37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
19FOr Beginners Only
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Spread
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a spread involves the simultaneous purchase of one futures contract against the sale of another futures
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contract, either in the same market or in a related market. in essence, a spread trader is primarily
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concerned with the difference between prices rather than the direction of price. an example of a spread
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trade would be: Buy 1 July cotton/sell 1 December cotton, July 200 points premium December.
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This order would be executed if July could be bought at a price 200 points or less above the level at
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which December is sold.
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such an order would be placed if the trader expected July cotton to widen
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its premium relative to December cotton.
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not all brokerages will accept all the order types in this section (and may offer others not listed here).
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Traders should consult with their brokerage to determine which types of orders are available to them.
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■ Commissions and Margins
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in futures trading, commissions are typically charged on a per-contract basis. in most cases, large
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traders will be able to negotiate a reduced commission rate. although commodity commissions are
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relatively moderate, commission costs can prove substantial for the active trader—an important rea-
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son why position trading is preferable unless one has developed a very effective short-term trading
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method.
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Futures margins are basically good-faith deposits and represent only a small percentage of the con-
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tract value (roughly 5 percent with some significant variability around this level). Futures exchanges
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will set minimum margin requirements for each of their contracts, but many brokerage houses will
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frequently require higher margin deposits.
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since the initial margin represents only a small portion of
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the contract value, traders will be required to provide additional margin funds if the market moves
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against their positions. These additional margin payments are referred to as maintenance.
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Many traders tend to be overly concerned with the minimum margin rate charged by a broker-
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age house.
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if a trader is adhering to prudent money management principles, the actual margin level
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should be all but irrelevant. as a general rule, the trader should allocate at least three to five times
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the minimum margin requirement to each trade. Trading an account anywhere near the full margin
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allowance greatly increases the chances of experiencing a severe loss. Traders who do not maintain at
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least several multiples of margin requirements in their accounts are clearly overtrading.
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■ Tax Considerations
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Tax laws change over time, but for the average speculator in the United states, the essential elements
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of the futures contract tax regulations can be summarized in three basic points:
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1. There is no holding period for futures trades (i.e., all trades are treated equally, regardless of the
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length of time a position is held, or whether a position is long or short). |