"Commodities- Alternative Actions and Investing for Today's Mega Information Era."

Commodities—Alternative Actions and investing for today’s Mega Information Era:

To begin any new venture, we must first learn the language and lingo of the discipline.
Commodity Trading is nothing more than a huge supermarket of tangible goods (cocoa, sugar, coffee, lumber, feeder cattle etc) whereby buyers and sellers are brought together by the modern day exchanges (clearing houses where individual trades are executed) to buy and sell products.
The first reported contract on record was traded in Chicago in 1851. Back then contracts were only accomplished by individuals using “forward contracts”. This was simply a contract between a buyer and a seller in which the seller agreed to deliver some specific commodity to the buyer sometime in the future.
This unique phenomenon was quite innovative for the times and was initiated in part due to Chicago’s rapid growth after incorporation to become a city in 1867. Chicago was the hotbed of commerce for trade with its strategic location to Lake Michigan and all the Great Lakes as well as rich and ripe Midwest farmland. It was the Nations main Grain terminal and with the major expansion in the Midwest it led to many issues with supply and demand, transportation, storage and the overall flow of product in an uncivilized marketplace for efficient trading.
Farmers, with their grain and livestock harvest in hand came to regional markets in hopes of “bumper crop” sales. In most cases, supply far exceeded demand and prices were poor. In other times, meat packers found it difficult to find product at certain times of the year so prices were very high. In short, there was no conformity or structure to trade within a set framework. This led to our modern day “futures trading”.
In 1848 the Chicago Board of Trade was founded by key merchants to have a standardized meeting place to provide some structure to buyers and sellers for their commodities.
The CBOT was very successful in laying the ground work for more systematic trading but it quickly recognized some flaws. In using the old paradigm of the “forward contract” which was between the buyer and seller, it was difficult to have any check and balance system with regard to grade, quality of product, delivery times or “iron clad” contractual commitments.
In 1865 the Board created an immutable platform in which to trade known as the modern day “futures contract”. This set the stage for an equitable trade between both buyer and seller. A margining system was enacted similar to earnest money on a house to counteract any party backing out of their agreement. Funds were deposited with the exchange or an exchange representative to guarantee performance.
Standardization of Grades within each commodity was crucial to this process protecting buyers mainly from unscrupulous practices of the sellers sending them low quality or old product. In short, a “futures contract”, is a legally binding agreement made on a trading floor of a futures exchange to buy or sell a commodity or financial instrument sometime in the future. All futures contracts were then standardized with respect to grade, quality, quantity, and delivery time. The table was now set for a free enterprise, unalterable trading platform.
With the legally binding futures contract in place and the trade being executed on an exchange rather than between two individuals it was time for the marketplace to expand. The affluent within the community, began to see value in “Speculating” in these markets by forecasting into the futures market to gain some honest profit. This quickly made the markets much more liquid(larger and more people trading) and the futures markets were off and running to gain market share with respect to people investing their monies. Standardization of trading led to more and more types of commodities being traded. Cocoa, coffee, lumber, gold, hogs, orange juice, beans, sugar to mention a few.

Just like any discipline, commodity trading has unique characteristics within the platform of trading futures contracts. There are a few terms and concepts we must learn to begin to understand the trading system.
There are two basic terms that are crucial to any trader, “long” and “short” futures positions. A long position is a purchase in the marketplace with the presentment of rising prices. A short position is a purchase in the marketplace with the presentment of lower prices.
With statistical data, charts, crop reports, and weather related information, a trader makes calculated determinations of which position he wants to “own” in the marketplace.
A key factor to keep in mind is that it really doesn’t matter which direction the “analyzed” market is headed, it only matters that you have staying power within the market you are entering. Once you have determined that the market is showing a possible set up to make a move, you need enough money and margin to trade the market. Margin is the amount of money you must put up with the exchange and broker to own a futures position, regardless of whether it’s a short or long position.
Staying Power is making sure you have enough cash to ride out the peaks and valleys that a commodity will no doubt make within your futures position. As you enter a market, you will enter at a specified price point and in a futures contract you will be responsible for all the ticks that a market realizes throughout the trading day. A tick is simply the minimum price move an individual market can make. The ticks are comprised of a monetary figure that is attached to each move. This is how the exchange determines through its standardization process just how each individual trader is doing with respect to their long or short positions.
All markets have different trading hours, or the length of time each market is open throughout the day for traders to realize profit or loss for their prospective trades.

There are many methodologies and strategies for the novice commodity investor to learn but there are none better than becoming a “chartist”. When you are looking at chart formations and set ups, there are no reasons to ever listen to “hot tips” from “BROKERS”!
When you become a chartist, you are relying on charts to decipher and analyze when markets will most likely make major moves up or down. That price action and movement is where the traders profit potential is realized.
In order to begin, you must become familiar with a chart legend which is a guide and reference standardized chart to show you each individual commodity and the characteristics of it.

To use as an illustration, we will focus on the lumber commodity. The trading hours we have spoken about, which is just simply the hours the market is open for active trading. In this case they are 10:00am – 2:05pm EST but it should be noted that they do change depending on the exchange. The contract size is quoted in Board footage in lumber. Its standardized measure is always 110,000 board ft or BDFT in lumber language. This simply means that when you enter into a futures contract in lumber, you are going long or short on 1 futures contract which is quoted in 110,000bdft measure. It is quoted on a per thousand bdft measure based upon delivered price to Chicago, which is why it is traded on the CME or Chicago Mercantile Exchange. Because there are many grades and species within the lumber commodity, it is always quoted in terms of Western SPF (Spruce Pine Fir) species and a grade of standard and better construction grade lumber.
The margin to hold 1 futures position on lumber is $1650 per contract and the maintenance (minimum in your account at the end of each trading day close) is $1100. This can also change periodically at the discretion of the exchange depending on activity.
If your margin falls below this level you will be issued a margin call, which is the presentment that you need to put in more money in your trading account as the market has slipped below the amount of money you put up to trade.
There is a daily limit (maximum amount or price move a market can make in one trading day) on lumber of $1100 for each contract. There are exceptions in lumber depending on certain conditions but most markets do have a daily limit move.
The point value in lumber is $1= $110 and the minimum point move is 10cents or $11.
The FND (first notice date) is the day in which a notice of intent to deliver a commodity in fulfillment of a given months futures contract can be made by the clearinghouse to a buyer. The LTD (last day trading) is the last day you can be in the market in the front month whereby the contract must be settled by the delivery of the underlying commodity or settled in monetary concessions. The last component is the Opt expires date. This is the date you must liquidate your options in the lumber market or they expire worthless.

In 1982, the futures market added another dimension to the trading platform that allowed for many more speculators and newbie investors into the market. An investor could now purchase a “CALL or PUT” option to enter a commodity market. An option was the right but not the obligation to enter a market at a pre determined price whereby they could leverage multiple futures contracts with a much smaller amount of money. A call option was purchased with the preconceived notion of rising prices, similar to going long in futures. A put option was purchased with the preconceived notion of falling prices, similar to going short in futures.
This allowed the newbie investors into the market with much less risk with only having to put up an amount of money much less than the margin on futures to trade.
Options, like futures contracts, have their own set of languages to learn in order to feel comfortable purchasing calls or puts.
In purchasing options, we purchase at a Strike Price which is a price determined from the underlying futures price of the commodity. To use our lumber as an example, if the price for a day of trading ranged from 140-147 per BDFT than we might use Strike Prices of 140 or 145 to buy options. Each of these Strike prices are assigned a point value. A price for example for a 145 CALL option might be 780 Points, and our pt value in lumber is 1.10. We simply multiply the points times the point value to determine our dollar amount to hold one option and in this case it would be $858.
Every day, the markets have an open, high, low and close price. In this case, let’s say the market closed at 147. This particular option at a strike price of 145 would be an “in the money option”. This simply means we purchased an options strike price that was lower than our closing price that day. In essence, we have already created a profit for that day of trading as we own it at 145.
Conversely, out of the money options are the options that are a ways away from the futures trading price. For instance, let’s say were looking to buy a 180 CALL option in lumber as we thought the market was going to rise. If the market closed at 147, than a 180 call would be 33 points out of the money.
Options are quoted not only in the strike price but by the time value of money principle. In short, time erodes money and the further out (time) options you buy the more expensive they become. And as the time erodes on that option, the less valuable they become.
In our lumber example, let’s assume we are shopping for those 180 CALL options and we want to go at least 6 months out to give the market some time to see some price appreciation. Again, we are buying the right but not the obligation to enter this market so we need some “time value” in order for the market appreciation to hopefully provide some profit. If the Front month, or the month we are currently trading in doesn’t show much time value we might look to a further deferred months, or the months further out to trade to shop for options. If it is in the March contract, we might look to say July to get some prices. With our market trading in the front month at say 147, we might shop for an out of the money CALL option in that 180 to see a price. With all that time, the options are going to be more expensive as we now have “bought” a few more months for the price appreciation to come.
That option might be say 1700 pts or $1870. Why? You are buying more time value for that option to be worth more profit potential. And as the time erodes and we go from one month to another that option will be worth less. The OPT EXP on the chart legend is usually 1-2 weeks prior to the Last Trading day of the month.
Options provide a very powerful tool to leverage and provide the staying power to ride out the peaks and valleys of commodity markets. Unlike other investments, commodity trading is very fast and very liquid. Many contracts are bought and sold every minute of every day and for every new buyer of an option there is a seller. The staying power, or ability to ride out the market when it goes against your initial direction to profit is crucial to your success. There is an old saying, the market will always do what you think it can’t, and the minute you get out of a position is usually when it turns. Options provide a very powerful tool to leverage while still being able to profit handsomely.

While there are many other facets, methodologies and strategies to trade within the commodity markets, this is just a brief introduction to a new age of thinking when it comes to your financial future.
It is time to WAKE UP America, take responsibility for your own financial future. It is just too risky to entrust your hard earned money to a so called “financial planner”.

Here at WAKE UP Sense, we will guide you on the right path to financial independence and personal empowerment.
www.wakeupsense.com