How do I speculate with futures?

E*TRADE Futures

06/07/19

The idea of “speculation” may sound reckless and risky, something reserved for riverboat gamblers and oil barons. But when you think about it, speculation in one form or another is everywhere—in markets for real estate, fine art, collectibles, and many everyday goods and services.

For example, consider the stock market. When you purchase a stock, you’re likely expecting the price of the stock to rise. You probably wouldn’t buy it otherwise, right? That’s speculation: accepting a degree of risk in exchange for the possibility of financial gain.

Futures involve speculation, too. They let you express your opinion on the price movement of a range of different assets, including equity indexes, oil, agricultural products, and even gold and other precious metals.

Plus, unlike stocks, futures make it possible to speculate in either direction: that the price of the asset will rise or that it will fall. Having that kind of flexibility can potentially help you manage your risk and diversify.

Going long with futures

First, let’s take a look at how futures can be used to speculate that the price of an asset will rise—a strategy often referred to as “going long.”

To speculate in this way, you would simply buy the contracts associated with the asset whose price you believe will climb. For example:

  • Oil. If you believe the price of oil will rise, one way to act on this conviction would be to buy the CME E-mini crude oil contract, a futures product tied to the price of 500 barrels of oil.
  • Large-cap stocks. If you believe US large caps are poised for a rally, you could buy the CME S&P 500 E-mini or the CME Dow E-mini. These futures contracts are correlated, respectively, to the price of the large-cap-oriented S&P 500® index and Dow Jones Industrial Average.
  • Gold. Think the price of gold is headed higher? Consider CME E-mini gold futures, contracts representing 100 troy ounces of gold. (There’s also an e-micro version, representing 10 troy ounces).

In all the above cases, if your conviction is correct and the price of the underlying asset rises, so will the price of the futures contracts you hold. You could then close your position by selling the contracts.

Going short with futures

But what if you think the price of the underlying asset will fall? With futures, you can go short, too. All you need to do is place a sell order for the associated futures contract—e.g., the CME E-mini crude oil contract—if you believe the price of oil is about to take a spill.

If you’re proven correct and oil declines, your futures position would increase in value—and when you’re ready to close the position, you’d simply buy back the contracts you sold.

While stock investors can also initiate short positions, the rules and regulations that govern short selling for stocks can be complex. That’s not the case with futures. The bottom line: If you have a futures account, your ability to go short is no different from your ability to go long. You simply initiate the short position by selling the contract instead of buying it. That’s all there is to it.

One last point: Because futures trading is available in retirement futures accounts (as well as in brokerage futures accounts), it can potentially give retirement investors additional flexibility for managing risk and speculating on price declines. Shorting stocks is not permitted in retirement accounts.

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