Futures questions

[bart]

Moved from another thread - open season on futures market questions as time is available in this thread... with the warning yet again that new futures market traders (especially those that use leverage) lose their butts about 70% of the time.

In my opinion, there are many ways to avoid it if one is actually trading raw futures contracts (warning - futures trading, especially with leverage, is a losing proposition for about 70% of new traders). The simplest is just to move into the new contract more than 7-10 days before contract expiration - or just trade/invest in contracts that are further out in the future so one doesn't need to trade as often.

Thanks for your reply, bart, it is very helpful. I had come to the conclusion that I was going to use futures to invest in oil, as it appeared to me that ETFs were built on top of futures, and hence, offered no real advantage. And, to my suspicious mind, figured that most likely they'd not perform as well as the underlying futures contract, given that the ETF fund managers need to extract their pound of flesh.

For an investor, as opposed to a trader, of the two choices you suggested, that is roll 7-10 days before expiry or buy further out contracts, would you recommend one over the other, or is it basically a wash?

Clearly, the current contract has the highest liquidity, and the further out you go, the less the liquidity. But, for an investor, that's probably not an issue. And, for oil futures, probably no liquidity issues, anyway.

If one wished to invest in oil using futures, would 12 months out be too far out?

I realize that there's probably not necessarily a right or wrong answer to this last question, and that you are a professional trader, but would be interested to hear your thoughts.

First, nice job of doing your homework. It seems like you have a decent understanding of the area.

One of the big positives of futures is indeed as you stated - they're "pure" plays on the various underlying items and in my opinion avoid added factors like ETFs based on them, or even the odd decay and poor tracking of leveraged ETFs ( a 2x leveraged ETF will never return close to 2x over more than a short period of time), and of course the premium and time decay issues of options (but options do have the advantage of limiting one's losses).

All else held the same, in my opinion its close to a wash on rolling over vs. buying or selling long dated contracts... with the underlying assumptions that you need to take into account the likely path of contango vs. backwardation, and much more importantly how long you want to and expect to hold the contract(s).
I've chosen to mostly avoid the whole issue and concentrate on short term trades, mostly by process of elimination - I just plain do better as a short term trader. Mine average around two weeks long, but have gone as long as over 6 months, for what its worth.

There are significant exceptions to "the further out you go, the less the liquidity" too, precisely due to investors like you. Currently, the full size NYMEX oil contract picture has 16,000 open contracts for December 2010, where July through November 2010 months have less than 10,000 each. And December 2011 has more than any other month in 2011, same with December 2012.

As far as 12 months being too long, I don't think so for an investor - even 24 months or longer is fine since it gives you longer to be right, but perhaps asking yourself if you'd hold a pure/perfect (no roll yield issues, etc.) oil ETF for that long will help answer it for you.




For others possible education, and using one unleveraged mini oil contract (which is 500 barrels) as an example, today one would need to have about $41,000 (500 barrels * ~$81 per barrel) available in one's account to trade a December 2010 contract without leverage.

A full sized contract is 1000 barrels, for what its worth. Leverage may be used up to about 8:1 in oil futures contracts currently, also for what its worth.