This article will talk about some common sense of futures and some common trading methods.
Basic knowledge of futures
Let me briefly talk about some common sense about futures. These things can be found by searching the Internet, so I will briefly talk about the more basic things.
1. Futures basics
First of all, futures is based on a pre-agreed price, and the two parties reach an agreement, that is, to buy or sell the underlying spot or make cash delivery on the delivery date. Looking around, it's actually not that complicated.
For example: if it is a stock index futures transaction, then the long side and the short side reach an agreement, and on the delivery day, they will see where the stock index closes, and what is the difference from the price at which they started the transaction. Then pay in cash. That is to say, if it rises, the long side will win; if it falls, the short side will win.
The trading volume of futures is very large, and there are mainly two types of players in it. The first type is hedgers, also known as hedgers; the second type is speculators.
Those who do hedging use futures and some other positions to form a hedging relationship. For example, if I have stocks in my hand, and I am worried that my stocks will fall, I will hedge my risk by shorting stock index futures. This is hedgers.
In other words, I am an iron ore producer, and I am worried that the price of iron ore will fall after it is produced, and I will suffer losses, so I can hedge my risk by shorting iron ore in the futures market in advance, this is hedgers.
Then speculators are doing the opposite, trying to make profits through changes in futures prices. Mainly these two categories.
2. Related concepts
Regarding the basic concept of futures, I won’t say much here, it’s meaningless, and those who are interested can learn it by themselves.
I will write a few main related concepts that should be known:
First, each futures contract has a corresponding target. It can be a stock index, or a national bond, or a commodity such as gold, silver, or crude oil.
Second, futures is a margin trading system. When going long or short a futures contract, you only need to deposit a percentage of the notional amount, such as 10% of the notional amount.
Third, futures have a delivery date, on which day both long and short parties will settle, and then there are delivery rules. Some types of futures are physically delivered, such as commodity futures are physically delivered, and treasury bond futures are also physically delivered.
There are also some varieties that are settled in cash, such as stock index futures. The example mentioned above is that on the delivery day, everyone can directly determine who should pay whom by looking at the price difference.
Fourth, the more important thing about futures is a contract multiplier. Taking rebar as an example, if the contract itself is 4,000 yuan, it has a contract multiplier of 10, which is equivalent to a first-hand rebar futures contract, and the corresponding spot value is about 40,000 yuan.
Finally, about the main contract of futures. If you often read financial news, you should often encounter this word. What does that mean?
That is, there will be many contracts for a certain futures product. For example, February, March, April, and May are available, but some of them have relatively large transaction volumes. Usually, the ones that are relatively close to the current time point and have a relatively large trading volume are called main contracts.
3. Domestic futures varieties
Next, I will talk about some basic varieties of the domestic futures market. In fact, China's futures trading is very developed, ranking among the best in the world. There are many varieties of futures traded in the domestic market, and most of them have very good liquidity. There are two main types of futures, the first type is financial futures, and the second type is commodity futures.
financial futures
Financial futures mainly include treasury bond futures and stock index futures.
Treasury bond futures correspond to five-year treasury bonds and ten-year treasury bonds.
Stock index futures should be familiar to everyone. When there is a stock market crash, stock index futures often take the blame. There are currently three varieties listed and traded, corresponding to the SSE 50 Index, CSI 300 Index and CSI 500 Index.
Stock index futures are cash delivery methods.
commodity futures
There are many varieties of commodity futures. Rebar, methanol, soybeans, etc. too much. Some people may find it confusing, but in fact these commodity futures can be classified into several categories.
black variety
It is directly related to the steel industry, so it is also called "coal coke steel mine". The main varieties include rebar (used in construction, bridge building, etc., that is, steel bars), hot coiled plates (mainly used to make cars), and then iron ore, coking coal (used in steelmaking) and so on.
Here is a digression, China's economy is huge, so why is our country's futures market trading volume so large? In fact, it is very related to the economic volume of the entire country.
Taking the iron and steel industry as an example, China's annual steel output is about 700 million tons. It can be roughly calculated, if rebar is three to four thousand yuan per ton, then what does 700 million tons correspond to? This is a trillion-level industry, probably worth more than 2 trillion!
Think about it, how much iron ore coke upstream, including some finished products downstream, will be needed in order to smelt more than two trillion yuan worth of steel? This is a very large industrial chain.
Corresponding to the futures market, this is a very active market.
Non-ferrous metals
Non-ferrous metals, that is, copper, aluminum, lead, zinc, and nickel. This is mainly used in manufacturing and construction industries, including decoration.
Energy and Chemical
Such as PTA, methanol, asphalt, these are some chemical products, mainly some relatively basic raw materials.
And crude oil futures is a very active variety.
agricultural products
There are many types of agricultural products, and a few with relatively large trading volume are listed, such as corn, soybeans, and soybean meal. In addition, there are sugar, cotton, etc., which are agricultural products.
precious metal
Now listed in the country is gold and silver.
other
Finally, there are some other things that are not easy to classify, such as rubber, glass and so on.
There are about 40 kinds of commodity futures in the domestic market, of which more than 30 are relatively active.
4. Four major futures exchanges
When it comes to futures, there must be exchanges. There are four major futures exchanges in China. While listing these exchanges, let’s talk about their varieties by the way.
4.1. China Financial Exchange (CFFEX)
The first is the China Financial Exchange, also known as the China Financial Exchange. Listed on the CFFEX are treasury bond futures and stock index futures.
In terms of volume, CFFEX has the largest ten-year treasury bond, followed by CSI 300 stock index futures.
But from the actual situation, because the 10-year treasury bond futures move less, the volatility is small, while the volatility of stock index futures is large, so from the perspective of risk and return, the trading volume of stock index futures may actually be larger .
4.2 Shanghai Futures Exchange (Shanghai Futures Exchange)
The second is the Shanghai Futures Exchange, also known as the Shanghai Futures Exchange. Some non-ferrous metals are traded on the SHFE, in addition to rebar, natural rubber, gold, silver and so on.
Rebar, according to the trading volume, if I remember correctly, it should be the most active commodity futures in the country, and it is also ranked very high in the world. It is a very large variety.
Natural rubber is also very active, known as the "small stock index", describing it as a lot of traders, but I think natural rubber is more demonic, it is recommended not to mess with this variety.
4.3. Dalian Commodity Exchange (DCE)
The third is the Dalian Commodity Exchange, also known as the Dashang Exchange. The relatively active products of DCE are iron ore, soybean meal, coke and coking coal, etc.
4.4 Zhengzhou Commodity Futures Exchange (ZCE)
The last one is Zhengzhou Commodity Futures Exchange, also known as Zhengzhou Commodity Exchange. The main varieties of ZCE are some agricultural products and agrochemicals, such as sugar, cotton, methanol, PTA, steam coal and so on.
If you want to do futures trading, you should study the trading rules and delivery rules of each product.
In addition, at the beginning of the production, it is recommended to learn one variety and make another variety, and do not spread the stalls too wide. Because every variety of commodity futures has its special features, it is very likely that a layman will suffer a loss if he enters and trades casually without understanding.
Arbitrage relationship between futures and spot (futures and spot arbitrage)
1. Futures arbitrage - positive
What does futures arbitrage mean? If the price of futures deviates from the reasonable price, when the deviation is relatively large, you can do some arbitrage, and the risk of this arbitrage is very small.
For example, the so-called "positive arbitrage" means long spot or short futures. This arbitrage is relatively simple.
For example: if the price of the Shanghai and Shenzhen 300 Index is 4100, then you can directly buy the constituent stocks of the Shanghai and Shenzhen 300, and at the same time short the stock index futures, sell the stocks on the delivery date, and then settle the futures in cash.
The risk in this process is very small, because the long position is the CSI 300, and the short position is also the stock index futures of the CSI 300. The fluctuation of these two prices has no effect.
This is positive arbitrage, buying spot and shorting futures.
2. Futures arbitrage - reverse
Since there is forward arbitrage, there is naturally reverse arbitrage: what if the actual trading price of futures is lower than the theoretical price?
For example, the price of the CSI 300 Index is 3900. Theoretically speaking, it is possible to sell the CSI 300 constituent stocks through securities lending, that is, to find a securities firm to borrow securities and sell the stocks first.
On the delivery day, I will buy the stock back, and the futures will be settled in cash at the same time.
But from a practical point of view, it is often impossible to do. The first reason is that it is more difficult to lend securities. Even if you can get securities, the cost is relatively high. So reverse arbitrage is actually very difficult to operate.
3. The risk of futures arbitrage
I just said that although the risk of positive arbitrage is small, there are still risks. So still need to pay attention to the following points:
The first is the futures-to-spot spread, also known as the basis difference, which can be widened significantly in the short term. Futures are traded on margin, which means that when you lose money, you have to make up the margin. Therefore, if the time limit widens significantly when doing spot arbitrage, the arbitrage trade may cause insufficient margin.
If you look it up, there are actually quite a few such examples in the world's trading history. For example, in December 2014, the gap between the Shanghai and Shenzhen 300 Index and the futures widened significantly. At that time, the futures premium was very strong, which caused many speculators who did futures and cash arbitrage to liquidate their positions.
The second is related to some rules of futures trading. In many varieties, if you are doing speculation, you are not allowed to hold positions into the delivery month, which will cause the deadline arbitrage to fail to reach the last day.
As mentioned earlier, futures are roughly divided into hedgers and speculators. Generally speaking, people who do transactions do not hold speculative accounts if they do not hold knowledge. Therefore, if the term arbitrage cannot be delivered, it is not complete. Even in some special cases, the holders of the spot will squeeze the futures speculators. Finally, under the rules of physical delivery, the uncertainty of delivery varieties and quality will lead to non-convergence of futures and spot differences.
If you are new to the futures market, you can spend a little more time studying stock index futures, which is relatively simple. The delivery of treasury bond futures and commodity futures is more complicated, because it is the delivery of physical objects, such as treasury bond futures, many bonds can be delivered, and the delivery rules of stock index futures are different.
Commodity futures are even more troublesome because food comes in a variety of qualities and where the delivery warehouse is located. Sometimes it may be cheaper if you hand it over at the dock, but it will be more expensive if you hand it over at a warehouse near the production site, which is very complicated. Therefore, it is recommended not to consider commodity futures and treasury bond futures at the beginning.
Originally, I wanted to write about the pricing principles of futures, but it was a bit complicated and out of the scope of basic knowledge, and I will write it later when I have time.
References:
"Options, Futures, and Other Derivatives"
"Options Futures and Other Derivatives" Chapter 2, Chapter 3, Chapter 5
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