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If you have ever looked at the futures markets and thought that it was too risky, you could be right. But that does not mean you can't use them to make money in the markets that you choose to trade.
Today, we're going to show you how to make money from futures without even trading them.
The futures markets are some of the fastest-moving markets around. Think about what makes an index like the S&P 500 move.
Every few seconds, the powers that be calculate a new value for it based on the prices of all 500 component stocks. You can be sure that not all 500 move in unison.
S&P 500 futures, whether the big contract or the e-minis, don't have that problem. They offer one-stop shopping for traders who can buy the entire index with one little buy order.
There is no waiting for all, or even most, of the component stocks to move before the index itself finally makes its move.
That means there are times during the day when the cash index and the futures contract get a little out of line. Knowing how to spot those differences can lead to better short-term trading, even if you are only trading one of the stocks in the index.
Money Morning Options Specialist Tom Gentile says it's like having a crystal ball. By comparing where the cash index and the futures close on any given day, you can also get some serious clues as to where the stocks in the index will open the next day.
Here's how the futures market can help you profit…
What Is a Futures Contract?
Much like an option, a futures contract creates an obligation for the holder to take delivery of a specified amount of a commodity at a certain date in the future.
Futures originated in the commodities markets but have since spread to financial instruments, like stocks and bonds. You'll also find them in exotic markets like electricity and freight.
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Unlike options, there is no option, or choice, to take delivery. It must happen. Also unlike options, you pay your money up front, locking in your price.
If the price of the underlying commodity rises before you have to take delivery, then you can sell it for a profit.
For stock futures, specifically futures on indexes like the S&P 500 or Russell 2000, you don't actually take delivery on a basket of stocks. Rather, you get just the value of the that basket. In other words, they settle in cash.
If you sell a futures contract, you create an obligation to deliver the underlying commodities, or cash for stock index futures. This is how producers of commodities, such as farmers or miners, lock in the price they will receive for their wares.
Consumers of commodities, such as bakeries or metals foundries, lock in the prices which they will pay, so they know what their costs will be.
These groups are called hedgers. Most individual futures traders are speculators, willing to take the risk from the hedgers in order to make a profit.
But there's a way you can profit without even trading a single futures contract…
Profiting from Futures Without Trading Futures
If you check the after-hours and before-hours trading in the futures markets, you can get an idea about how your stocks are going to open the next day.
For example, if S&P 500 futures are up and crude oil prices are up, your energy stocks are probably going to do well early in the day.
Similarly, if foreign currency futures are up overnight, that means the U.S. dollar is weaker, and your gold stocks might be poised to do well.
Look at an exchange website, like the CMEGroup.com, as well as some trading platforms, like ThinkorSwim, to see futures prices. Look around at what energy, precious metals, stocks, bonds and currencies are doing.
Also check out what agricultural futures are doing. A chocolate maker stock, for example, will likely move when cocoa futures and sugar futures move. A baker needs to know where wheat and corn prices are.
Just be aware that professional traders are also looking to scalp the difference between cash and futures markets. They will likely be ahead of you on major stocks, like Apple or Microsoft.
However, there are plenty of lesser-known stocks in the S&P 500, and even more in the Russell 2000, that the big guys might leave alone.
You are not trading futures. Instead, you are looking for that little edge to get your next trading day started on the right foot.
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