Why can i trade commodities only through futures?
Question by Akiko Himenokouji: Why can i trade commodities only through futures?
I’m with optionsxpress.com and i realized i can’t trade commodities and forex directly. I can only do it indirectly via futures. Shouldn’t futures trading be at a higher trading level than spot trading? And since i can trade futures then i should be able to trade less complicated assets like spot commodities. How do i buy them directly?
Best answer:
Answer by JoeyV
FX and commodities have different answers:
FX – Spot trading FX is a fairly small market relative to the big boys – interbank forwards, swaps, and futures. The problem is that if you are speculating on currencies, the interest rate available on that currency is an integral part of the trade. For instance, the “arbitrage” that occurs to all kids sometime is that Brazilian real (or whatever ) yields 12% so why not convert your dollars into real, get 12% and then convert back? Of course the answer is that the 12% says that you expect real to depreciate and that depreciation is implicit in the pricing of the derivatives. The spot trade gets you no yield as you just own a bunch of uninvested real which you then have to go do something with (which is not as easy as you might think). The retail internet spot forex is actually just divvied up interbank forwards.
For commodities – it’s all about delivery and quality. You can trade spot crude oil but if you think it is “less complicated”, think again. Crude oil gets different prices depending on what it is and where it is and how easy it is to deliver. There are storage concerns and fees. I know some folks who do this for a living and it is a reasonably tough job which punishes mistakes. Trading a crude oil future and never taking delivery is a vastly easier way to bet on crude oil prices.
Just as an introduction to the complications of trading crude oil go read the delivery specs on a nat gas futures contract and see if you understand it (you won’t). That’s the very first step in trading physicals. But a nat gas futures contract is simplicity itself, if you are long and at gas goes up you win (and the other 3 cases are easy).
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