Perfect For Beginners and Middle-Leveled Traders!
Free Demo Account!
Free Trading Education!
Get Your Sign-Up Bonus Now!
Good Broker For Experienced Traders!
Become an FT subscriber to read:
Pork belly and hog prices continue to fall
Leverage our market expertise
Expert insights, analysis and smart data help you cut through the noise to spot trends, risks and opportunities.
Join over 300,000 Finance professionals who already subscribe to the FT.
How to trade on Crypto Futures and Options
Have you heard of Crypto Futures? Have you heard of Bitcoin Futures? You know CME Group’s adding them and this is positive news, but do you really know what derivatives are, how can you trade them, and where can you learn more about futures trading? Here’s your first part of Bitcoin Futures guide to get you started.
Bitcoin and other cryptocurrencies have evolved from a playful experiment among technical experts to an established and growing branch of the global financial industry. This means that the times in which cryptocurrency traders and investors only concerned themselves with straightforward buying and selling are over. Derivatives are now entering the picture.
What are derivatives?
Think of a derivative as a bet between two parties about the development of an underlying asset. These instruments are derived from the value of the underlying asset, having no value of their own. Hence the name “derivative.”
In traditional financial markets, derivatives are used as speculation objects as well as insurance against losses. T
The latter is known as hedging. One popular variety of derivatives used for hedging are called futures. A future is a contract between two parties in which one party agrees to pay the other a predetermined amount of money for an underlying asset at a specific point in time.
For example, let us assume that the underlying assets are pork bellies:
Trader A is a producer of pork bellies. In order to insure herself against a price drop in pork bellies in the future, she enters a futures contract with Trader B. Trader B uses these pork bellies to manufacture sliced breakfast bacon. Thus, he is not worried that prices might fall in the future – his worry is that prices will go up. Both traders agree that Trader A will sell a metric ton of pork bellies for 1,000 USD 3 months from now. This increases security for both of their businesses. Because a futures contract is a binding contract between two parties, neither party can drop out of the contract: Even if the price for pork bellies is 1,200 USD at the time of execution, trader A is still contractually obliged to sell for 1,000 USD.
Options: Call and put, short and long, and leverage
Traders A and B in the previous example are hedgers. However, futures contracts, once they exist, can also be bought and sold in their own right. This is where futures get interesting for speculators. Say that Speculator X believes the price of a ton of pork belly will rise to 1,200 USD in 3 months’ time, so buying the futures contract at 1,000 USD is a good deal. He can then sell the contract to bacon producers who want to buy pork bellies at 1,000 USD. The option to buy at a specified price in the future is known as a call option. The price of call options rise when traders assume that the price of the underlying asset will rise.
However, Speculator Y may think that pork belly prices will drop to 800 USD per ton. For her, having the option of selling pork bellies for 1000 USD in the future is highly attractive. Such options to sell are known as put options. The price of put options rise when traders expect the prices to fall of an underlying asset.
The positions of Speculators X and Y are known as the long and short respectively: You assume a long position towards the underlying asset when you speculate the rising prices of an asset, and a short position when you speculate on falling prices (also known as “going long” and “going short”).
Perfect For Beginners and Middle-Leveled Traders!
Free Demo Account!
Free Trading Education!
Get Your Sign-Up Bonus Now!
Good Broker For Experienced Traders!
By now you may ask yourself, “If I think that the price of an asset is going to rise, why should I buy a call option and not the asset itself?” The answer is this: Options give you leverage. That means that with a limited amount of capital, you can profit much more by buying options than assets – but also lose much more. This is because a small difference in the price of the underlying asset immediately leads to a substantial change in the price of the derivative.
For example, when pork belly prices rise from 1,000 USD to 1,100 USD (an increase of 10%), call options for 1,000 USD suddenly become much more valuable – their prices may rise from 10.5 USD to 105 USD. Thus, if you have invested all of your capital in pork bellies, you will win 10% – if you have invested in pork belly call options, you will pocket a 1,000% profit.
These numbers are just approximate examples. The exact price of an option depends on the following factors:
The current price of the underlying asset.
The so-called intrinsic value of the option, which is simply the difference between the current market price of the asset and the predetermined price in the option (1100 USD – 1000 USD = 100 USD in this example).
The remaining time until the expiration of the option.
The volatility of the underlying asset.
As for why you should buy a put option instead of the asset itself, the answer is simple. By buying the asset itself, you can never profit from falling prices. With put options you can, simply because their value rises as the price of the underlying stock is falling. In addition to this feature, they offer the same kind of potential for leverage that calls options do, as described above. The price of put options is calculated in a similar manner, but with the important difference being that the intrinsic value is calculated as a predetermined price of the option minus the current market price of the asset – not the other way round as is the case for call options.
It is important to note, however, that leverage means that your potential losses may also be much higher. If pork belly prices fall, call options lose value in a much higher proportion than the pork bellies themselves. In the above example, if the price of pork bellies falls from 1,000 to 900 USD (by 10%), the price of call options may fall from 10.5 USD to almost zero, resulting in a near-total loss of your funds instead of a small loss of just 10%.
What are Bitcoin futures contracts?
A Bitcoin futures contract is exactly what you would expect from the example above, replacing pork bellies with Bitcoin. It is a contract that enables you to buy Bitcoin at a predetermined price at a specific point in the future. For example, if today’s Bitcoin price is 8,000 USD per BTC and you expect it to rise to 10,000 USD per BTC in 4 weeks, then entering a contract which allows you to buy Bitcoin at 9,000 USD in 4 weeks is highly attractive.
Thus, Bitcoin futures are an up and coming class in the emerging crypto derivatives market.
Current situation in crypto derivatives
Just like cryptocurrencies themselves, crypto derivatives have been adopted enthusiastically by the crypto community, and have been traded in an unregulated manner at first, and have even been used as a way to avoid the increasingly heavy regulation in the traditional financial sector.
And just like cryptocurrencies, they soon saw the first backlash from governments and authorities – take for example the Chinese cryptocurrency ban.
Crypto derivatives were naturally discovered as an interesting addition to cryptocurrency exchanges first – probably as individual contracts between interested investors on these exchanges. Nowadays, there are already a couple of exchanges that offer crypto derivatives trading as a standard feature: JEX is one of the current market leader, according to The Merkle News; others are BitMEX, OKEX, Crypto Facilities, Coinpit, and Deribit, as well as LedgerX (the first regulated cryptocurrency exchange in the US).
The most common way to trade in Bitcoin and other cryptocurrency derivatives today is through contract-for-difference (CFD) contracts. These CFD contracts are usually traded over the counter (OTC), meaning that they are not traded on exchanges but directly between participants. Due to the high volatility (exceeding 1.5-2x std from the mean) most of the OTC platforms do not provide leverage on bitcoin and other cryptos CFDs.
How to trade Bitcoin futures
As described above, you can assume one of two positions in regards to trading in futures and other derivatives: Long and short. When you follow a long strategy, you speculate on prices of the underlying asset going up. With a short strategy, you speculate on prices going down.
Short and long
If you are “going long” on Bitcoin, you assume that Bitcoin prices will go up. And if you expect Bitcoin prices to go up, you are interested in buying call options – options that enable you to buy Bitcoin at a predetermined price in the future.
For example, if the current Bitcoin price is 5,000 USD and you expect it to rise to 8,000 USD 6 months from now, you would certainly pay good money for a call option that allows you to purchase Bitcoin for 5000 USD in 6 months, when everyone else is buying for 8,000 USD.
In contrast, if you are “going short” on Bitcoin, you assume that Bitcoin prices will fall. Buying put options will enable you to sell Bitcoin at some point in the future at a price that is higher than the future price you expect.
In analogy to the example above, if the current Bitcoin price is 5,000 USD and you expect it to fall to 2,000 USD in 6 months, then put options allowing you to sell Bitcoin for 5,000 USD in 5 months (when everyone else is selling for 2000 USD) are very valuable.
In both of these examples, the options (call option in the first example, put option in the second) have an intrinsic value of 3,000 USD.
Going long is fairly straightforward. It is similar to buying the underlying asset itself, with the only difference being that it enables you to have more leverage.
Both call and put options have, as we have learned above, a certain expiration date. For example, my call option (Bitcoin for 5,000 USD) that I am buying on November 24, 2020, may have a running time of 6 months and thus expire on May 24, 2020. I can sell this option at any time between now and May 24, 2020. But what happens if I don’t sell?
Let’s assume that on the expiration date Bitcoin is worth 8,000 USD. Then my option is very valuable because it enables me to purchase Bitcoin significantly cheaper than the current market price. If this happens, the option is “in the money” – it is valuable.
If, however, Bitcoin is worth just 2,000 USD on May 24, 2020, then my call option for 5,000 USD is worthless. Nobody is interested in exercising this option and purchasing Bitcoin for 5,000 USD when the market price is only 2,000 USD. Thus, my option is “out of the money.”
So, one of two things can happen on the expiration date: If the option is “in the money,” I will receive its value in cash because CME Bitcoin futures are cash-settled. If the option is “out of the money,” it vanishes from my account without bringing me any profit.
However, if the price of the underlying asset is going down, your options usually become worthless before the expiration date. For example, if the Bitcoin price is already at 2,000 USD on May 17, then only the most extraordinary optimists (or “bullish” investors) would buy a 5,000 USD option that expires in just a week.
Everything discussed above is true for put options as well, except that their value development goes in the opposite direction. They become more valuable as the underlying asset price is falling.
A futures contract, as we have mentioned above, is a contract between two parties who agree to make a transaction of an underlying asset at a specified time in the future.
For example, you can enter a Bitcoin futures contract with Mortimer Duke saying that you will sell him 1 BTC on March 30, 2020, for the price of 5,000 USD per BTC. (In the actual CME futures contracts, the limit for one contract is 5 BTC, but we will stick with 1 BTC now for the purposes of easy explanation.) You enter into this contract on an exchange like CME.
Now, what if the Bitcoin price is rising? For example, if 1 BTC is worth 5,500 USD, you don’t want to fulfill this contract any more and sell cheap for 5,000 USD. In order to still make things fair for both participants, the exchange will make sure that you can sell for the current market price of 5,500 USD if you so wish, but they will compensate your contract partner for this. How? They will take the difference – 500 USD – out of your so-called margin account and give it to Mortimer.
This kind of settlement is not only performed on the fulfilment date of the futures contract, but on every trading day, according to the current price of the asset.
In order to make sure that you actually have money in your margin account to settle the difference with Mortimer every day, you are required to put up an initial margin at the beginning of the contract. A lower sum, the so-called minimum margin or maintenance margin, is also defined by the broker. If the money in your margin account falls from the initial margin to the maintenance margin, it triggers a margin call: The broker requests you to fill up your margin account to at least the initial margin (of course, you may also put up more).
However, if you don’t have the money to fill up the margin account upon margin call, you are in trouble: The broker then has the right to sell your assets (usually at a price that is more unfavourable than if you had waited for a good opportunity yourself). This is why margin calls should be avoided.
As you have known crypto futures very well from the contents above, you should find a place to try protical trading.
If you have a interesting in trading Bitcoin, Ethereum, EOS or other cryptocurrency futures in a professional exchange, JEX Exchange would be a good choice.
It’s the leading Bitcoin futures & options trading exchange in the world.
It’s official website is as follows www.jex.com
For more questions, you could find them in the following ways
Can You Still Invest In Pork Bellies? The Trade Explained In 2020
Sharing is caring!
Last Updated on August 12, 2020
Why Are Pork Bellies Valuable?
Pork bellies are cuts of meat taken from the pig’s stomach. The high fat content of this cut makes it ideal for producing bacon.
Pork bellies have a long and storied tradition in financial markets. In 1961, their commoditization ushered in the first livestock trading markets on the Chicago Mercantile Exchange (CME). Over the years, they attracted a wide following from market analysts and traders eager to try to profit from the ups and downs of this niche market.
In 2020, the CME announced the end of pork bellies trading on its exchange. Extreme volatility coupled with dwindling trader interest made the product no longer relevant to financial markets.
However, pork bellies and bacon remain dietary staples for many people around the world, and demand for these products remains robust. For this reason, prices for pork bellies still influence global commodity markets.
Why Did Pork Bellies Become a Commodity?
The market for pork bellies started as a result of Americans’ love affair with bacon.
Before the advent of a transparent futures market for pork bellies, pork manufacturers experienced wild swings in their cost of producing bacon. The reason for this volatility was the seasonal nature of bacon demand in the United States in the 1950s and 1960s.
Although hog farms produced a steady supply of pork year-round, demand for particular cuts of pork varied by the calendar. In the hot summer months, Americans grilled more foods and used bacon as a topping on items ranging from summer salads to hamburgers. In the cold winter months, demand for bacon declined.
Pork producers aware of these seasonal fluctuations began buying, freezing and warehousing pork bellies. The idea was to smooth out their production costs and make their profits more predictable.
Once a Pig Was Butchered, the Pork Belly Would Be Stored in a Freezer – Image via Pixabay
Since pork bellies can be frozen for up to a year, the idea made economic sense. Not only could pork manufacturers insulate themselves from seasonal fluctuations in bacon demand, they also could protect against other supply shocks such as declines in hog production.
Ultimately, the growing interest in buying and selling pork bellies ushered in the pork belly futures contract on the CME.
Traders looking to capitalize on arbitrage opportunities began trading contracts to buy and sell standardized lots of pork bellies in the future. A standard lot consisted of a 40,000-pound frozen slab made up of eight- to 18-pound individual cuts. These standardized contracts provided traders, slaughterhouses and manufacturers with a transparent market for pricing pork bellies and conducting business.
Over the years, the seasonal patterns of bacon consumption became less pronounced. Americans began consuming more bacon year-round for a variety of reasons:
- Migration and demographic shifts resulted in more Americans moving south to states with less extreme seasonal weather differences.
- The fast-growing Latino population in the United States has fueled year-round demand for pork products including bacon.
- Americans are dining out more and the food service industry is supplying more recipes with pork bellies.
- The Pork Board, a leading industry group, is promoting consumption of a variety of cuts of pork including pork bellies.
- The growing popularity of Asian foods such as banh mi has created demand for pork bellies.
The unpredictability of seasonal bacon demand may have contributed to excessive volatility and dwindling interest in the CME pork bellies futures contract. However, overall pork belly demand is greater than ever, and pork producers still need to purchase the commodity to satisfy consumer demand.
How Are Pork Bellies Produced?
The production of pork bellies begins on hog farms that raise the animals for food. Modern hog farms have evolved dramatically in recent year as large private and corporate operations have replaced small family farms. The advantages of these mega-farms are two-fold:
- Lower production costs: Economies of scale allow farmers to feed pigs more efficiently and better utilize their labor. This results in more affordable cuts of pork for food manufacturers.
- Negotiating leverage: Larger farms can enter into better contracts with packing operations – the companies that slaughter, process, pack and distribute cuts of meat such as pork bellies. Packers are usually willing to pay more for hogs if a farmer can offer a consistent supply of the animals.
It takes about six months to raise a pig from birth to slaughter. At the time of slaughter, a typical hog weighs about 270 pounds.
Packing facilities purchase whole hogs from hog farms, slaughter them and process them into a variety of cuts of meat, which they sell to retailers. A typical 270-pound hog will yield a 200-pound carcass with an average of 25% ham, 25% loin, 16% belly, 11% picnic, 5% spareribs and 10% butt.
A Guide to Understanding Opportunities and Risks in Futures Trading
Basic Trading Strategies
Dozens of different strategies and variations of strategies are employed by futures traders in pursuit of speculative profits. Here are brief descriptions and illustrations of the most basic strategies.
Buying (Going Long) to Profit from an Expected Price Increase
Someone expecting the price of a particular commodity to increase over a given period of time can seek to profit by buying futures contracts. If correct in forecasting the direction and timing of the price change, the futures contract can be sold later for the higher price, thereby yielding a profit. If the price declines rather than increases, the trade will result in a loss. Because of leverage, losses as well as gains may be larger than the initial margin deposit.
For example, assume it’s now January. The July crude oil futures price is presently quoted at $15 a barrel and over the coming month you expect the price to increase. You decide to deposit the required initial margin of $2,000 and buy one July crude oil futures contract. Further assume that by April the July crude oil futures price has risen to $16 a barrel and you decide to take your profit by selling. Since each contract is for 1,000 barrels, your $1 a barrel profit would be $1,000 less transaction costs.
|Price per barrel||Value of 1,000 barrel contract|
* For simplicity, examples do not take into account commissions and other transaction costs. These costs are important. You should be sure you understand them.
Suppose, instead, that rather than rising to $16 a barrel, the July crude oil price by April has declined to $14 and that, to avoid the possibility of further loss, you elect to sell the contract at that price. On the 1,000 barrel contract your loss would come to $1,000 plus transaction costs.
Note that if at any time the loss on the open position had reduced funds in your margin account to below the maintenance margin level, you would have received a margin call for whatever sum was needed to restore your account to the amount of the initial margin requirement.
Selling (Going Short) to Profit from an Expected Price Decrease
The only way going short to profit from an expected price decrease differs from going long to profit from an expected price increase is the sequence of the trades. Instead of first buying a futures contract, you first sell a futures contract. If, as you expect, the price does decline, a profit can be realized by later purchasing an offsetting futures contract at the lower price. The gain per unit will be the amount by which the purchase price is below the earlier selling price. Margin requirements for selling a futures contract are the same as for buying a futures contract, and daily profits or losses are credited or debited to the account in the same way.
For example, suppose it’s August and between now and year end you expect the overall level of stock prices to decline. The S&P 500 Stock Index is currently at 1200. You deposit an initial margin of $15,000 and sell one December S&P 500 futures contract at 1200. Each one point change in the index results in a $250 per contract profit or loss. A decline of 100 points by November would thus yield a profit, before transaction costs, of $25,000 in roughly three months time. A gain of this magnitude on less than a 10 percent change in the index level is an illustration of leverage working to your advantage.
Assume stock prices, as measured by the S&P 500, increase rather than decrease and by the time you decide to liquidate the position in November (by making an offsetting purchase), the index has risen to 1300, the outcome would be as follows:
A loss of this magnitude ($25,000, which is far in excess of your $15,000 initial margin deposit) on less than a 10 percent change in the index level is an illustration of leverage working to your disadvantage. It’s the other edge of the sword.
While most speculative futures transactions involve a simple purchase of futures contracts to profit from an expected price increase — or an equally simple sale to profit from an expected price decrease — numerous other possible strategies exist. Spreads are one example.
A spread involves buying one futures contract in one month and selling another futures contract in a different month. The purpose is to profit from an expected change in the relationship between the purchase price of one and the selling price of the other.
As an illustration, assume it’s now November, that the March wheat futures price is presently $3.50 a bushel and the May wheat futures price is presently $3.55 a bushel, a difference of 5¢. Your analysis of market conditions indicates that, over the next few months, the price difference between the two contracts should widen to become greater than 5¢. To profit if you are right, you could sell the March futures contract (the lower priced contract) and buy the May futures contract (the higher priced contract).
Assume time and events prove you right and that, by February, the March futures price has risen to $3.60 and the May futures price is $3.75, a difference of 15¢. By liquidating both contracts at this time, you can realize a net gain of 10¢ a bushel. Since each contract is 5,000 bushels, the net gain is $500.
Net gain 10¢ bushel
Best Binary Options Brokers 2020: