yes, I see my error... there is no way that what you posted could possibly be confused with predicting the future price...
"a speculative play where you think the price will move in some direction over that timeframe "
There is a difference between thinking a futures market "predicts" the future price, vs understanding that you can speculate on future price changes based on entering into contracts at around today's spot price.
If I go long on a Dec '16 expiring gold futures contract today @ $1250 (which is around the spot price), I am speculating that by December the spot price of gold will be higher than $1250 - (remember my Dec contract today becomes that spot contract by December). To take this position and profit from a higher future price, I didn't need to enter into my Dec contract at the price I think "predicts" gold will be in December. In fact quite the opposite, as the higher the contract entry price for my position, the less profit I would make if the spot price actually did increase, equals much more risk in taking a long position - hence liquidity dries up as the price of a longer dated future rises, keeping the market price of this contract not too far away from the spot price.
Got it now?
EDIT: as an aside, in most futures markets most of the trading (and thus positions) are actually in the spot month or maybe spot + one further expiry. Traders, speculators, hedgers etc then generally "roll" their position over into the next expiry just before the spot expires each month/quarter etc, until the point in time in the future were they want to close their position. Hence there is not really much liquidity / price discovery in the longer dated expires anyway.
There is a difference between thinking a futures market "predicts" the future price, vs understanding that you can speculate on future price changes based on entering into contracts at around today's spot price.
If I go long on a Dec '16 expiring gold futures contract today @ $1250 (which is around the spot price), I am speculating that by December the spot price of gold will be higher than $1250 - (remember my Dec contract today becomes that spot contract by December). To take this position and profit from a higher future price, I didn't need to enter into my Dec contract at the price I think "predicts" gold will be in December. In fact quite the opposite, as the higher the contract entry price for my position, the less profit I would make if the spot price actually did increase, equals much more risk in taking a long position - hence liquidity dries up as the price of a longer dated future rises, keeping the market price of this contract not too far away from the spot price.
Got it now?
EDIT: as an aside, in most futures markets most of the trading (and thus positions) are actually in the spot month or maybe spot + one further expiry. Traders, speculators, hedgers etc then generally "roll" their position over into the next expiry just before the spot expires each month/quarter etc, until the point in time in the future were they want to close their position. Hence there is not really much liquidity / price discovery in the longer dated expires anyway.
fair comment... poor use of words, but I think we are saying the same thing.
speculate - When you speculate, you use what you know to make a prediction about an outcome
Perhaps I should have used the words 'hope to predict' or speculate rather than predict.
Your example of going long on gold is you speculating (predicting) a rise in gold.. if you were speculating (predicting) a drop in gold, you would not have gone long.
Does that not tell you anything as to the expected price between Dec 216 and Dec 2018 in the market ?
From memory when I used to play the OEX a million years ago, long dated options had higher implied volitility, and were often priced higher...
In this example, 2 years gets me a cheaper option does it not ? Implying that the futures market, despite the extra time pushing up implied vix, thinks the price will be down by Dec 2018.
Feel free to correct me.
Trollie
22 Apr 2016, 12:10 PM
Just how much do I need to dumb it down for you. You let me know ok.
Come on Trollie... don't hide in other threads... explain to us just how the following posts of yours make sense...
History:
Poontang asked why you considered gold could not to rise to new highs as some shares did.
You posted
Gold has long bear cycles. It could surprise us, I just think it's more of a long shot.
I pointed out iron ore, like gold has had a long bear cycle...
You then claimed.
Iron ore hasn't been a spot market long enough to make that call.
I posted, the price of iron ore, as shown on a chart, clearly had a bear market..
You then claimed
How does a bear "market" happen in a commodity which isn't freely traded?
fair comment... poor use of words, but I think we are saying the same thing.
speculate - When you speculate, you use what you know to make a prediction about an outcome
Perhaps I should have used the words 'hope to predict' or speculate rather than predict.
All I am saying is that the long dated futures "price" don't really tell you anything about what the market is predicting re the "future" price of a commodity, at least not directly. Generally if the weight of the market is on the long side, the spot price will rise, and fall in the opposite case. The spot then drives the price of any later dated contracts, if there is any liquidity (more on that below).
Quote:
Your example of going long on gold is you speculating (predicting) a rise in gold.. if you were speculating (predicting) a drop in gold, you would not have gone long.
That's right - I would have taken a short position (ie sold a futures contract) if I thought the price was going to fall. In either case I would be speculating (in the pure sense) if I had no desire to acquire or sell the physical stuff at the end of the day. The key point is th eprice that I entered my position at - whether long or short, tells you little about my actual expectation for where the price might end up at the time of expiry in the future.
Another way to think of this is to remember that every open futures position has someone on the long and also on the short side - at the SAME price - always. The risk is the same for both sides (this is very different to options).
Does that not tell you anything as to the expected price between Dec 2016 and Dec 2018 in the market
In this example, 2 years gets me a cheaper option does it not ? Implying that the futures market, despite the extra time pushing up implied vix, thinks the price will be down by Dec 2018.
Not really. For a start, if you look there is very little liquidity (ie very few trades or open positions - eg only 80 contracts open which is basically nothing) on that far (Dec '18) dated contract - so the price discovery there is weak at best. Compare that to the June '16 contract with 2,233 open positions.
Secondly, the price of a longer dated future has to account for the "cost of carry" over the time period compared to spot - ie say you are short and your position is covered by physical holdings - you have to keep those holdings to cover delivery in the future rather than sell them now at a higher price - so in addition to the money you make if your short works out, you need to also cover the opportunity cost of holding the current value of your holdings. So therefore you will only go short on a longer dated contract at a lower price than the current spot - ie spot less cost of carry. If you look at the chart of the Jun '16 contract at the same time as the Dec '18 one, you can see that the price moves basically mirror each other, just with a different base. (Ie look at this http://www.barchart.com/charts/stocks/ITIM16 and this http://www.barchart.com/charts/stocks/ITIZ18). The relative lack of liquidity of the 2018 contract adds a bit more volatility, but you can still see the same pattern.
Thirdly often far dated contracts in futures markets have no open positions at all - so you may see a reported price, but it just reflects an estimated price which was based on the spot price + cost of carry calculated on the first day that contract was listed for trading (or some other point days/weeks ago in the past of a small number of positions were opened then). The price then sits there at that level until people eventually start to trade it more actively. So if the price of the commodity is rising, as it is right now, often long dated futures sit at a relatively low price until some decent amount of positions start to get opened in it. The opposite occurs when the commodity price starts to fall for a period of time.
Quote:
From memory when I used to play the OEX a million years ago, long dated options had higher implied volitility, and were often priced higher...
Options are a different beast to futures - with options you pay a premium to take your position, and your risk (on a single option) is only the loss of the premium one way, and unlimited the other. With a futures contract you pay nothing to open the position, but your risk is unlimited in BOTH directions. The price of a futures position is just the initial "mark-to-market" price that your position is based on, and margining will be based on going forward, and ultimately settlement. With an option at a given strike and underlying price the option premium will vary based on volatility and time to expiry, as well as other factors like interest rates and so on. So yes all other things being equal, a further dated option will have a higher premium that a nearer one. This does not apply with futures as there is no up front premium paid or collected.
All I am saying is that the long dated futures "price" don't really tell you anything about what the market is predicting re the "future" price of a commodity, at least not directly. Generally if the weight of the market is on the long side, the spot price will rise, and fall in the opposite case. The spot then drives the price of any later dated contracts, if there is any liquidity (more on that below).
That's right - I would have taken a short position (ie sold a futures contract) if I thought the price was going to fall. In either case I would be speculating (in the pure sense) if I had no desire to acquire or sell the physical stuff at the end of the day. The key point is th eprice that I entered my position at - whether long or short, tells you little about my actual expectation for where the price might end up at the time of expiry in the future.
Another way to think of this is to remember that every open futures position has someone on the long and also on the short side - at the SAME price - always. The risk is the same for both sides (this is very different to options).
Not really. For a start, if you look there is very little liquidity (ie very few trades or open positions - eg only 80 contracts open which is basically nothing) on that far (Dec '18) dated contract - so the price discovery there is weak at best. Compare that to the June '16 contract with 2,233 open positions.
Secondly, the price of a longer dated future has to account for the "cost of carry" over the time period compared to spot - ie say you are short and your position is covered by physical holdings - you have to keep those holdings to cover delivery in the future rather than sell them now at a higher price - so in addition to the money you make if your short works out, you need to also cover the opportunity cost of holding the current value of your holdings. So therefore you will only go short on a longer dated contract at a lower price than the current spot - ie spot less cost of carry. If you look at the chart of the Jun '16 contract at the same time as the Dec '18 one, you can see that the price moves basically mirror each other, just with a different base. (Ie look at this http://www.barchart.com/charts/stocks/ITIM16 and this http://www.barchart.com/charts/stocks/ITIZ18). The relative lack of liquidity of the 2018 contract adds a bit more volatility, but you can still see the same pattern.
Thirdly often far dated contracts in futures markets have no open positions at all - so you may see a reported price, but it just reflects an estimated price which was based on the spot price + cost of carry calculated on the first day that contract was listed for trading (or some other point days/weeks ago in the past of a small number of positions were opened then). The price then sits there at that level until people eventually start to trade it. So if the price of the commodity is rising, as it is right now, often long dated futures sit at a relatively low price until some decent amount of positions start to get opened in it. The opposite occurs when the commodity price starts to fall for a period of time.
Options are a different beast to futures - with options you pay a premium to take your position, and your risk (on a single option) is only the loss of the premium one way, and unlimited the other. With a futures contract you pay nothing to open the position, but your risk is unlimited in BOTH directions. The price of a futures position is just the initial "mark-to-market" price that your position is based on, and margining will be based on going forward, and ultimately settlement. With an option at a given strike and underlying price the option premium will vary based on volatility and time to expiry, as well as other factors like interest rates and so on. So yes all other things being equal, a further dated option will have a higher premium that a nearer one. This does not apply with futures as there is no up front premium paid or collected.
You are effectively describing it as an average of what people think the future price will be.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
If you want to make money do the opposite to anything Goldman Sachs, BIS or Credit Suisse say.
We have already heard Rio and BHP declaring that they have problems with supply for next year (its a game I know) but the reality is that the flooding the market strategy is over for now. It may fall back to$50 but falling to $35 is a joke and will not happen, IMHO.
Definition of a doom and gloomer from 1993 The last camp is made up of the doom-and-gloomers. Their slogan is "it's the end of the world as we know it". Right now they are convinced that debt is the evil responsible for all our economic woes and must be eliminated at all cost. Many doom-and-gloomers believe that unprecedented debt levels mean that we are on the precipice of a worse crisis than the Great Depression. The doom-and-gloomers hang on the latest series of negative economic data.
If you want to make money do the opposite to anything Goldman Sachs, BIS or Credit Suisse say.
We have already heard Rio and BHP declaring that they have problems with supply for next year (its a game I know) but the reality is that the flooding the market strategy is over for now. It may fall back to$50 but falling to $35 is a joke and will not happen, IMHO.
Oh yeah right, because alongside the puppet show, the puppeteer also runs a team of demand forecasters for iron ore.
All I am saying is that the long dated futures "price" don't really tell you anything about what the market is predicting re the "future" price of a commodity, at least not directly. Generally if the weight of the market is on the long side, the spot price will rise, and fall in the opposite case. The spot then drives the price of any later dated contracts, if there is any liquidity (more on that below).
That's right - I would have taken a short position (ie sold a futures contract) if I thought the price was going to fall. In either case I would be speculating (in the pure sense) if I had no desire to acquire or sell the physical stuff at the end of the day. The key point is th eprice that I entered my position at - whether long or short, tells you little about my actual expectation for where the price might end up at the time of expiry in the future.
Another way to think of this is to remember that every open futures position has someone on the long and also on the short side - at the SAME price - always. The risk is the same for both sides (this is very different to options).
Not really. For a start, if you look there is very little liquidity (ie very few trades or open positions - eg only 80 contracts open which is basically nothing) on that far (Dec '18) dated contract - so the price discovery there is weak at best. Compare that to the June '16 contract with 2,233 open positions.
Secondly, the price of a longer dated future has to account for the "cost of carry" over the time period compared to spot - ie say you are short and your position is covered by physical holdings - you have to keep those holdings to cover delivery in the future rather than sell them now at a higher price - so in addition to the money you make if your short works out, you need to also cover the opportunity cost of holding the current value of your holdings. So therefore you will only go short on a longer dated contract at a lower price than the current spot - ie spot less cost of carry. If you look at the chart of the Jun '16 contract at the same time as the Dec '18 one, you can see that the price moves basically mirror each other, just with a different base. (Ie look at this http://www.barchart.com/charts/stocks/ITIM16 and this http://www.barchart.com/charts/stocks/ITIZ18). The relative lack of liquidity of the 2018 contract adds a bit more volatility, but you can still see the same pattern.
Thirdly often far dated contracts in futures markets have no open positions at all - so you may see a reported price, but it just reflects an estimated price which was based on the spot price + cost of carry calculated on the first day that contract was listed for trading (or some other point days/weeks ago in the past of a small number of positions were opened then). The price then sits there at that level until people eventually start to trade it more actively. So if the price of the commodity is rising, as it is right now, often long dated futures sit at a relatively low price until some decent amount of positions start to get opened in it. The opposite occurs when the commodity price starts to fall for a period of time.
Options are a different beast to futures - with options you pay a premium to take your position, and your risk (on a single option) is only the loss of the premium one way, and unlimited the other. With a futures contract you pay nothing to open the position, but your risk is unlimited in BOTH directions. The price of a futures position is just the initial "mark-to-market" price that your position is based on, and margining will be based on going forward, and ultimately settlement. With an option at a given strike and underlying price the option premium will vary based on volatility and time to expiry, as well as other factors like interest rates and so on. So yes all other things being equal, a further dated option will have a higher premium that a nearer one. This does not apply with futures as there is no up front premium paid or collected.
well, not directly, but indirectly it certainly does imply expected price direction....
Lets face it, if a commodity has seasonal swings, the futures would factor that in and demonstrate a swing away from spot price, would it not ?
Also... if, for whatever reason, a lot of people have expectations of gold to fall over the next 12 months, they will be looking to go long on that contract... that would influence the contract price of Apr2017, would it not ? That, sir, tells me that the (majority of) market is predicting a price fall...
I do not dispute what you are saying, I just think you and I are saying the same thing, although it is quite possible my choice of words is not to your liking... fair enough.
re your gold example... If you had gone short instead of long, then your prediction on the price of gold would have altered... if enough people went short on that 12 month contract for the same reason, their prediction on the future (spot) price would cause the futures price to alter... that is exactly what I was saying. Yes, there are 2 sides to the transaction, however that is why price is an indicator of the overall predicted direction is it not ? This discovery of (future spot) price as volumes increase is exactly what you described.
Your right on the options comments and also the discovery comment on the futures due to low open contracts. None the less, there are certainly rsome ecent transactions of the ITIZ18 Dec18 contracts with far cheaper values than spot.
I see what you mean with options vs futures... although volliity impacts both which was my point regarding long dated futures (and options).
fair comment... poor use of words, but I think we are saying the same thing.
speculate - When you speculate, you use what you know to make a prediction about an outcome
Perhaps I should have used the words 'hope to predict' or speculate rather than predict.
Your example of going long on gold is you speculating (predicting) a rise in gold.. if you were speculating (predicting) a drop in gold, you would not have gone long.
Does that not tell you anything as to the expected price between Dec 216 and Dec 2018 in the market ?
From memory when I used to play the OEX a million years ago, long dated options had higher implied volitility, and were often priced higher...
In this example, 2 years gets me a cheaper option does it not ? Implying that the futures market, despite the extra time pushing up implied vix, thinks the price will be down by Dec 2018.
Feel free to correct me.
Come on Trollie... don't hide in other threads... explain to us just how the following posts of yours make sense...
History:
Poontang asked why you considered gold could not to rise to new highs as some shares did.
You posted
Gold has long bear cycles. It could surprise us, I just think it's more of a long shot.
I pointed out iron ore, like gold has had a long bear cycle...
You then claimed.
Iron ore hasn't been a spot market long enough to make that call.
I posted, the price of iron ore, as shown on a chart, clearly had a bear market..
You then claimed
How does a bear "market" happen in a commodity which isn't freely traded?
==============================
Dumb it down for us
There's no point arguing with idiots like you rastus, you'll just drag us down to your level and beat us with experience to quote mark twain. If you can't put 2 and 2 together on you own, that's your issue to work through.
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy