The oats futures price is
different than the oats 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 oats 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 oats is 5,000 bushels. So each $.01 move equals $50. 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 oats product then futures may be for you. If you are a speculator with a limited amount
of risk capital then oats options are a better way for you to invest in the oats market.
