Commodity futures is a contract or an agreement to buy or sell a particular commodity at a future date
Commodity futures basic overview
- Commodity futures are majorly found in three categories; food, energy, and metals. Major contributors for food futures are meat, wheat, and sugar. Most energy futures are for oil and gasoline. Metals using futures include gold, silver, and copper, mostly they contribute to major chunk of commodity futures for metals.
- The price and the amount of the commodity are defined during agreement
- Most contracts have agreement that the options will be fulfilled by actual delivery of the commodity
- Some commodity futures have contractual arrangement of cash settlements in lieu of immediate delivery
- Most commodity futures have closures before the delivery date
- A commodity futures option gives the prospective purchaser the right to buy a futures contract at a future date for a particular price
- Same goes with seller, a commodity futures contract gives the prospective seller the right to sell a particular futures contract at a future date for a particular price
- Since 2016, apart from various regional exchanges, there are 6 national commodity exchanges namely, Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX), Indian Commodity Exchange (ICEX), National Multi Commodity Exchange (NMCE), ACE Derivatives Exchange (ACE) and Universal Commodity Exchange(UCX).
- Commodity futures has certain exceptions. It might be bit complex for the new trader. It is wisely advised to deal with a registered broker while investing in commodity options.
What is the basic information a commodity futures trader must have before buying commodity options?
Commodity futures trading is not completely risky proposition, like other options in stock market, it is a speculation which gives good return of investment, provided you have planned money management and immense patience to hold on to a position until desired entry prices are noticed.
Before you purchase Commodity Futures or Options Contracts, remember validating it through these pointers:
- Consider your overall investment, margin amount, goals and financial resources
- Determine the loss amount you can afford based on your initial investment
- Make further moves based on the loss value that you expect, there is never profit-only option in speculative trading
- Dedicate spare amount in advance to absorb loss value
- Acknowledge all the conditions, scenarios and obligations for any commodity futures contract that you purchase
- Observe the pattern and resources that has impact on the commodity futures
- Deep mine fine prints of risk disclosures, ensure that it is provided in a detailed format by the broker.
- Keep track on changes happening in your positions
- Based on experience, deal only with the broker who is problem solver and right guide.
- Be controvert. Ask relevant queries to the experts in online forums for share trading in India and browse through relative articles before commitment investment in commodity futures and opening a trading account.
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