Kevin Kraus - How to Start Trading Options

START TRADING OPTIONS

A Self-Teaching Guide for Trading Options Profitably

Kevin M. Kraus

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ISBN: 978-0-07-176993-8

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For Gayle Marie

for all your love and support

An investment in knowledge always pays the best interest

Benjamin Franklin

In this chapter we begin with some basic market information and concepts. We define commodities and derivative contracts and explain supply and demand, market fundamentals, the exchanges, and futures trading. Your option education begins with the basics of derivative contracts and market economics. In we will cover:

What are commodities

Derivative contracts

Supply and demand

Market fundamentals

The commodity exchanges

Futures trading

Before beginning your option education we want to cover the basics of derivative contracts and basic market economics. First lets cover what commodities are and how they relate to the futures industry. Commodities are very simply things that are consumed or processed in the manufacture or production of products.

For example: ABC Steel company uses iron ore in the production of steel. Iron is a commodity, although it is not commonly traded on futures exchanges. A bakery company uses wheat from a grain miller in the production of bread. Wheat is a commodity commonly traded on futures exchanges. Most everything you look at or use is a commodity, many of them traded on commodity exchanges somewhere in the world. Everything from the gold in your ring to the milk in your refrigerator is a commodity.

FIGURE 1-1

Commodities are typically described as agricultural or mining products; however, in todays market the term commodity has come to describe many agricultural, food, energy, mining, and financial products.

When people talk about trading commodities they are referring to trading derivative contracts, more commonly known as futures. Derivatives, or futures, are contract instruments between two parties for the exchange of a commodity whether it be a physical commodity like wheat or a financial instrument like a 10-year Treasury note or a foreign currency. The instrument must specify certain things in order to qualify as a futures contract:

Commodity

Quantity

Quality

Time of delivery

Point of delivery

Futures contracts do not specify the price. The price of the contract is determined in open market trade on a futures exchange. Here is an example of a current futures contract: