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Fundamentals of Futures and Options Market and Characteristics to Watch out For

by | Futures 101

In contrast to conventional equities trading, the fundamentals of futures and options market products are inherently diverse. One’s primary concern is to not simply buy low and sell high ― it is to buy low and sell high (or vice-versa) on a finite timeline. Due to the fact that futures and options contracts are perishable items, a broad spectrum of unique factors impacts asset pricing.

Active trading is a challenging endeavor. While the markets are filled with opportunities, they are also littered with pitfalls. In order for a trader to be successful over the long haul, it is important to have an understanding of a market’s underpinnings and behavior to watch out for. In this article, we will take a quick look at the essential fundamentals of futures and options market structure.

What Is A Market Driver?

A market driver is a fundamental or technical factor that brings participation to the marketplace. It may be almost anything under the sun, coming as a routine function or complete surprise. Market drivers stimulate the process of price discovery by enhancing order flow, and subsequently, volatility.

In any discipline, it is impossible to fully account for an unknown-unknown. So, successful traders do the next best thing ― they prepare for possible contingencies. This is done by accounting for the presence and potential impact of these fundamentals of futures and options market dynamics:

  • Economic Data Release: Scheduled economic data releases such as quarterly GDP, a seasonal WASDE report, or the weekly EIA crude oil inventory brief can immediately spike participation in a related market. Referencing an economic calendar before initiating trade can take the mystery out of planned data releases.
  • News Cycle: Breaking news items or the day’s headlines often generate public interest and attract investors to the markets. Staying current on everything from global politics to weather patterns is essential to identifying potential market drivers before they present themselves.
  • Obvious Technical Levels: It is no secret that a majority of traders and investors utilize some form of technical analysis in their trading. So, it stands to reason that specific support and resistance levels are likely to draw added attention from market participants. Fibonacci levels, moving averages, big round numbers, or overbought/oversold oscillator values are all capable of stimulating order flow and driving markets.

As the old saying goes, victory loves preparation. Staying abreast of the economic calendar, breaking news, and the presence of key technical levels are important aspects of competent derivatives trading.

Ready to think like a technical trader? Download our free guide to learn how to identify chart formations and take action when the time is right.

Market State Is Key: When In Doubt, Stay Out!

The presence of market drivers, or lack thereof, can lead to a plethora of different scenarios. Too many can lead to chaotic, whipsaw trading conditions; too few can lead to stale, compressed markets. Understanding when to trade and when to stay on the sidelines is an integral part of achieving longevity in the futures/options markets.

One of the important fundamentals of futures and options market study is market state. Being able to identify market state in real-time is Futures Trading 101 ― if you don’t know what a market is doing, then falling victim to what it may do becomes a possibility. Below are the three distinct market states to be aware of when trading futures and options:

  1. Trend: If the “trend is your friend,” then fading a trend is the enemy! Being on the wrong side of a trending market is to be avoided at all costs. Fortunately, spotting a trend isn’t too difficult; it consists of a series of periodic higher highs or lower lows.
  2. Consolidation: Shrinking periodic ranges and compression chart patterns are a few obvious signs of a consolidating market. Consolidating markets are often the precursor to violent breakouts in price, the proverbial “calm before the storm.” In the event that a market becomes compressed, be aware that it won’t stay that way forever and plan accordingly.
  3. Liquidity: Market liquidity is essential to efficient trade. When markets exhibit solid depth, the trader enjoys advantages such as tight bid/ask spreads and reduced slippage. In the event that participation lags and markets become thin, the limited order flow undermines trade execution. For most trading strategies, thin markets are best avoided.

Among all of the skills successful traders possess, being fluent in the identification of market state is near the top of the list. It can be incredibly frustrating ― not to mention expensive ― to implement a trading strategy that is not tailored to the prevailing market conditions. Your strategy for futures and options must complement market state; if it doesn’t, success is likely to be fleeting.

Understanding The Fundamentals Of Futures And Options Market Pricing

At first, identifying market drivers or market state may seem to be monumental tasks. However, through a bit of study and some live-market experience, applying these concepts can become second nature.

A great reference for all things futures and options is Daniels Trading’s online educational suite. Featuring informative blogs, trading guides, and webinar tutorials, it has everything you need to build a rock-solid analytical foundation.

Ready to think like a technical trader? Download our free guide to learn how to identify chart formations and take action when the time is right.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

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