Another question I don’t want the ‘gurus’ to miss:
John, I know we’ve had ‘interaction’ about this before and I have had another look at your website AND I STILL DONT UNDERSTAND!!!
Futures: what are they???
What I want to know and understand is this (let’s take Oil for example):
You will hear on Bloomberg or CNBC that ‘Oil futures for February are now standing at $200’ ($200 for the purposes of this question i.e. ‘not heard today’ on Bloomberg or CNBC) or ‘the Oil futures February contract is now at $200’.
What does this mean AND how does this relate to the current price i.e. the price today, tomorrow, next week, right up until the ‘expiry’ of the contract?
In other words, let’s say that you have heard the above statement and the price of Oil is now (a month prior) $100 a barrell. What does the $200 ‘price tag’ of the February contract have to do with todays price? Does it affect the price today (and will it affect the price for the coming days until the ‘expiry’ of the February contract or what). Also, when the term ‘contract’ is used: between who / whom / what is this contract i.e. a contract assumes ‘two sides’.
Sorry, like I said, I still don’t get it and I trade these things, so I figure I should know. Maybe I’ve just not been ‘explaining’ my ‘misunderstanding’ correctly.
Thanks for the reply BUT been there, read that, got the ‘t-shirt’, and STILL it does not answer my question (well maybe it IS answering my question but I dont’ understand the answer).
I’m getting old you know - and this business has taken ‘decades’ off of my life - so I’m not as sharp as I used to be!!!
Serioulsy - I still don’t get it.
I mean to say (for example): if the February Oil contract ‘is at $200’ today for example does this mean that at the end of February when that contract expires then the price of oil should be $200 when the contract expires???
I need it to be put in pure ‘laymans’ terms. I like cars. Let’s say that I bought a car today for $10 000 and then I was going to resell it in February. Use something like that as an example (if it could be applied). Then ‘I’ll get it’ I’m sure!!!
No it just means that someone has bought to right to purchase it at 200.00 a barrel. It doesn’t mean that that is the price oil will be at at contract expiry.
daedalus:
Fair enough. In other words someone has bought the right to purchase it at $200 a barrel i.e. someone ‘thinks’ that in the future it’s going to be worth $200 a barrel so if it goes higher then they can still buy it at $200 a barrel but if it does not reach that price then they do not have to buy. Is that right? Does this have anything to do with ‘puts’ and ‘calls’ and ‘options’? What if someone has bought the right to purchase it at $400 a barrel but has no intention of excercising this right: could it have the effect of ‘artificially’ pushing the price up?
Sorry - but I need more on this. A ‘real world’ example in ‘laymans terms’.
No. Futures are contract agreements. There is no option. If you hold a futures contract to it’s conclusion (meaning you don’t offset it by taking an opposing position) then you are required to deliver (if short) or receive (if long) the product in question, meaning a cash payment as well, obviously.