Acquire the skills to identify the components of a futures. Understand the role of a futures exchange, including the standardization of product requirements in commodities markets, and certain marketplace rules.
The usual spread between prices tells us that forward prices are higher than current prices. This situation, referred to as ‘contango’ is quite typical, due to a variety of factors such as inflation, insurance, storage and the investor’s psychology.
However, forward prices may fall below current market prices either on a short-term basis or for a sustained period. When this happens, investors refer to ‘backwardation’, which might occur when there has been, or there is expected to be, a shortage of the product in the near-term, yet production is widely expected to resume in the coming weeks and months.
Backwardation gets right to the very heart of imminent supply and demand.
Now, at this point, you may be wondering why your next-door neighbor invests in corn or crude oil, and yet you haven’t seen their backyard crammed with stalks of corn or flooded in petroleum.
This is primarily because investors in the futures market are able to transact, and take positions in, and yet never actually own the commodity or product that they invest in.
At the same time, the liquid nature of most futures markets makes it a viable environment for producers to offset risk and ultimately transact physical delivery.
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Supporting documentation for any claims and statistical information will be provided upon request.
Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
Disclosure: Futures Trading
Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.