Introduction to

Futures Trading
A basic understanding to
start trading the futures markets.

rjobrien.ca Toronto: 888-275-0027

Winnipeg: 877-617-5542
Montreal: 888-701-0071

© 2015 R.J. O’Brien & Associates Canada Inc.

Important Information About
Trading Futures and
Options on Futures
This communication is intended as solicitation. There is a substantial risk of loss in trading
commodity futures, options and foreign exchange products and is not suitable for all investors.
The data and comments provided herein are for informational purposes only and must not
be construed as an indication or guarantee of any kind of what the future performance of the
concerned markets will be. Contact your account representative for more information on these
risks. Information and opinions contained herein come from sources believed to be reliable by
R.J. O’Brien & Associates Canada Inc. (RJO Canada) but are not guaranteed as to accuracy or
completeness. All trading decisions will be made by the account holder. Please carefully consider
your financial condition prior to making any trading decisions.

When analyzing option strategies, it is important to take into account the commission and fees
associated with making a trade. Similar to trading futures, each contract executed in an option
strategy is charged commission and fees. Commissions and fees from brokerage firms can be up
to $99 per round turn with the vast majority of people paying significantly less. Your actual charges
may vary based on the service level you choose. The two primary factors investors tend to overlook
when trading options include:

• Each contract traded is charged a commission. This is often misinterpreted as each spread or
strategy that is charged a commission. If you trade one bull call spread, your account would be
charged for 2 contracts rather than 1 spread.

• Customers often try to sell or collect premium on options that are far out of the money with the
belief that they are collecting “easy money.” The further away an option strike price is from the
current market price, the lower the value of the option. Make sure that you are not paying more
in commission and fees than what you are collecting. Keep in mind that until an option expires,
you do hold risk in the positions. Is the net premium collected after paying commission and
fees worth the risk?

2 BEGIN TRADING NOW. Call: 888-701-0071 (Montreal), 888-275-0027 (Toronto), 877-617-5542 (Winnipeg) Click: rjobrien.ca/account/open
Table of Contents

Getting Started.........................................................................................................................4

Futures 101..............................................................................................................................5

Who Trades Futures............................................................................................................... 10

Why Trade Futures.................................................................................................................. 11

Basic Futures Trading Strategies............................................................................................ 13

Get Comfortable with Futures................................................................................................ 16

Additional Resources ............................................................................................................. 17

Getting Started

Many of the savviest traders in the world trade futures. For starters, they appreciate
the exposure to worldwide markets on regulated exchanges and regulated
counterparties.

They also like increasing the efficiency of their A list of guides from RJO Canada covering
trading capital via the leverage available in more specific futures trading topics—as well as
futures (which can also work against you). And, additional resources for learning the basics—is
finally, they know they can count on the futures at the end of this document.
markets’ liquidity to help them execute their
Please feel free to contact us to answer any
ever-changing strategies.
questions you have about trading futures.
You can be a savvy futures trader, too. This Any of our experienced team can explain the
guide will start you down the path with a good principles and strategies in this guide, and help
explanation of the basics—from how prices you understand if trading futures is right for you.
are quoted to understanding margin to trading If so, we look forward to welcoming you as a
strategies. We hope it will inspire you to try your new client at RJO Canada.
hand trading some of the most exciting markets
in the world.

RJO Canada, a leading brokerage firm for

derivative products, is specialized in serving
futures and options traders. Everyone on our
team is devoted to providing the service you
need to become a successful futures trader.

4
Futures 101

Futures contracts are financial instruments focused on discovering the price of

a specific commodity or asset at a specific time in the future—anywhere from
tomorrow to years from now.

Most often, though, futures traders are focused How Futures Trading Works
on price prospects over the next few months.
Futures trading occurs on regulated exchanges,
In futures, as information about the supply and which facilitate the place where buyers and
demand for the underlying asset changes over sellers trade as well as post-trade clearing. In
time, the price of the futures contract changes the United States, futures trading began in the
as traders take positions based on their opinion mid-1800s as a way to bring together producers
of what the asset’s price will be at that certain and users of grains and cotton. Today, the CME
point of time in the future. Group in Chicago is the largest futures exchange
in the world; its stock is listed on the New York
What is a Futures Contract?
Stock Exchange.
A futures contract is an obligation to buy or sell
In futures trading, the buyer and seller create a
a specific quantity of a certain commodity or
new contract with each trade, and the number
asset on a future date at an agreed upon price.
of contracts that can be created is limitless. In
Because the terms of futures contracts for each contrast, a limited number of shares of stock
commodity or asset are standardized (i.e., same are available to trade for each company that is
quantity, quality, delivery), they can be traded publicly listed and traded.
on an exchange. The only variable is the price.
Remember, it’s a “futures” contract. You are
Today, futures contracts represent commodities taking a position on what you think the price
and financial instruments you know and hear of something will be on the date the contract
about in the news every day, including oil, expires. If you’re trading crude oil and you
corn, gold, popular stock indices and foreign believe the future price of oil will be higher,
currencies. then you would buy the contract. If you believe
the future price will be lower, then you sell the
contract.

5
What is Margin? expire and cease to exist. On the expiration
date, futures contracts may call for physical
Margin is essentially a good-faith deposit. It delivery of the commodity, while others are
represents a small percentage of the total dollar settled in cash. But, don’t worry. When you
value of the contract you have agreed to buy or make a futures trade, you don’t need to make or
sell at a future date. take delivery of the commodity. In fact, if you’re
like the vast majority of futures traders, you
There are two types of margin. Initial margin is
will offset your position long before ever being
the amount of cash (or equivalent) you must
faced with the delivery process.
have in your account at the time an order
is placed. Maintenance margin is the dollar To close out a position in a futures contract, and
amount that must be maintained in the account avoid delivery, you offset the contract by taking
to continue to hold the futures position. an equal, but opposite, position in the same
contract month. Thus, if you were long a futures
Margin Call
contract (i.e., having bought a contract), you
A margin call occurs when there is not would sell a matching contract; if your initial
enough cash in the account to cover all the position were a sale, you would buy to offset it.
maintenance margin required to hold all the Either of these actions exits your position and
positions in the account. It is a call for money. gets you even.
A margin call generally occurs when prices
move against your positions. Many experienced
Counterparty
traders view a margin call as a red flag that Once you have a position in a futures
their trading strategy might be flawed. Market contract, that contract is cleared and held at
conditions permitting, brokerage firms might a clearinghouse, which ultimately is your true
allow up to four days to meet a margin call, counterparty so that you may exit the position
even though they are due payable before the at any time. The futures exchange clearing
next trading day begins. corporations handle this process automatically.

Expiration and Delivery

An important aspect of trading futures is

understanding that futures contracts ultimately

6
Trading Symbols Contract Month Symbols
January F
In futures trading, each commodity has its own
February G
symbol, e.g. “C” for corn or “ES” for the E-mini
March H
S&P 500. However, each market might have April J
more than one symbol to represent contracts May K
trading on different exchanges or on different June M
platforms, e.g. trading pit or electronic. For July N
example, wheat in the Chicago Board of Trade August Q
trading pit is “W,” but is “ZW” on the CBOT’s September U

electronic platform and “KW” for Kansas City October V

November X
Wheat.
December Z
Your RJO Canada representative can help
As an example, the symbol for the July 2016
you find the contract symbol for the product,
soybean contract at the Chicago Board
exchange and platform you wish to trade.
of Trade would be SN6 for the pit-traded
Each commodity contract has an expiration contract and ZSN6 for electronic trading.
month that also is abbreviated by symbol:

ADDITIONAL RESOURCES

For more information on options trading,

call 888-275-0027 to request your free copy of the
Introduction to Options Trading guide.

rjobrien.ca Toronto: 888-275-0027

Winnipeg: 877-617-5542

7
Know Your Contracts

Commodity Symbol Unit of Trade How Quoted Value

Grain Futures PIT E-CBOT
CBOT Corn C ZC 5,000 bushels per contract Cents per bushel 1 cent = $50
CBOT Wheat W ZW 5,000 bushels per contract Cents per bushel 1 cent = $50
CBOT Soybeans S ZS 5,000 bushels per contract Cents per bushel 1 cent = $50
CBOT Soybean Oil BO ZL 60,000 pounds per contract Cents per pound 1/100 cent = $6
CBOT Soybean Meal SM ZM 100 metric tons per contract Dollars per ton $0.10/ton= $10
CBOT Oats O ZO 5,000 bushels per contract Cents per bushel 1 cent = $50
Meat Futures PIT GLOBEX
CME Live Cattle LC GLE 40,000 pounds per contract Cents per pound .025 cents = $10.00
CME Feeder Cattle FC GF 50,000 pounds per contract Cents per pound .025 cents = $12.50
CME Lean Hogs LH HE 40,000 pounds per contract Cents per pound .025 cents = $10.00
Metals Futures PIT GLOBEX
NYMEX Gold GC GGC 100 troy ounces per contract Dollars per troy ounce 1 dollar = $100
NYMEX Platinum PL GPL 50 troy ounces per contract Dollars per troy ounce $0.10 per oz.= $5
NYMEX Silver SI GSI 5,000 troy ounces per contract Dollars per troy ounce 1 cent = $50
NYMEX Copper HG GHG 25,000 pounds per contract Cents per pound 1 cent per lb = $250
Petroleum Futures PIT GLOBEX
NYMEX Crude Oil CL GCL 1,000 barrels per contract Dollars per barrel $0.01 per barrel = $10
NYMEX Heating Oil HO GHO 42,000 gallons per contract Dollars per gallon 1 cent per gal = $420
NYMEX RBOB Gasoline RB GRB 42,000 gallons per contract Dollars per gallon 1 cent per gal = $420
Softs PIT ICE
NYBOT Coffee KC IKC 37,500 pounds per contract Cents per pound 1 cent = $375
NYBOT Sugar #11 SB ISB 112,000 pounds per contract Cents per pound 1 cent = $1120
NYBOT Cocoa CC ICC 10 metric tons per contract Dollars per metric ton $1 per ton = $10
NYBOT Orange Juice OJ IOJ 15,000 pounds per contract Cents per pound 1 cent = $150
NYBOT Cotton CT ICT 50,000 pounds per contract Cents per pound 1 cent = $500
Currencies PIT GLOBEX
CME Euro FX EC GE $100,000 per EC per contract Dollars per foreign currency 0.0001 = $12.50
CME Canadian Dollar CD GC $100,000 per CD per contract Dollars per foreign currency 0.0001 = $10
CME British Pound BP GB $62,500 per BP per contract Dollars per foreign currency 0.0001 = $6.25
CME Japanese Yen JY GJ $1,250,000 per JY per contract Dollars per foreign currency 0.0000001 = $12.50
Stock Index Futures PIT GLOBEX
CME S&P 500 SP GS $250 times the index Dollars per index 0.10 = $25
CME S&P Emini ES $50 times the index Dollars per index 0.50 = $25
Mini Dow YM $5 times the index Dollars per index 1 = $5

Provided for information purposes only

8
Price Quotes Volume

Futures contracts are not all priced in dollars Volume tells you how many contracts traded
and cents, with a handy decimal point and hands in a particular contract or market.
two numerals behind it. So, it is important to Total volume equals all contracts traded. (The
understand how the market you are trading is purchase and sale of a single contract counts
quoted. For example, the grains have minimum as one, not two.) Volume helps measure the
ticks of quarter-cents while T-bonds are priced strength of price movements.
in 32nds, sugar in points based on the contract
Open Interest
size and some stock indices in multiple-point
increments. Open interest tells you how many contracts
exist—are live or active—in the market at any
Your RJO Canada representative can explain
given point in time. This is similar to the number
how the markets are priced and how to
of shares outstanding for a stock. The larger the
decipher a quote on the quote system you are
open interest, the greater the liquidity (i.e., ease
using. For example, a corn quote might read
with which you can enter or exit the market).
$4.2525 for $4.25 and ¼ cents per bu., or it
could be listed old-school as 4252, where the
last digit represents 2/8 of a cent, or ¼ cent.

Note that the opening price is generally the

midpoint of the opening range or a single price
designated by the exchanges. The end-of-day
value of a futures contract used to determine
margin calls is called the “settlement” price.
Settlement prices are determined by exchanges
based on closing prices.

9
Who Trades Futures

Participants in the futures market fall into two broad categories—speculators or

hedgers. Speculators take risk and provide liquidity for hedgers who are seeking to
dispose of any number of kinds of business risks they face.

Speculators Hedgers

Speculators take risk and seek to profit from the Hedgers use the futures markets to get rid of
ups and downs of futures prices. Speculators the price risk that is inherent in their business.
can be individuals like you to professional Farmers, food processors, energy producers—
traders working alone or within trading groups. and even corporate treasury departments—are
They also could be institutional money examples of hedgers who lock in prices using
managers. But, whoever they are, profit is their futures contracts to protect against price
primary objective. movement and volatility. Hedging becomes a
form of price insurance as it establishes a price
Similar to stock trading, speculators in futures
for something they intend to buy or sell in the
use both fundamental and technical analysis
cash market at a future date.
to generate signals as to the future price
movements of a specific contract. They might Stock traders can hedge, too. Let’s say you hold
trade support and resistance levels from a a broad range of stocks or a stock index in your
futures price chart. Or, they might study global portfolio. You are concerned about near-term
supply and demand. Professional traders performance given market conditions, but do
increasingly use computerized algorithms to not want to lighten your holdings because of
monitor the markets and take advantage of capital gains tax consequences — plus, long-
very slim pricing opportunities. The volume term you’re bullish. Selling a stock index futures
of trading generated by speculators provides contract could protect your exposure to a drop
liquidity for hedgers. in the stock market.

10
Why Trade Futures

Let’s get right to it. Why should you even be interested in futures trading? What’s in it
for you?

Leverage There is no doubt that leverage is a two-edged

sword. Experienced futures traders will tell you
This is the big one for most traders. In futures that using stops, taking small losses and being
trading, the capital you devote to holding a vigilant about your risk-management practices
position is substantially less than what you will help you stay on the right side of the
need to hold an equities position—even on leverage beast.
margin.
Ask your RJO Canada representative about
A non-margined equities account requires you current minimum margin requirements for
put up 100% of the value of the security. Even the markets you are interested in trading. Be
a margin account may require an initial deposit aware that margin requirements can change
of at least 50% of the stock’s current value. In at any time, and are particularly likely to do so
contrast, you typically are required to put up when the markets are volatile. Also, you can
just 5%-20% of a contract’s value to hold a always commit more capital to margin than
futures position. the minimum requirements in order to reach a
comfortable level of leverage for you.
Your gain or loss, however, is still calculated as
if you had deposited 100% of the value of the Example of Leverage:
contract.
At $6 per bu., a 5,000-bu. corn futures contract is
Leverage is what gives futures trading its worth $30,000. If the price of corn rises by 10% to
reputation for being risky. Although it can $6.60, the contract is then worth $33,000—a gain of
make your money work harder and deliver $3,000 for someone who is long futures at $6.
more profits when you are on the right side
If the margin requirement for one corn futures
of the market, leverage is equally effective at
contract is $2,000, then a 10% price increase (and
magnifying your losses if the market is going
gain of $3,000 in contract value) means a futures
against your position.
trader made a 150% return on the capital required
to hold the position, however a 10% price decrease
results in a corresponding loss.

11
Tax Advantages Futures also allow a “pure play” with the
underlying commodity that simply is
Consult your accountant or the Canada unavailable with stocks, even those with strong
Revenue Agency for tax information. correlation. For example, a mining stock could
be considered as having exposure to the gold
Increased Opportunity
market. But it is not a “pure play” because
Futures trading appeals to those who embrace other factors exist, e.g., sector influence and
opportunity and freedom. For example, corporate management, that affect the value
futures trading does not discriminate against of the security but are not related to the
someone who wants to trade on the short side commodity’s price.
of the market. The margin and order-entry
requirements to sell short are the same as if you
Financial Protection
want to be long. You don’t have to “borrow” Futures trading has its roots in protecting
anything to get into a short position, and there’s against the risk of adverse price movement.
no uptick rule for selling short. Indeed, the markets began in the mid-1800s
as a way for commodity producers and users
Second, many futures markets—even U.S.
to “hedge” against prices going against their
stock indices—are open virtually 24 hours day
best interest. Today, companies worldwide do
from Sunday night through Friday afternoon.
exactly that, particularly with financial futures
You’re able to trade when it’s convenient for
contracts that cover stocks, interest rates and
you—or whenever global news prompts you to
currencies.
take action.

Asset Diversification

Futures allow investors to broaden the range

of asset classes held in their portfolios, thereby
potentially reducing risk and improving long-
term returns. According to a study published by
the CME Group, portfolios with as much as 20%
of assets in managed futures yielded up to 50%
more than a portfolio of stocks and bonds alone.

12
Basic Futures Trading Strategies

The most-often used trading strategies in the futures markets are pretty simple. You
buy if you think prices are going up or sell if you think prices are going down.

And, in futures trading, selling first is just as Here’s an example, using July 2106 soybeans
easy as buying first—the positions are treated trading at $13.00 per bushel in January 2016.
equally from a regulatory point of view. In January, you think soybean prices are likely
to rally into the summer, so you put up $4,000
The following two strategies are just a starting
in initial margin and buy a July 2016 soybean
point. For more advanced futures-trading
futures contract.
strategies, request the RJO Canada guide
“Introduction to Spread Trading.” Or, learn some Four months later, soybean prices have rallied
trading strategies for options on futures with the $1 per bushel and you decide to take your
RJO Canada guide “Introduction to Options on profits and close out your long position by
Futures Trading.” selling a July 2016 soybean futures contract.
That generates a profit of $5,000 (minus
Buy Futures commissions and fees*), or return on initial
If you expect a futures market’s price to be margin of 125%.
higher in the future than it is today, you would
buy a futures contract, or “go long.” If you are
right about both market direction and timing Price Value of
and the price indeed rises, you can then sell per 5,000-bu.
the same futures contract to collect your profit bushel contract
(minus commissions and other fees). January Buy 1 July $13.00 $65,000
soybean
futures
However, if you are wrong about the market’s contract
direction or your timing is off and prices April Sell 1 July $14.00 $70,000
ultimately fall, then you will take a loss when soybean
futures
you exit the position. And, because of the contract
leverage in futures, that loss could be greater Gain $1 $5,000
than your initial margin deposit.

*Commissions and fees from brokerage firm can be up to $99 per round turn with the vast majority of people paying significantly less. Your actual charges may vary
based on the service level you choose. See disclaimer on inside cover for detailed discussion.

13
Of course, there’s always the possibility that Selling a futures contract as your initial position
prices don’t behave as you expect. If soybean is just as simple as buying a futures contract. You
prices dropped $1 per bushel from January to believe the price will go down, so you sell. If you
April and you exited your initial long position ever traded stocks, you’ll be glad to know that no
at a loss, you would have lost your initial borrowing or loan fees are involved with shorting
margin of $4,000 plus an additional $1,000 (plus futures. You simply sell as easily as you buy.
commissions and fees*).
If you are correct in your market direction and
Price Value of timing and prices decline, then you can profit
per 5,000-bu. from your short position by simply buying the
bushel contract
same contract. However, if the market moves
January Buy 1 July $13.00 $65,000
soybean against your position and rallies, then you
futures would suffer a loss when exiting—and the loss
contract
could be more than what you put up to make
April Sell 1 July $12.00 $60,000 the trade.
soybean
futures
contract As an example, you believe in January that
Loss $1 -$5,000 soybean prices will fall into the summer. So,
you put up $4,000 in initial margin to take a
Sell Futures short July soybean futures position. By April,
the market has fallen $1 per bushel, which
The concept of selling something you don’t
equates to a $5,000 decline in the value of the
own is often a stumbling block for traders
contract. Because you shorted the market when
new to futures. But it’s easy to overcome.
the contract value was higher, you can buy it
Just remember that a futures contract simply
back at the lower price and make $5,000 (minus
represents the commitment to either sell or
commissions and fees*).
buy an asset at a future date. So when you sell
to initiate a position, all you’re committing
to is selling at that price in the future. In
the meantime, you don’t need to own the
underlying commodity or financial instrument.

Note: Commodity accounts are marked-to-market on a daily basis and if the account value
depreciates below maintenance margin requirements, a margin call will be generated so that
the client must bring the account value up to initial margin requirements.

*Commissions and fees from brokerage firm can be up to $99 per round turn with the vast majority of people paying significantly less. Your actual charges may vary
based on the service level you choose. See disclaimer on inside cover for detailed discussion.

14
 Price Value of
per 5,000-bu. ADDITIONAL
bushel contract RESOURCES
January Sell 1 July $13.00 $65,000
soybean
futures
contract
April Buy 1 July $12.00 $60,000
soybean
futures
contract
Gain $1 $5,000

However, if soybean prices rally Click for your RJO

$1 from January to April, your Futures PRO demo!
short position will show a $5,000 An exclusive and
sophisticated online
loss (plus commissions and trading platform
fees*) if you buy July futures to like no other with
exit the position. integrated tools to
seamlessly trade and
monitor the markets.
Test drive a demo
Price Value of today with a Free 100K
per 5,000-bu. simulated account
bushel contract with real time data &
January Sell 1 July $13.00 $65,000 execution.
soybean
futures Or, call 888-275-0027
contract to request your free
April Buy 1 July $14.00 $70,000 demo.
soybean
futures
contract
Loss $1 -$5,000

*Commissions and fees from brokerage firm can be up to $99 per round turn with the vast majority of people paying significantly less. Your actual charges may vary
based on the service level you choose. See disclaimer on inside cover for detailed discussion.

15
Get Comfortable with Futures

Futures Stocks
Represents A commitment to buy or sell something in the future at Ownership of a corporation
an agreed-upon price
Trading Traded on a regulated exchange Traded on a regulated exchange or through a dealer
association
Issued by A futures exchange writes the terms of each contract A corporation
and makes it available for trading
Maximum number No limit to the number of futures contracts that can be Set by the company’s charter; issuance regulated by filings
that can be traded with regulators
outstanding
Margin Requires deposit of about 5%-20% of the value of If purchased in a margin account, usually requires
the futures contract, depending upon price level and minimum initial deposit of 50% of the value of the security;
volatility the remaining 50% is considered a loan from the broker
who charges interest
Selling short As easy as buying Requires borrowing stock, if available, and selling when
price is rising
Timing Fixed expiration date, usually less than 18 months Stocks are perpetual instruments as long as the underlying
company remains solvent
Fundamental For commodities, research analysts provide views of Research analysts provide views of micro and macro
analysis supply/demand and other economic factors or physical economic factors that could affect values
conditions (e.g., weather) that could affect values

For financial futures, the same stock research applies

Technical analysis Traders chart price movements to analyze patterns Traders chart price movements to analyze patterns and
and support/resistance levels; this generates buy/sell support/resistance levels; this generates buy/sell signals
signals
Risk of loss Because the purchase or sale of a futures contract In terms of potential loss, a stock bought on margin works
requires only a small percentage deposit of the total the same as a futures contract
value of the contract, a client can lose more money
than the initial deposit A non-margined stock purchase requires a 100% deposit
and therefore represents the total potential loss

Provided for information purposes only

16
Additional Resources
Thank you for the opportunity to provide you with this educational material. Anyone can offer
online trading in online markets. But RJO Canada is not just anyone. We are specialists devoted to
delivering the best possible trading experience for our clients. Whether you want to trade on your
own or tap into the experience of our market strategists, you can do it all at RJO Canada, a leading
provider of futures brokerage services.

Open an Account Easily and Quickly:

By Phone: By Email: Online:
Montreal: 888-701-0071 [email protected] rjobrien.ca/account/open
Toronto: 888-275-0027
Winnipeg: 877-617-5542

RJO Futures Brokers

The The RJO Canada Market Strategists provide the experience and background to help you with
your trading needs, and assist you with reaching your trading goals.

Click to contact our team.

17 BEGIN TRADING NOW. Call: 888-701-0071 (Montreal), 888-275-0027 (Toronto), 877-617-5542 (Winnipeg) Click: rjobrien.ca/account/open
RJO Canada
1700-110 Yonge St
Toronto
ON M5C 1T4

Toronto: 888-275-0027
Winnipeg: 877-617-5542

rjobrien.ca

Futures trading and/or Foreign Exchange trading involves substantial risk, may result in serious financial loss, and
is not suitable for everyone. R.J. O’Brien & Associates Canada Inc. is a Member of IIROC and Member CIPF.

© Copyright 2015 R.J. O’Brien & Associates Canada Inc.

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