High-End Investments: Futures, Options, and Commodities - dummies

High-End Investments: Futures, Options, and Commodities

If you want to try your hand at high-end investment, you might think about futures, options, and commodities. In some ways, higher-end investments aren’t much different than traditional investments: You invest your money in stocks or bonds or mutual funds or exchange-traded funds (ETFs) and make all the same decisions that an average investor does. The difference is the amount of capital in play (typically a lot) or the risk exposure (typically high).

In other ways, high-end investing is an almost completely different beast. It’s not so much investing (buying and holding on) as it is trading or speculating — assuming a business risk with the hope of profiting from market fluctuations.

Successful speculating requires analyzing situations, predicting outcomes, and putting your money on one side of a trade based on those predictions. Speculating also involves an appreciation of the fact that you can be wrong 70 percent of the time and still be successful if you apply the correct techniques for analyzing trades, managing your money, and protecting your account.

Basically, high-end investing means you have to chuck all your preconceptions about buy-and-hold investing and asset allocation, and essentially all the strategies that stock brokerages put out for public consumption.

Investing in futures and options

Futures and options, by their very nature, are complex financial instruments. It’s not like investing in a mutual fund, where you mail your check and wait for quarterly statements and dividends. If you invest in futures and options contracts, you need to monitor your positions on a daily basis, often even on an hourly basis. You have to keep track of the expiration date, the premium paid, the strike price, margin requirements, and a number of other shifting variables.

That said, understanding futures and options can be very beneficial because they are powerful tools. They provide you with leverage and risk management opportunities that your average financial instruments don’t offer. If you can harness the power of these instruments, you can dramatically increase your leverage — and performance — in the markets.

Investing in commodities

Commodities are the raw materials humans use to create a livable world: the agricultural products, mineral ore, and energy that are the essential building blocks of the global economy. The commodities markets are broad and deep, presenting both challenges and opportunities. Some examples include crude oil, gold, sugar, palladium, natural gas, frozen concentrated orange juice, soybeans, and aluminum.