Trading Wheat Futures

If you are a new or beginning futures trader, I can go ahead and tell you that trading wheat futures is not for the faint of heart. I happen to have a very special place in my heart for wheat futures, as it was the first market that my wife traded alongside with me (ahhh, young love). Seriously, though, I had a trading account and taught my wife how to day trade wheat futures, and she was actually out-performing me by a long shot—this is no surprise to me, but it was a slight blow to the ego. But anyway, as of this writing (August of 2010), wheat futures have gone absolutely bananas, with some days being limit up, and some days being limit down. The most recent closing price was SIXTY CENTS lower than the previous close—that’s a $3,000 move in one day!!! For those who may not know the contract specifications for wheat futures, a wheat futures contract represents 5,000 bushels of wheat. Wheat is quoted in cents per bushel, so a one-cent move in wheat is equal to fifty bucks. Now think again about what I just wrote above—wheat just moved SIXTY CENTS LOWER this past Friday (August 6^th) to make it what’s known as a “limit down” move—that is equal to three-thousand bucks in one day worth of price movement. Suffice it to say, some people lost their freakin’ shirts, shoes, pants, and underwear on that drop. This is why I say, you don’t just roll up into the Wheat market as a rank amateur without using protective stops or even protective calls or puts to keep your position secure. The crazy thing about limit moves, however, is that basically “all bets are off” when it comes to stop-loss orders and so forth. In other words, if you are trading wheat futures and you get caught on the wrong side of a limit move, you are screwed, dude…there’s no way around it. You will not be able to get out of the market until it settles down and “normal” trading resumes (if there is such a thing).

So that’s one of the dangers of trading wheat futures (or any other type of futures contract for that matter), is that limit moves could be your demise. This is why I say that, even over stop-loss orders, I would recommend using protective options to hedge against potential losses. For instance, you may have been long on a 60-cent drop in wheat, but if you would have bought a long put option for protection, your losses in the wheat futures contract would be offset somewhat by the gains in the put option on such a dramatic price drop. I will say, though, having traded several positions with protective calls/puts, that the price movements in the futures versus the option are not always equivalent. In other words, just because you had a 60-cent drop in a long wheat futures contract does not mean that you automatically have a 60-cent gain in the wheat put option’s price, especially if the put is out-of-the-money. Since most people establish their protective put at or near their entry price on the long futures contract, there may not be a “tit-for-tat” hedge against adverse price movements—in other words, it may not be an exact “net-zero” hedge in extreme cases like these. But, I’m getting into all kinds of hypotheticals, and the truth be told, you just have to trade with some common sense and don’t try to “go commando” with the markets. One thing that I realize now is that a lot of the early wheat futures trades I did were basically playing with fire, and I didn’t even realize it or understand the magnitude of it at the time—I was really naïve about a lot of these things as a beginning trader. Now, though, I know all too well how powerful the leverage of the futures markets can be. So I recommend to the beginning trader who is interested in trading wheat futures, just be sure to start small (one contract only), play it conservative, and use protective stops or options to hedge against losses. SteadyHubs out.