What is futures trading?

Halloween is either a week away or much sooner (depending on when you’re reading this). If you haven’t already bought your candy, you better get to the store. Otherwise, you’ll be stuck with the variety pack of Laffy Taffy, Nerds (not the good kind), mini Hersheys, and Smarties. You don’t want to get the reputation of the worst house for candy.

Futures trading is a contract that obligates the parties to buy or sell an asset at a future price. Futures trading is a higher stakes gamble on the price of an asset since it requires the parties to purchase or sell the asset by the established date. 

You are literally trading on the future price of something.

Options trading, on the other hand, buys the option (but not obligation) to trade an asset at an agreed upon price. Futures trading is higher risk because of the obligation to purchase/sell the asset.

Futures contracts operate similarly to options with an expiration date, quantity, and price. The buyer of a futures contract agrees to purchase the asset at the set price by the set date. 

You can buy futures contracts on seemingly everything: oil, wheat, cryptocurrency, real currency, stocks, and gold. When trading contracts for physical things, futures traders rarely expect to actually take the thing. They use data (or vibes) to find undervalued future prices for things then sell the contract closer to the expiration date when the real price increases beyond their purchase price. They profit on the difference.

If you are paying attention to the increasing diseases affecting bananas, you could look to purchase a futures contract for next summer. You might think we are going to have a banana shortage causing the price to increase. If there are futures contracts selling millions of bananas at the historical average Summer Banana Price (SBP, if you will), you may think that is a good deal as there is a looming crisis. Then, next spring, as the cavendish banana price starts to rise, your futures contract could be extremely valuable. 

Please don’t take this as advice, just a hypothetical. I don’t even know if there are banana futures contracts. Plus, this will lead you down a rabbit hole about the cavendish banana variety, the other (worse) banana varieties, the fact that this has already happened in the past, and the insane reality that trees can get and spread diseases. 

On another note, futures contracts also caused the price of oil to become NEGATIVE in May of 2020. While the world shut down due to COVID, the demand for oil plummeted. A bunch of traders had contracts to purchase millions of barrels of oil. With demand so low, the normally empty storage tanks were all full. The traders, who never expected to actually buy the oil, couldn’t sell their contracts since the usual buyers had nowhere to store the oil. Eventually, the price of West Texas crude oil dipped as low as -$37. Traders were PAYING people to take their oil… imagine that.

Futures contracts are just another example of how humans have made it possible to gamble on everything. From the future price of oil to the color of the Gatorade dumped at the Super Bowl, you can monetize any hunch you have.

For that, you can thank capitalism, alcohol, and the U.S. of A.

What We’re Reading:

Kochland. This is a fascinating book about the history of Koch Industries and the billionaire family behind it. If you want to learn more about how the weather affects oil futures, how not all oil is made equal, and the political influence of the secretive Koch Brothers, this book is a great place to start.

Debrief on Deck

Next week we talk about Angel Investors… whoever came up with that name deserves a branding award.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on Instagram.

Until then, stay the course.

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