When one buys futures and makes money like on oil futures, who loses money?

Question

With all these people in transportation buying futures to hedge their costs and speculators now jumping in the game to make a quick buck who is losing?

How far out are the prices good for? If I buy a future what is it called? If I buy said future, for a barrel of oil to be (as some undoubtably did) $140.oo one week ago when is it supposed to be $140.oo a barrel? When ever I specify? Or 6 months down the road, the next day or week, what?

If I buy the futures at said $140.oo per barrel and made a bundle, who loses? And could the masses of people who are now buying these futures to make money off the gas prices causing the oil people to raise the prices because they are the ones who pay the losses? How often are the prices on comodities changed?

Answer 1

Whoever was on the other side of the trade loses money - in this market that is a lot of money.

Buying futures is an EXTREMELY RISKY proposition. You could be leveraging 100 to 1. Leverage works both ways.

Futures trade so fast, and are so complex for even the savvy stock/ options trader, it is hard to grasp sometimes. The key is to understand what is driving prices (below).

Commodity prices change 24-7, 365.

Gas and oil are completely different trading vehicles. There are different oil contracts (different grades of oil - "light sweet crude" is the high demand oil used for gasoline, "sour crude" used more for industry. Saudi Arabia produces most of the sour crude). There are gas contracts (gasoline, diesel, and also non-oil natural gas or "nat gas"); there are different months, and contract or strike prices.

Options may be an alternative way to play on commodities.

One of the problems I have found in the options markets is that the premiums (cost to buy or sell) is very very expensive. Meaning the prices of the commodity really has to soar in order for you to break even.  

Example:

http://finance.yahoo.com/q/op?s=USO

July 110 option contract (ISY GF) for US Oil (USO) (an ETF) traded earlier today at $5.00 and change (closed today at 6.30).

http://finance.yahoo.com/q/op?s=USO

I bought some for a client recently and today (06-26-08) the USO closed at $113.12. You would think, hey, he made $3.12 for the client because the option strike ($110) is in the money by $3.12, right? We'll yes and no.

The problem is that the cost of the option was about $5.00. This means that the USO needs to climb to $115 ($110 strike + cost of option, $5.00) to break even. The intrinsic value of the option is now $6.00 and change. So to buy in now, the USO needs to go to $116 before you break even. With the USO at about $113.00, oil (USO) can go up $2.99 and you could still lose money on the option.

I got the client out of the trade with a small profit because the risk/ reward ratio isn't there in my opinion - at least not now. In the future maybe, but all options expire at some point, so you have to pick the month and strike price and the right premium to make money.

Some option terms for the above:

intrinsic value

http://www.investopedia.com/terms/i/intr...

strike price

http://www.investopedia.com/terms/s/stri...

  

(option) premium

http://www.investopedia.com/terms/p/prem...

in the money

http://www.investopedia.com/terms/i/inth...

There are far fewer speculators in oil for example that the media wants people to think. If you just read the news (Reuters.com for example) (forget the 6:00 or 'evening news' they don't know squat about what is really going on and what is moving markets).  

The Commodity Futures Trading Commission (CFTC) said recently on CNBC that 75% of all oil futures are trading for delivery (of oil). This is buying and receiving oil, as opposed to flipping a buck.

There was a separate investigation that said that there is no evidence that speculators are driving the market. Everyone in Washington and the liberal media wants us to think that high oil prices are "Bush's fault" or being driving by speculators.

WHY?

It is an election year.

Congress wants to look good in front of their constituents that they are being "tough on oil."

The left media hates Bush anyway, and Blames him for everything, even though the reality is that US Gov does not control oil prices, the free global market does.

You can regulate all you want in the USA on oil trading. You cannot regulate global demand and limited supply. The people who are ballsy enough to be trading oil futures for non-delivery (cash settlement) can just go to any overseas market and resume trading. The USA can't regulate or control the global markets.

So what is really driving oil prices?

Oil is being driven up by demand (USA, China, India), short supply (everyone), threat of supply cuts (Libya); attacks and worker strikes in Nigeria on Chevron's big Light Sweet Crude supply; threats of attacking Iran to take out their nuke pwr facilities (by Israel and or USA); concerns that Iran may retaliate and attack via suicide boats vs US war ships in the Gulf to disrupt oil supply and drive oil prices higher.  If this happens 50-90% chance (when?) oil could easily go to $200+ bbl.

Iran has flirted w/ gun boats over the last year w/ US war ships in the Gulf. Iran has said it wants to wipe Israel off the map. Israel has said if no one does anything to stop Iran (nuke production), they will do it. Last week, Israel used 100+ military aircraft to do dry runs over Iran to see if they could take out targets in Iran. This could create a major impact on oil prices like we have never seen. I think there is a very good chance of this happening since Iran has said (today, 06-26-08) that their "enemies" (USA and Europe - EU) 'can do nothing to stop them' (from developing nuke energy). When is the question.

A weak US Dollar (what most commodities such as oil are priced in) doesn't help either.

The FED wants to raise interest rates which would increase the US Dollar and they think should lower crude oil prices - maybe.

The result could also worsen the US Housing/ Credit Crisis, increase unemployment, decrease consumer spending, and help the US economy into a full recession - more likely.

Should we (US Gov, The People, The EU, and the rest of the free world) allow oil prices to soar?

After think about this, and hearing many arguments, I think we should not attempt to regulate (control) oil prices (impossible really). We should allow oil to go through the roof.

Why?

MAJOR INCENTIVE (the kick in the a**) we need to spend the money and develop our alternative energy to finally get off our foreign oil dependence (which by the way, the USA buys 50% of its oil from Canada and Mexico).

Because of higher gas prices at the pump, people (in the USA) are already driving less, there is an increase in public (mass) transportation use, they are dumping their gas hog SUVs, buying more fuel efficient cars, and hybrids. This is the long term trend that will benefit any country dependent on foreign oil.

Can you imagine if we could say, F the middle east - we don't need your oil any more, we are using our own clean burning fuels. Oil prices will plunge (decreased demand), the US economy would soar, and even the environment would improve.

The USA could have done this back in the early 1970's when this first major oil crisis hit the USA. But the US gov did nothing, US auto manufactures did little, and this tiny car company in Japan (Toyota) was turning out high fuel economy cars.

Where are we today?

Same place, but worse than the 1970's.

- Oil prices all time record high.

- Toyota beating all the US car manufactures.

- General Motor's stock at nearly a 53 year low (1955) @ $11.43

- Chrysler denies bankruptcy rumors.

- Ford has borrowed $26 Billion in 2006, pledging virtually every asset it has to stay afloat, and in 2008 says, having a hard time making payments on the loans.

Other ways to trade?

You could also look at these ETFs for trading. Beware they are VOLATILE!

Ultra Oil & Gas ProShares (DIG) - 2x long

UltraShort Oil & Gas ProShares (DUG) - 2x short

iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) 1x long

United States Oil (USO) - 1x long

United States Natural Gas (UNG) - 1x long

Answer 2

You pay for any trade you make and that fee makes a lot of wall street thugs rich. The traders work with the money of other people and take a fee, even if you loose. The entire house of cards called stock market is just that, an illusion of real value, where non is. It works great for a while like any pyramid scheme and then goes kaput. Lets say you actual double your money in US$, but at the same time the US current looses half its value. You end up with nothing but a fee you paid for trading.

What is, if the US$ doubles in value in 1 year, oil in US$ will be around the 80$ level.

Or technology finally gets motors in the cars, using half the gas (they are already on the market). Oil will be cheap again for a while.