs 72,000) will be credited to your account.
The following day, the price dips to Rs 72,500.
Rs 500 will get debited from your account (Rs 73,000 - Rs 72,500).
What you need to know
Compared to stocks, trading in commodities is much cheaper, because margins are much lower than in stock futures.
Brokerage is low for commodity futures. It ranges from 0.05% to 0.12%.
Because of this, commodity futures are a speculator's paradise.
If you are a hard-core trader who follows the technical charts and do not really care what you trade, and if you are nimble and savvy, then commodity futures could be another asset class that you would be interested in.
The advantages in this line is that there are no balance sheets, no complicated financial statements----all you have to do is follow the supply and demand position of the commodities you trade in very closely.
Go onto the commodities trading exchange - NCDEX and MCX - to see which commodities are offered for trading, their contract size and other criteria. You will have to get hold of a commodities broker but that should not be a problem. There are lots of brokers that offer commodity trading these days.
But, it would be wise to avoid commodity trading if you are a rookie. A better move would be to initially trade in stock futures before opting for commodity futures.
Are you sure that crude oil prices are going to fall?
Have you heard that the soya crop this year is bad and will result in soya prices going up?
If you believe that these predictions have a good chance of coming true and are willing to bet some money on them, you could try your hand at playing the commodity futures market.
In How to trade in Futures, we spoke about stock futures. Here we talk about commodity futures.
The commodity markets have changed a lot from the poky, little hole-in-the-wall trading offices in narrow streets next to crowded markets where traditional dhoti-clad merchants used to trade.
Brand new commodities exchanges---the main ones are NCDEX and MCX---have been set up and these are fully computerised.
More and more stock brokers are setting up commodity brokerages as well, and trading volumes in commodity futures is widely predicted to rival the volume of derivative transactions (futures and options) on the stock exchanges.
What's more, you can also trade online.
Why commodities trading?
Well, let's suppose you want to buy gold because you believe that the price of gold will rise.
You could then buy gold ingots, store them, wait for them to go up in price, and then sell them at a profit.
But, you have to be sure that the gold you buy is pure, you have to find a place to store it, you have to provide the security, transport it to vault and other such hassles.
A far better way to invest in gold would be to buy gold futures from the commodities exchange.
How do you do that?
When you buy a Gold Futures contract, you undertake to do three things.
1. Buy the amount of gold specified in the contract.
2. Buy it at the price specified in the contract.
3. Buy it on the expiry of the contract. This could be after one month, two months, three months and so on. Of course, if you sell the Gold Futures contract before it expires, then you don't have to worry about actually buying the gold.
Let's say you buy the Gold Future contract at say Rs 7,200 per 10 gm.
Your hunch comes true and the gold prices rally to Rs 8,000 per 10 gm.
You can sell the Gold Futures any time before expiry of the contract.
Gold and other commodity futures prices are quoted on the commodity exchanges in exactly the same way in which stock prices or stock futures prices are quoted on a daily basis in the stock markets.
How it works
Just like stock futures (Read How to trade in Futures to understand how futures work).
When you buy a Futures, you don't have to pay the entire amount, just a fixed percentage of the cost. This is known as the margin.
Let's say you are buying a Gold Futures contract. The minimum contract size for a gold future is 100 gms. 100 gms of gold may be worth Rs 72,000.
The margin for gold set by MCX is 3.5%. So you only end up paying Rs 2,520.
The low margin means that you can buy futures representing a large amount of gold by paying only a fraction of the price.
So you bought the Gold Futures contract when it was Rs 72,000 per 100 gms.
The next day, the price of gold rose to Rs 73,000 per 100 gms.
Rs 1,000 (Rs 73,000 – Rs 72,000) will be credited to your account.
The following day, the price dips to Rs 72,500.
Rs 500 will get debited from your account (Rs 73,000 - Rs 72,500).
What you need to know
Compared to stocks, trading in commodities is much cheaper, because margins are much lower than in stock futures.
Brokerage is low for commodity futures. It ranges from 0.05% to 0.12%.
Because of this, commodity futures are a speculator's paradise.
If you are a hard-core trader who follows the technical charts and do not really care what you trade, and if you are nimble and savvy, then commodity futures could be another asset class that you would be interested in.
The advantages in this line is that there are no balance sheets, no complicated financial statements----all you have to do is follow the supply and demand position of the commodities you trade in very closely.
Go onto the commodities trading exchange - NCDEX and MCX - to see which commodities are offered for trading, their contract size and other criteria. You will have to get hold of a commodities broker but that should not be a problem. There are lots of brokers that offer commodity trading these days.
But, it would be wise to avoid commodity trading if you are a rookie. A better move would be to initially trade in stock futures before opting for commodity futures.
MCX india Daily Trading Level Tips 02.11.2009
At www.Commodity.tk
We proides daily trading Levels for Trade & Earn in MCXINDIA commodity market
To get Free Trading Tips & Trading Levels on MCX .. Please visit www.Coomodity.tk or www.Mcxindia.webs.com or Email us on Care@AskUs.In
We proides daily trading Levels for Trade & Earn in MCXINDIA commodity market
To get Free Trading Tips & Trading Levels on MCX .. Please visit www.Coomodity.tk or www.Mcxindia.webs.com or Email us on Care@AskUs.In
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