Commodity Trading – Chapter 5: Advantages of commodity trading

By:

Updated: Mar 5, 2019, 13:14 GMT+00:00

This is chapter number 5 out of 13. Read the rest: Read Commodity Trading – Chapter 1: History of Commodity TradingRead Commodity Trading – Chapter 2:

Commodity Trading – Chapter 5: Advantages of commodity trading

This is chapter number 5 out of 13. Read the rest:

Read Commodity Trading – Chapter 1: History of Commodity Trading
Read Commodity Trading – Chapter 2: Commodities Trading
Read Commodity Trading – Chapter 3: What is traded?
Read Commodity Trading – Chapter 4: Using Commodity Trading as an Investment Vehicle

1.Commission– Buying or selling of future contracts is much more cheaper than trying to sell or buy the actual instrument. For instance, a full size S&P 500 contract is worth around $250,000 and could be transacted for as little as $20. The actual expense of buying/selling $125,000 worth of asset can amount to more than $2500+.

2.You can go short – A speculator can profit from bullish as well as bearish markets.

3.Liquidity – Because of the existence of speculators in the Futures market, Futures contracts are practically liquid. Nevertheless, the liquidity depends very much on the actual Futures contract being traded. Contracts like the E-Minis which are traded electronically are the most liquid. Agricultural Commodities like corn, soya etc which are traded in the pits are not available outright to the retail trader and are also more costly to transact in with regards to commission and spread.

4. No cut-offs – Options are subjected to time decay because as they inch closer to expiry, there is less time there for the option to be realized monetarily. Whereas with commodity Futures, they do not suffer from time decay as they are not expecting a particular strike price at expiry.

5. Leverage – Commodity futures works on margin, which implies that to take a position only a small portion of the total value of the Futures contract is required to be paid in cash into the trading account.