Stocks & Commodities V. 31:11 (49): Futures For You by Carley Garner

Futures For You by Carley Garner

SO MANY CHOICES

Which futures markets should I focus on, and which should I avoid?

Ultimately, the key to fluid and reasonable price action is liquidity. As we all know, even in the deepest and most commonly traded markets there will be temporary lapses in judgment that cause pricing to enter ridiculous territory. Nonetheless, such abhorrent pricing happens far more frequently in thinly traded futures markets. As a result, traders should fight the urge to play exotic markets; instead, they should stick to those with efficient price discovery.

Ideal commodity markets: Futures markets with attractive liquidity include Treasuries (10-year notes and 30-year bonds), eurodollars, certain stock indexes (emini S&P and emini NASDAQ), crude oil, grains (corn, wheat, and soybeans), and the euro.

Viable commodity markets: Commodity markets that are liquid — but that should be seen as venues to trade a bit more sparingly — are alternative stock indexes such as the S&P Midcap, the Russell 2000, the full-sized S&P, and the NASDAQ.

Similarly, natural gas and unleaded gasoline markets tend to be more treacherous than crude oil; this is particularly true in the option markets in which traders typically face substantial spreads between the bid & ask.

In the grain complex, traders sometimes enjoy the relatively lower volatility in soy byproducts (soybean meal and soybean oil). These futures and option contracts are viable candidates for futures traders but are on the thin side. Further, option traders would want to keep any position in either of these products to a minimum. Should the “going get tough,” it might be difficult for the market to efficiently price options causing traders to be forced into unfortunate fill prices.

The major currency futures contracts are liquid markets; specifically, the yen, the British pound, the Canadian dollar, and the Aussie see in excess of 100,000 contracts traded on a daily basis. Options written on currency futures are not always highly liquid, but they are certainly tradable, and the CME provides very capable market makers to help in the price-discovery process. In our view, the euro futures and option contracts are the preferable vehicles in the currency complex because they typically see twice the volume of the aforementioned currency products.