Futures Trading: Futures vs Others

When deciding which asset class to trade, new traders often find themselves considering various options such as index futures, commodity futures, stocks, forex, or options. While all of these assets offer speculative opportunities, they each possess distinct characteristics that may require specialized knowledge.

Let’s explore the advantages and disadvantages of each asset class, beginning with forex trading.

Stocks #

Pros #

• There are thousands of stocks, sectors, and industries to choose from, making equities trading very flexible for the trader
• Stocks that outperform or underperform can break away from the broader market, such as in the case of “sector rotation,” where a given sector (e.g. “Tech”) may outperform another (e.g. “Industrials”)
• “Event risk” is both an opportunity and risk, and it can be triggered by company executives (saying the right or wrong thing), internal or external fundamentals, or public opinion

Cons #

• Day traders are required to hold $25,000 in their account, otherwise they are subject to penalization (sometimes resulting in the closing of your account)
• You are subject to the “wash sale” rule (see details on the SEC website)
• During tax time, you may have to list every single trade to determine your taxable status–a nightmare for day traders
• “Event risk” is both an opportunity and risk, and it can be triggered by company executives (saying the right or wrong thing), internal or external fundamentals, or public opinion

Options #

Pros #

• There exists hundreds of option strategies designed to take advantage of a multitude of speculative scenarios–bull call spreads, bull put spreads, iron butterflies, iron condors, straddles, strangles, and those barely scratch the surface
• Because option strategies are so varied and flexible, you can fine-tune your trading approach to better match a given market situation.
• Option have an asymmetric payoff–one they’re in the money, they appreciate faster and at an exponential rate, making it possible to make a profit much greater than your premium

Cons #

• The biggest disadvantage is that options requires very complex skills and specialized knowledge–both of which can take a lot of time and experience to develop
• Margin required for selling options naked can be prohibitively high, as option selling can expose you to unlimited risk

Commodities (other than indexes) #

Pros #

• Many commodities that are not as popularly traded may have fewer correlations to the broader market–commodities such as orange juice, sugar, rice, and lumber.
• Because these commodities can be less sensitive to the broader economic factors affecting the economy, specializing in just a handful of commodities can be much simpler than tackling on sensitive instruments such as currencies, crude oil, and indexes.

Cons #

• The flip side of all of this is that certain of these commodities also tend to be less liquid and are more likely to be moved by commercial producers and purchasers as well as institutional investors
• Lack of liquidity can make these commodities subject to “limit up or “limit down” moves, which can significantly impact your account (positively or negatively)

Index Futures #

Pros #

• Index futures come in both micro and mini contract sizes, making them easier to match your level of risk tolerance and capital
• Index futures are popular and liquidly traded
• Because you are following the broader market, index data and news is plentiful, meaning you won’t be “out of the loop” with regards to market and economic development

Cons #

• If fundamentals play a role in your trading, you have to constantly monitor every major report that may affect your index (e.g., follow an economic calendar and understand how certain reports may impact your market)
• Index futures can also be noisier since many market participants are trading them–this can be a pro or a con depending on your trading strategy

Types of Futures You Can Trade #

Stock Indices	Treasuries	Currency Futures	Energies	Metals	Grains	Meats	Softs
E-Mini S&P 500, Nasdaq and the Russell 2000, German Emini DAX, Australian SPI, Emini Nikkei, UK FTSE	Bonds (30-year bonds and ultra-bonds), Euro Bobl	Euro currency, British pound, Japanese yen, Australian dollar, and Canadian dollar	Crude oil, Brent Crude, RBOB gasoline, heating oil and natural gas	Gold, silver, copper, platinum and palladium	Corn, wheat, soybeans, soybean meal and soy oil	Cattle, lean hogs, pork bellies and feeder cattle	Cocoa, sugar and cotton