Oh for fuck’s sake!

Futures allow traders to speculate on what the price will be at a certain date. For example, if oil currently trades at $40, but a trader believes it will increase to $50 in two months, they can use futures to engineer a profit. If the price does reach $50 in two months, they can immediately sell for a $10 profit. If it falls short of $40, the contract is worthless.

No, futures are symmetric. Price drops to $30 in the above example and you lose $10 a barrel.

It is options which are asymmetric. They do expire worthless if out of the money.

Seriously, someone writing the newspapers should know the difference.

By agreeing to buy one type of oil contract at the end of the day and selling another, they profited when the price went into freefall. But they hit the jackpot twice: as futures prices plunged into negative territory, the traders were reportedly paid huge sums for buying contracts they had already agreed to when prices settled at -$37.63 at the end of the day.

And what the hell does that mean? Of course they were paid for their contracts. Futures are – in near all markets at least – cash settled.

8 thoughts on “Oh for fuck’s sake!”

  1. That’s the Sunday Times too. Are they usually this bad? Mixing up futures and options is the kind of thing that should be very hard to get wrong – you either understand the basics of them in which case you would get this right, or you don’t understand them and do a quick Google whereupon you’ll immediately be reminded of which is which. To cock it up, you need to think you understand them but actually don’t, which is a big red flag.

    “By agreeing to buy one type of oil contract at the end of the day and selling another” is the kind of language that is written to suggest the truth of the matter is quite complicated and the journalist is doing the world a favour by simplifying it for us all (dear reader, you do not need to know what the two types of contract actually were, as over your head it will go) but I am suspicious they simply didn’t understand this bit either. Wonder what was intended by “hitting the jackpot twice” in this context.

  2. It somehow doesn’t surprise me that somebody writing for the London Times doesn’t understand the difference between futures and options. It’s the perfect illustration of Gell-Mann amnesia.

    Prices went negative, (in part, but only in part), because NYMEX WTI oil futures are physically settled (futures requires delivery of the actual physical stuff) … “Cash” settled futures are a relativly recent phenomenon

  3. @dcardno That’d be funny, but no. 😉

    More the scenario where a bunch of smart cookies ( the article dubs them “armchair traders” ) spotted a hole where a gamble on a large drop in price would net them big time and took a large gamble position. And then the price crashed, instead of just dropped below treshold…

  4. The journo has had. several months and many articles, especially in the US specialist press, to get his /her head around how this could have happened.
    And still makes a pig’s ear out of what, basically, is plagiarism.

  5. They’re probably getting confused because one of the interesting bits about this story is the use of TAS (trade at settlement) orders as part of the fun and games. TAS orders allow buyers and sellers to be matched in a closing auction at the end of the day.

    Sounds like the case is being made that they were “Banging the close” by buying TAS and then aggressively shorting to trigger stop-loss TAS sales… all on a panicky (to say the least) final day of trading.

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