The lumber
futures price is different than the lumber price in the cash (physical) market. Generally, the price of a commodity for future
delivery is higher than the cash price due to carrying costs (insurance, interest, and warehousing fees). This is called contango.
The opposite of contango is backwardation. Backwardation is when the price of a commodity for future delivery is lower than
the cash price Backwardation is normal in a “seller’s market.”
When
you trade lumber futures, your futures price depends on where you get into the market. After you post your initial margin,
your profit or loss depends on where you enter and exit the market (minus transaction costs).
For
example:
The contract size for lumber is 110,000 bd. ft. So each $1 move equals $110. As
the market moves your account value adjusts. If your account value drops below the maintenance margin, a margin call is due.
A margin call can be met by offsetting positions or adding money to your account.
Trading
futures is like driving a car without insurance. You save the insurance premium, but if you crash you will wish that you were
insured. If you have very deep pockets or deal with the physical lumber product then futures may be for you. If you are a
speculator with a limited amount of risk capital then lumber options is a better way for you to invest in the lumber market.
