by Aurelio Pena
LOOKING AT a market that seems to be going nowhere, some Pinoy stock traders have been shifting their focus somewhere else, some dabbling in US or other Asian stocks — or even in global commodity futures.
Although the Philippine Stock Exchange had been drumming up the possibility that someday, Pinoy traders can start trading in such commodities as corn, rice, coffee, cocoa, copra, soybeans, gold, silver, etc in the PSE, some of our local traders have been doing this online for years, trading in foreign exchanges in New York, Chicago, London, Hong Kong, etc.
Nice thing about the commodity futures market is that a trader can put up a very small “margin deposit” of only 2%, 5% up to 8% to buy a futures contract for a commodity.
For instance, to buy one futures contract for corn at 5000 bushels per contract, you need to put up only 4% of the value that you’re buying. So, if the market price for corn today is $7.30, the contract value is 5000 x 7.30 or $36,500. But you don’t have to put up this total amount, you need to deposit only 4% or $1460 with your broker to execute your buy order.
Contract months for corn are March (H), May (K), July (N), September (U) and December (Z), Those capital letters are the “codes” used for each trading month.
Lets assume this month April, you bought one (1) September futures contract for corn quoted at $7.30 per bushel. Then by July, the price had gone up to $8.50 and you decide to sell at market price.
Computing your trade, your one contract of corn futures earns 8.50 x 5000 bushels or $42,500. Deduct the original value of 36,500 from this sale and you get a gross profit of $6000. Then deduct your margin deposit of $1460 and you get a net profit of $4540. (That’s P199,760 profit for you in just four months) immediately sent to your account.
Now, let’s assume you want to buy crude oil futures, taking advantage of the rising tensions in the Middle East. Let’s say you want to buy one (1) December contract for crude oil. Your online broker quotes you a market price of $105 a barrel. (Contract size for crude oil is 1,000 barrels) or a total cost of $105,000. Your broker requires you to put up an 8% margin deposit or $8400 to execute your buy order. . .
Let’s say by June the revolutions in the Middle East get worse and oil prices skyrocket to $112 a barrel, You decide to sell at market price and get your order filled at $114 giving you a contract worth $114,000 Deducting the original cost of 105,000 and you get a gross profit of $9000 which isn’t bad for two months wait.
These low margins in trading futures can be very, very tempting and blamed for wiping out many traders out of the markets. This kind of “leverage” gives you lots of opportunities to make TONS of money from commodities— but can wipe you out in seconds.
( Comments? Email me at : anthonypenn@gmail.com)
