Getting Started in FUTURES F I F T H E D I T I O N Todd Lofton John Wiley & Sons, Inc Getting Started in FUTURES The Getting Started in Series Getting Started in Online Day Trading by Kassandra Bentley Getting Started in Asset Allocation by Bill Bresnan and Eric P Gelb Getting Started in Online Investing by David L Brown and Kassandra Bentley Getting Started in Investment Clubs by Marsha Bertrand Getting Started in Internet Auctions by Alan Elliott Getting Started in Stocks by Alvin D Hall Getting Started in Mutual Funds by Alvin D Hall Getting Started in Estate Planning by Kerry Hannon Getting Started in Online Personal Finance by Brad Hill Getting Started in 401(k) Investing by Paul Katzeff Getting Started in Internet Investing by Paul Katzeff Getting Started in Security Analysis by Peter J Klein Getting Started in Global Investing by Robert P Kreitler Getting Started in Futures by Todd Lofton Getting Started in Financial Information by Daniel Moreau and Tracey Longo Getting Started in Emerging Markets by Christopher Poillon Getting Started in Technical Analysis by Jack D Schwager Getting Started in Hedge Funds by Daniel A Strachman Getting Started in Options by Michael C Thomsett Getting Started in Real Estate Investing by Michael C Thomsett and Jean Freestone Thomsett Getting Started in Tax-Savvy Investing by Andrew Westham and Don Korn Getting Started in Annuities by Gordon M Williamson Getting Started in Bonds by Sharon Saltzgiver Wright Getting Started in Retirement Planning by Ronald M Yolles and Murray Yolles Getting Started in Online Brokers by Kristine DeForge Getting Started in Project Management by Paula Martin and Karen Tate Getting Started in Six Sigma by Michael C Thomsett Getting Started in Rental Income by Michael C Thomsett Getting Started in FUTURES F I F T H E D I T I O N Todd Lofton John Wiley & Sons, Inc Copyright © 2005 by Todd Lofton All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008 or online at http://www.Wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our Web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Lofton, Todd Getting started in futures / Todd Lofton — 5th ed p cm — (Getting started in ) Includes index ISBN-13: 978-0-471-73292-1 (pbk : alk paper) ISBN-10: 0-471-73292-3 (pbk : alk paper) Futures market I Title II Series HG6024.A3L64 2005 332.64¢52—dc22 Printed in the United States of America 10 2005048620 To Beth, James, Christine, and Margaret, whom I love more than they know And, to the incandescent minds at Apple Computer, to me anonymous, from which sprung my marvelous Macintosh iBook Without it I would be mute, engaged in a mind-numbing spiral of writing and rewriting Without it, this book would not exist Preface f you would like to know how futures markets can help you reduce risk or earn greater profits, you have come to the right place Futures enable you to: I • Set now the purchase price of a financial instrument that you’ll buy later • Protect a foreign currency bank balance from changes in the exchange rate • Reduce the market exposure of a single-stock or a large stock portfolio • Benefit from a favorable change in interest rates without owning the cash instruments • Protect an inventory of an actual commodity against a decline in its cash price • Make a bet on the price trend in any traded commodity, from corn to the Canadian dollar This is the fifth edition of Getting Started in Futures, and a lot of the information is new But our goals have not changed Our first goal is help you understand how futures markets work Our second goal is to show you how you can use these fast-moving marketplaces to your own personal economic advantage And we it all in simple, easy-to-read prose, with lots of examples Begin at the Beginning We begin by introducing you to the basics using the traditional commodity markets as examples Then we move on to financial futures, the newest and fastest growing futures markets in the world These include futures and futures options in interest rates, equities, and foreign currencies Finally, we talk about the modern marvels that the personal computer has wrought: rock-bottom commission costs, lightning-fast online trading, and the ability to get up-to-theminute market information at the touch of a computer key In between, you’ll learn how to set yourself up for trading online, where to dig when you’re mining the Internet, ways to forecast prices, and how day trading works vii 270 SINGLE-STOCK FUTURES TRADED ON ONECHICAGO DuPont (E.I Du Pont de Nemours) Eastman Kodak eBay Inc Elan Corp PLC Electronic Data Systems Corp Eli Lilly and Co EMC Corp Emulex Corp Exxon Mobil Corp Federated Department Stores Inc Ford Motor Co General Electric Co General Motors Corp Genzyme Corp.—Genl Division Goldman Sachs Group Inc Google Inc Halliburton Co Hewlett-Packard Co Home Depot Inc Honeywell International Inc Intel Corp International Business Machines Corp International Paper Co J.P Morgan Chase & Co JetBlue Airways Corp Johnson & Johnson Juniper Networks KLA-Tencor Corp Kohl’s Corp Linear Technology Corp Lennar Corp Limited Brands Inc Maxim Integrated Products Inc McDonald’s Corp Merck & Co Inc Merrill Lynch & Co Inc Micron Technology Inc Microsoft Corp Morgan Stanley Motorola Inc Newmont Mining Corp Hldg Co News Corporation Ltd Nextel Communications Inc Nokia Corp ADR Northrop Grumman Corp Novellus Systems Inc NVIDIA Corp Oracle Corp PeopleSoft Inc PepsiCo Inc Pfizer Phelps Dodge Corp PMC Sierra Inc Procter & Gamble Co QLogic Corp QUALCOMM Inc Research In Motion Ltd Reynolds American Inc SanDisk Corp SBC Communications Inc Schering-Plough Corp Schlumberger Ltd Siebel Systems Inc Starbucks Corp Sun Microsystems Symantec Corp Target Corp Single-Stock Futures Traded on OneChicago Tenet Healthcare Texas Instruments Inc Tibco Software Inc Time Warner Inc Tyco International Ltd U.S Bancorp (New) United Technologies Corp United Parcel Service Inc VERITAS Software Corp Verizon Communications Inc Viacom Inc Wal-Mart Stores Inc Walt Disney Co Wells Fargo & Co Williams Companies Inc Xilinx Inc Yahoo! Inc 271 F Appendix Single-Stock Futures Traded on LIFFE CONNECT Banco de Sabadell SA Banco Popolare Di Verona E Novara Banco Popular Espanol SA BASF AG Bayer AG Bayerische Hypo-und Vereinsbank AG Bayerische Motoren Werke (BMW) AG BNP Paribas SA Bouygues SA Capitalia SpA Carrefour SA Cisco Systems Inc Citigroup Inc Commerzbank AG Compagnie de Saint Gobain Compagnie Financiere Richemont AG Abertis Infraestructuras SA ABN AMRO Holdings NV Accor SA Aegon NV Air Liquide SA Akzo Nobel NV Alcatel SA Allianz AG Altadis SA American Express Co Amgen Inc Arcelor ASML Holding NV Assicurazioni Generali SpA Assurances Generales de France Axa SA Banca Intesa SpA Banco Bilbao Vizcaya Argentaria SA 273 274 SINGLE-STOCK FUTURES TRADED ON LIFFE CONNECT Compania Espanola de Petroleos SA (CEPSA) Credit Agricole SA Credit Suisse Group DaimlerChrysler AG Danske Bank A/S Deutsche Bank AG Deutsche Post AG Deutsche Telekom AG Dexia DSM NV E.ON AG Endesa SA Enel SpA Eni SpA European Aeronautic Defence and Space Company Exxon Mobil Corporation Fiat SpA Fortis France Telecom SA Gas Natural SDG SA General Electric Company Groupe Danone SA Heineken NV Hennes & Mauritz AB Hypo Real Estate Holding AG Iberdrola SA Industria de Diseno Textil SA (Inditex) Infineon Technologies AG ING Groep NV Intel Corporation Inbev SA International Business Machines Corporation Johnson & Johnson KBC Bankverzekeringsholding Koninklijke Ahold NV Koninklijke KPN NV Koninklijke Philips Electronics NV Lafarge SA Lagardere SCA L’Oréal SA LVMH Moet Hennessy Louis Vuitton SA Mediaset SpA Mediobanca SpA Merck & Co Inc Metro AG Microsoft Corporation Münchener Rückversicherungs Gesellschaft AG Nestlé SA Nokia OYJ Nordea AB Norsk Hydro ASA Novartis AG Novo Nordisk A/S Pernod Ricard SA Peugeot SA Pfizer Inc Pinault-Printemps-Redoute SA Porsche AG Reed Elsevier Renault SA Repsol YPF SA Riunione Adriatica di Sicurta SpA Single-Stock Futures Traded on LIFFE CONNECT Roche Holding AG Rodamco Europe NV Royal Dutch Petroleum Company RWE AG San Paolo-IMI SpA Sanofi-Aventis SA Santander Central Hispano SA SAP AG SBC Communications Inc Schering AG Schneider Electric SA Siemens AG Société Générale SA Societe Television Francaise (T.F.1) Sodexho Alliance SA Solvay SA Statoil ASA Physical STMicroelectronics NV Stora Enso Oyj Suez SA Svenska Handelsbanken AB Swiss Reinsurance AG Swisscom AG Telecom Italia Mobile SpA 275 Telecom Italia SpA Telecom Italia SpA (saving shares) Telefonaktiebolaget LM Ericsson AB Telefonica Moviles SA Telefonica SA TeliaSonera Terra Networks SA ThyssenKrupp AG Time Warner Inc Total SA TPG NV UBS AG UniCredito Italiano SpA Unilever NV Union Fenosa SA UPM-Kymmene Oyj Verizon Communications Vivendi Universal SA VNU NV Volkswagen AG Wal-Mart Stores Inc Wolters Kluwer NV Zurich Financial Services AG G Appendix Overseas Futures Markets S everal active interest-rate futures contracts are traded on exchanges outside the United States They include: Euro bund A Euro bund is a government bond issued by the Federal Republic of Germany It carries a percent coupon and has a maturity of from 81⁄2 to 101⁄2 years Euro-bund futures are traded on Eurex, an electronic futures exchange located in Frankfurt, Germany Euro-bund futures are also traded on the Chicago Board of Trade Euro bobl and Euro schatz Euro bobl and Euro schatz are German government bonds of shorter maturities than the Euro bund Both have coupons of percent The bobl has a maturity of from 41⁄2 to 51⁄2 years; the schatz has a maturity of from 13⁄4 to 21⁄4 years Both are traded on Eurex and on the Chicago Board of Trade Euribor Euribor stands for Euro Interbank Offered Rate, the rate at which eurobank term deposits within the euro zone are offered by one prime bank to another Euribor futures are traded electronically on Euronext.life, the derivatives side of Euronext TIIE 28 TIIE 28 stands for 28-day Mexican Interbank Equilibrium Interest Rate, the rate at which the supply of and demand for 28-day Mexican bank loans are in equilibrium Futures contracts on the TIIE 28 are 277 278 OVERSEAS FUTURES MARKETS traded on the Mexican Derivatives Exchange, a subsidiary of the Mexican Stock Exchange KOSPI 200 The KOSPI (Korea Composite Stock Price Index) is an index of 200 major stocks listed on the Korea Stock Exchange KOSPI 200 futures are traded electronically on the Korean Futures Exchange Interest rates Bolsa de Mercadorias & Futuros in Brazil trades futures contracts on 1-day interbank deposits, long-term interbank deposits, and several financial intermarket spreads H Appendix Firms with Direct Access for Electronic Trading he following futures brokerage firms currently provide direct online access to the exchange for electronic trading Most offer access to all U.S and major international exchanges T Alaron Trading Corp ANCO Discount Futures ChicagoEFutures.com Carlin Futures LLC efutures.com Fox Investments Ira Epstein & Co Interactive Brokers Lehman Brothers Inc Lind-Waldock Man Financial MBF Clearing Corp Merrill Lynch Merchant Capital National Futures www.alaron.com www.ancofutures.com www.chicagofutures.com www.carlinfutures.com www.efutures.com www.foxinvestments.com www.iepstein.com www.interactivebrokers.com www.lehman.com www.lind-waldock.com www.manfutures.com www.mbfcc.com www.mlx.ml.com www.merchantcapitalinc.com www.nationalfutures.com 279 280 FIRMS WITH DIRECT ACCESS FOR ELECTRONIC TRADING O’Connor & Co LLC PFG Inc Pioneer Futures PreferredTrade Inc Rand Financial Services RB&H Financial Services LP Robbins Trading Co Smart Futures Terra Nova Trading LLC TradeStation Securities Vision LP EXRESSTRADE LLC Zaner Group LLC/NetFutures ZAP Futures LLC www.eoconnor.com www.pfgbest.com www.pioneerfutures.com www.preferredtrade.com www.randfinancial.com www.webvestor.com www.robbinstrading.com www.smartfutures.net www.terranovatrading.com www.tradestation.com www.tradewithvision.com www.xpresstrade.com www.zaner.com www.netfutures.com www.zapfutures.com Index Carrying charge market, 20 See also Inverted market Cash price, Chart patterns double top and bottom, 244 expanding top and bottom, 244 gaps, 247–250 head-and-shoulders, 253 introduced, 77 island reversal, 251 rectangle, 73 rounding bottom, 252 triangles, 241–243 Clearinghouse described, 10 functions, 48 guaranty deposit, 53 Commissions, 36 Commitments of Traders Report, 89 Commissions, 40 Commodity Pool Operator, 137 Commodity Trading Adviser, 136 Congestion area, 71 Contrary opinion, 84 Convergence, 120 Cross-hedge, 95 Account, opening, 51, 174 Accumulation/distribution oscillator, 268 Arbitrage, 9, 130 Bar chart defined, examples, 7, Basis defined, 94 effect of changes in, 95–97 Books on futures, 218 Briefing sheets currencies, 176 energy, 181 foods and fibers, 184 grains (including soybeans and soybean products), 189 indexes, 196 interest rates, 203 meats, 207 metals, 210 wood, 214 Candlestick charts, 75–76 Capital leverage, 32 281 282 Index Daily price limits, 42 Day trading brokerage firm, 237 defined, 247 market selection, 234 online order entry, 237 volatility index, 235 Delivery months, 14 notice, 49 process, 49 selecting contract month, 94 Demand, 54 Derivatives, 100 Disappearing qualifiers, 58 Dynamic hedging, 107 See also Portfolio insurance Electronic futures trading, 227 direct access, 230, 279 history, 228 placing orders online, 229 price quotes, 229 trading arcades, 231 Elliott Wave, 85 Errors, 170 Exchanges, 47, 179 Expected return, 154 Failed signals, 75 Foreign currencies contract specifications, 17 futures, 103 hedging, 104 Foreign exchange rate fluctuations, 106 Forward contract, Fundamental analysis, 53 Futures contract defined, markets, 11 price, Futures commission merchant (FCM), 51 Futures Magazine, 219 Guaranty deposit for clearinghouse members, 49 Hedge defined, 27 examples, 28, 29, 90–92 imperfect, 92 margins, 94 nonregular, 95 Interest-rate futures, 115 hedging, 118 inverse relationship, 118 Internet, introduction to, 217 Internet, information sources books, 218 futures exchanges, 224 government organizations, 220 periodicals, 219 Inverted market, 18 See also Carrying charge market LIFFE CONNECT, 273 Long hedge, examples corn futures, 30, 92 single-stock futures, 128 S&P MidCap 400 futures, 111 Swiss franc futures, 105 Long position, defined, Margin call, 36 daily example, 34 defined, 31 maintenance, 34 original, 33 variation, 35 Mark to market, 35, 49 Momentum, 88 Money management guidelines, 131 Moving average Index defined, 78 exponential, 262 lag in, 80 simple, 80 trading with, 263 weighted, 261 Normal market, 17 On-call transactions, 96 Open interest defined, 11 example, 81 rules of thumb, 82–83 OneChicago, 269 Online futures trading benefits, 234 futures brokerage firms, 244 requirements, 241 price quotes, 242 risks, 245 Opening an account, 51, 170 Options on futures bearish put spread, 162–164 bullish call spread, 159–162 buying calls, 149–151 buying puts, 156 call option vs long futures, 166–167 choosing which option to buy, 150–153 covered sale of an option, 156–159 delta, 165 effect of volatility on premium, 148 hedging with options, 165–167 history, 141 interpreting price tables, 143–144 intrinsic value, 146 selling options, 154 spreads, 159 time value, 146–147 uncovered sale, 158 Order five elements, 39 283 limit, 41 market, 40 market-if-touched, 42 market-on-close, 44 market-on-opening, 44 spread, 44 stop, 43, 134–135 stop limit, 43 Overseas futures markets, 277 Perspective, 57 Point-and-figure chart adjusting values, 258 trading signals, 259 defined, 77 example, 255–258 optimizing, 259 Portfolio insurance, 114 See also Dynamic hedging Position limits, 172 Price chart patterns, 77 Price congestion area, 75 Price limits, 37 Price tables (typical daily) cattle, 13 gold, 14 S&P 500 Index, 16 Treasury bonds, 14 wheat, 12 Professional money management, 136 Proprietary trading systems, 138 Ratio hedge, 96 Rectangles, 73 Regulations, 169 Reparations, 172 Relative strength index, 88, 265 Resistance, 68–70 Role changing (support and resistance), 72 Short hedge, examples British pound futures, 106 284 Short hedge, examples (cont.) S&P 500 Index futures, 113 single-stock futures, 126–128 T-bond futures, 28, 90, 108, 122 Two-year T-note futures, 120 wheat futures, 28 Short position, defined, Single-stock futures, 123 stock vs futures, 125 fair value, 126 Stock index futures, 109 Solving hedging problems, 96 Speculator, 21 Spread (futures) defined, 23 examples, 23, 24 Spread (options) defined, 159 examples 159–164 Spread chart, 25 Stochastics calculating, 267 defined, 83 Supply, 54, 60 Support, 68 Index Taxes, income, 173 Technical analysis, 61 Trading arcades, 231 Trading volume defined, interpreting, 82 Trend, defined, 62 Trendlines drawing, 65 interpreting, 66–68 Triangles ascending, 242 descending, 243 symmetrical, 241 Unbalanced hedge, 96 Unusual reversals, 251 Volatility, 248 Yield curve defined, 116 inverted, 117 normal, 118 ... Hannon Getting Started in Online Personal Finance by Brad Hill Getting Started in 401(k) Investing by Paul Katzeff Getting Started in Internet Investing by Paul Katzeff Getting Started in Security.. .Getting Started in FUTURES F I F T H E D I T I O N Todd Lofton John Wiley & Sons, Inc Getting Started in FUTURES The Getting Started in Series Getting Started in Online Day Trading by... Klein Getting Started in Global Investing by Robert P Kreitler Getting Started in Futures by Todd Lofton Getting Started in Financial Information by Daniel Moreau and Tracey Longo Getting Started