Rice Futures Trading Basics

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Contents

Rice Futures Trading Basics

Rice futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of rice (eg. 2000 hundredweights) at a predetermined price on a future delivery date.

Rice Futures Exchanges

You can trade Rice futures at Chicago Board of Trade (CBOT).

CBOT Rough Rice futures prices are quoted in dollars and cents per bushel and are traded in lot sizes of 2000 hundredweights (91 metric tons).

Exchange & Product Name Symbol Contract Size Initial Margin
CBOT Rough Rice Futures
(Price Quotes)
RR 2000 hundredweights
(Full Contract Spec)
USD 2,430 (approx. 9%)
(Latest Margin Info)

Rice Futures Trading Basics

Consumers and producers of rice can manage rice price risk by purchasing and selling rice futures. Rice producers can employ a short hedge to lock in a selling price for the rice they produce while businesses that require rice can utilize a long hedge to secure a purchase price for the commodity they need.

Rice futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable rice price movement. Speculators buy rice futures when they believe that rice prices will go up. Conversely, they will sell rice futures when they think that rice prices will fall.

Learn More About Rice Futures & Options Trading

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

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Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Rice Options Explained

Rice options are option contracts in which the underlying asset is a rice futures contract.

The holder of a rice option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying rice futures at the strike price.

This right will cease to exist when the option expire after market close on expiration date.

Rice Option Exchanges

Rice option contracts are available for trading at Chicago Board of Trade (CBOT).

CBOT Rice option prices are quoted in dollars and cents per bushel and their underlying futures are traded in lots of 2000 hundredweights (91 metric tons) of rice.

Exchange & Product Name Underlying Contract Size Exercise Style Option Price Quotes
CBOT Rice Options 2000 cwt
(Full Contract Specs)
American N.A.

Call and Put Options

Options are divided into two classes – calls and puts. Rice call options are purchased by traders who are bullish about rice prices. Traders who believe that rice prices will fall can buy rice put options instead.

Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.

Rice Options vs. Rice Futures

Additional Leverage

Limit Potential Losses

As rice options only grant the right but not the obligation to assume the underlying rice futures position, potential losses are limited to only the premium paid to purchase the option.

Flexibility

Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.

Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a rice option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.

Learn More About Rice Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

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  • Futures Trading Basics

Futures trading has become an increasingly popular instrument for investors in recent years, particularly off the back of a wider media profile for derivatives trading in general. As traders increasingly turn their attention to high-risk, high-reward, leveraged instruments, futures are steadily becoming a staple of the investment portfolio mix.

Even the most successful futures traders were once beginners. If you are new to commodities, it’s important to start with the basics and learn the ins and outs of the market.

What is a futures contract?

A futures contract is a legally binding agreement between a buyer and seller to receive (in the case of a LONG position) or deliver (in the case of a SHORT position) a commodity or financial instrument sometime in the future, but at a price that’s agreed upon today. These contracts mature at a particular point in the future and are identified by reference to that date – for instance, a July Corn futures contract or a December S&P 500 stock index futures contract. The ability to make or take delivery of the underlying commodity at expiration creates a strong tendency for cash and futures prices to react to the same economic factors and move in the same direction by roughly equal amounts.

The process of futures trading

Futures trading takes place at centralized exchanges, mostly on electronic trade-matching platforms – such as the CME Group’s Globex system – but also, to a lesser extent, in open-outcry, auction-style trading pits. In every transaction, the exchange clearinghouse is substituted as the buyer to the seller and the seller to the buyer, thereby guaranteeing performance and eliminating counterparty risk.

Customers who trade futures are required to post margin deposits with an exchange member firm which, in turn, must deposit margin with the exchange. Margins are not payment against the market value of the commodity represented by the futures contract, but rather are performance bonds – good-faith deposits – to ensure the ability of market participants to honor their financial commitments and cover any obligations which might arise out of their trading activities.

Buying a futures contract is called taking a LONG position, while selling a futures contract is referred to as taking a SHORT position. A long futures position profits when the futures price goes up, and a short futures position profits when the futures price goes down.

Maturing futures contracts expire on specific dates, usually during the contract month. At any time before the contract matures, the trader may offset, or close out, his or her obligation by selling what was previously bought or buying what was previously sold. By offsetting an open futures contract, a trader is relieved of any obligation to make or take delivery of the underlying commodity or financial instrument. This is made possible by the fact that futures contracts have standardized terms and trade on centralized exchanges. The vast majority of futures contracts, in fact, are closed out by offsetting market transactions prior to their maturity, rather than through the delivery process.

Futures exchanges, clearinghouses and market professionals

U.S. futures exchanges typically have operated with a trading floor where traders and brokers compete on equal footing in an auction-style, open-outcry market and where they communicate by voice and hand signals with others in the pit. Customer orders coming into the futures pit were delivered to floor brokers who executed them with other floor brokers representing other public customers or with floor traders (known as locals) trading for their own accounts.

However, trading by means of electronic order matching has grown dramatically in recent years, as more and more market participants have expressed a preference for the speed, convenience, and extended hours of electronic trading. Some markets have abandoned open-outcry altogether in favor of screen trading.

The clearinghouse system is an important aspect of the financial integrity of the futures market. Traditionally, each U.S. futures exchange has had its own clearinghouse to act as the master bookkeeper and settlement agent. In every matched transaction executed through the exchange, the clearinghouse is substituted as the buyer to every seller and the seller to every buyer. The clearinghouse deals exclusively with clearing members and holds each clearing member responsible for every position it carries on its books, regardless of whether the position is being carried for the account of a non-member public customer or for the clearing member’s own account. The clearinghouse does not look to public customers for performance or attempt to evaluate their credit worthiness or market qualifications. Instead, the clearinghouse looks solely to the clearing member carrying and guaranteeing an account to secure all margin requirements and payments.

A futures brokerage firm – known in the U.S. as a futures commission merchant (FCM) – is the intermediary between public customers and an exchange. Some FCMs are part of national or regional brokerage companies that also offer securities and other financial services, while other FCMs offer only futures and futures options. An FCM must maintain records of each customer’s open futures and futures options positions, margin deposits, money balances and completed transactions. In return for providing these services and for guaranteeing the accounts carried on its books to the exchange clearinghouse – an FCM earns commissions. By U.S. law, an FCM is the only entity outside a futures clearinghouse that can hold the funds of futures customers.

Federal law also requires an FCM to segregate customer funds from the firm’s own funds at all times. The funds in segregation must be sufficient to meet the firm’s obligations to customers, and the FCM may not use those funds to satisfy any of its own obligations to creditors. Furthermore, an FCM must deposit its own funds to cover any customer-account deficits until the customer remits sufficient funds. Segregation of funds is designed to protect customer funds and make it possible to identify such funds in the event of an FCM’s default or bankruptcy.

Futures market participants: Hedgers and speculators

Futures market participants can be divided into two broad categories: Hedgers, who actually deal in the underlying commodity or financial instrument and seek to protect themselves against adverse price fluctuations, and speculators (including professional floor traders), who seek to profit from price swings.

The futures markets exist to facilitate the management of risk and are thus used extensively by hedgers – individuals or businesses who have exposure to the price of an agricultural commodity, currency, or interest rate, for instance, and take futures positions designed to mitigate their risks. This requires the hedger to take a futures position opposite that of his or her position in the actual commodity or financial instrument. For example, a soybean farmer is at risk should the price of the commodity fall before he harvests and sells his crop. A short position in the futures market will return a profit when the price of soybeans declines, and the hedger’s profit on the short futures position compensates to some extent for the loss on the physical commodity. Speculators are attracted to futures trading purely and simply because they see the opportunity to profit from price swings in commodities and financial instruments. Speculators take advantage of the fact that the futures markets offer them access to price movements; the ability to offset their obligations prior to delivery; high leverage (low margin requirements); low transaction costs; and ease of assuming short as well as long positions (short futures positions are not subject to any uptick rule or broker/dealer interest charges). In pursuit of trading profits, speculators willingly take risks that hedgers wish to transfer. In this process, speculators provide the liquidity that assures low transaction costs and reliable price discovery – market characteristics which, in turn, make futures markets attractive to hedgers.

Regulation of the futures markets

The Commodity Futures Trading Commission (CFTC) is the federal agency that regulates the futures markets. The mission of the CFTC, which was created by Congress in 1974, is to protect futures market participants against manipulation, abusive trade practices and fraud; to guarantee the integrity of futures market pricing; and to assure the financial solvency of futures brokerage firms, exchanges, and clearinghouses. The CFTC’s oversight and regulation help ensure that futures markets provide effective price discovery and risk-transfer opportunities.

CFTC regulations designed to protect customer trading funds are impressive. The single most significant safeguard is that no brokerage company is permitted to hold customer funds in any of its corporate bank accounts. Rather, futures brokerage companies are required to maintain customer funds in bank account that are totally separate from their own bank accounts.

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