Trading in the financial markets involves various types of instruments, two of the most common being futures and options. These derivative products are used for hedging risk, speculating on future price movements, and gaining access to otherwise hard-to-trade assets or markets. Here's a comprehensive guide on how trading futures and options is performed:
Futures trading involves dealing in futures contracts, which are agreements to buy or sell an underlying asset at a predetermined price and date in the future. The process typically involves these steps:
Market Analysis: This involves understanding the dynamics of the particular futures market you're interested in, including the fundamental and technical factors affecting prices.
Account Setup: Trading futures requires a specialized brokerage account, for instance with us, with a firm that offers futures trading services.
Contract Selection: Each futures contract represents a specific quantity and quality of an asset to be delivered at a future date. Traders choose contracts based on the delivery month and price.
Positioning: Traders can either go long (buying a contract in anticipation of a price increase) or go short (selling a contract expecting a price decrease).
Margin and Leverage: Futures trading involves putting up a margin amount rather than the full value of the contract. This allows for leveraging, i.e., controlling a large volume of an asset with a relatively small amount of capital.
Position Management: After entering a position, traders need to monitor and adjust their trades based on market fluctuations.
Closing the Position: Most futures contracts are closed before the delivery date by doing the opposite action of the initial trade.
Options trading involves dealing with options contracts, which give the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a specific price before a certain date.
Market Analysis: Similar to futures trading, understanding the market dynamics is crucial in options trading.
Account Setup: Trading options also requires a brokerage account, for instance with us, but it might need additional permissions due to the complexity of options trading.
Contract Selection: Options contracts specify the strike price (the price at which the underlying asset can be bought or sold) and the expiration date. Traders choose contracts based on their market view and strategy.
Positioning: Buying a call option if anticipating a price increase, or buying a put option if expecting a price decrease. Traders can also sell or "write" options, but this comes with increased risk.
Position Management: Traders must monitor their options positions closely and make adjustments as market conditions change.
Closing the Position: Options can be closed by selling the contract if you initially bought it, or buying back the contract if you initially wrote it. Alternatively, options can be allowed to expire, or if in-the-money, exercised to buy or sell the underlying asset.
Traders earn profits in futures and options trading if their predictions about the market direction are correct. However, these types of trading involve substantial risk and may not be suitable for all investors. It's vital to understand the risks and develop a sound trading strategy before getting started.
In terms of its interactions with international regulators, IFB is involved in cooperative arrangements similar to those facilitated by organizations like the Financial Industry Regulatory Authority (FINRA). FINRA collaborates with international regulators to enhance the oversight of firms with global operations. This involves facilitating cooperation and information sharing between FINRA and foreign authorities, ensuring strong relationships with key counterparts, and contributing to the development of global securities regulation and policy.
As part of these efforts, FINRA enters into information-sharing memorandums of understanding (MoUs) with key foreign regulators to allow for collaboration and coordination on selected issues. This can involve investigations of possible instances of cross-border market abuse, information exchange on firms under common supervision of both regulators, and coordination on supervision of firms and markets. FINRA also participates in the International Organization of Securities Commissions (IOSCO), which works to shape regulatory policy and global norms of conduct