The futures market involves parties contracting to purchase or deliver a certain quantity of an asset at a certain price at a specified point in the future. Futures contracts therefore do not involve an exchange of assets during the life of the contract, and nothing is bought or sold at the time of the purchase or sale of futures contracts, rather, they involve a promise to buy or sell the asset under contract.
When a futures contract is settled, there need not be the exchange of the asset at that point either, and most often the asset does not change hands, meaning that it not bought or sold at all. Parties may and often settle the contract for cash, meaning that the party in the favorable position receives cash from the party in the unfavorable position.
If you buy a contract for platinum, in other words are long the contract, and the value of the contract is higher at expiration than what you paid for it, the seller of the contract can deliver the platinum to you, in this case 50 ounces of it per contract, or they can simply give you the difference between the prices in cash. Then, if you wish, you can buy the 50 ounces of platinum on the spot market, or not.
Most of the time, the parties are not interested in acquiring or delivering actual platinum, although when futures contracts are settled for cash, that does not matter. If you were only buying 50 ounces of platinum you would pay a much bigger spread anyway, as this is not a particularly large order and only those transacting in very large quantities of an asset can get a price close to the spot market.
Not Having to Exchange Platinum Makes Trading More Efficient
So the fact that platinum generally does not have to be delivered with platinum futures contracts is a huge benefit to a lot of futures traders, especially if they are not trading in very big quantities, like for instance those who actually want the platinum for business inputs, or large institutional investors would.
A big benefit of platinum futures trading is that this offers even the smallest futures traders spreads that are by their nature well superior to even the biggest physical platinum dealers, as the spot market involves additional costs and margins that simply are not required if futures contracts are settled in cash.
While platinum futures contracts only run for a period of 3 months generally, this does not mean that one’s investment in platinum futures need be limited to this period, as one can stay in a position for as long as one likes by simply rolling over the contracts into a new one, indefinitely.
While there is a bit of slippage that usually results from rolling over contracts, meaning that the new position does not exactly replicate what would occur if the contracts did not need to be rolled over, the results are pretty close and arbitrage keeps the two different contracts pretty close to one another.
For those who actually want the platinum, the other party in the contract may not prefer to deliver it should they have to buy it on the market to do so, in other words not being a supplier of it, so settling in cash removes this requirement and the additional costs to traders that it would represent.
The whole idea behind futures is to be able to speculate or hedge on the price of a commodity like platinum in the future, and cash settlements allow for all participants to easily achieve their particular objectives in a way that is most efficient and allows for the benefits of the added liquidity of getting many more people involved in the trading, those with no real interest in possessing or delivering actual platinum.
The Real Benefits for Platinum Speculators
These days, one can easily speculate on platinum without actually taking delivery or worrying about taking delivery of any platinum through several means. One may invest in a platinum based exchange traded fund or ETF for instance, which does involve shares in actual platinum holdings, if this is felt to be important in some way.
Investing in a platinum ETF also has the benefit of limiting one’s risk exposure to price fluctuations in platinum, since ETFs do not offer the large amount of leverage that platinum futures and platinum contracts for difference can.
Some ETFs offer a bit of leverage, many do not offer any. However, one can manage one’s risk exposure even with the highest amount of leverage by refraining from exposing one’s portfolio to more leverage than one is comfortable with, although this approach takes real discipline.
If one has a trading advantage though, one may seek to take advantage of the large amount of leverage that platinum futures offer, where one can control a position in platinum by only putting up a small fraction of the ultimate value of the contract. One can therefore leverage their position by as much as 10 times versus the amount of platinum they could buy.
This means that both gains and losses will be magnified by this amount, so of course greater care needs to be exercised when trading platinum futures to ensure that the risk of the position is properly managed. Even with a trading advantage, traders must ensure that they can handle the drawdowns in their portfolio that normal trading produces and not overexpose themselves to this risk.
Given that most investors buy platinum in order to speculate on it, meaning that they are seeking capital gains through their position being closed at a profit, the ability to leverage positions to the degree that platinum futures allow can be a big advantage.
Platinum futures also don’t involve borrowing money like other forms of leverage require, as the only thing a trader need worry about is being able to make and maintain the required deposits for their contract, which are settled daily. Gains and losses are therefore realized on a daily basis and one can easily close out one’s position in platinum any time the market is open, which is 23 hours a day 5 days a week.
It’s Just as Easy to Go Long as Short with Platinum Futures
One not limit oneself to just speculating on increases in prices of platinum when one trades platinum futures, nor does one need to worry about borrowing securities from others when one seeks to speculate on price decreases, like is the case with stocks or shares in ETFs.
Since there is nothing bought or sold during open futures contracts, only promises to buy and sell, you aren’t taking possession of anything with futures contracts, so there’s no need to sell first in other words. You are simply placing a bet on the future direction of the asset, where you can go short so to speak without having to sell short, borrowing something to be bought and returned later. This makes trading more efficient.
If the price of platinum can be speculated on with long positions, they can just as easily be speculated on from the short side, where one has the expectation that the price will decline and seeks to profit if the prediction or the analysis comes to pass.
There are some who think that it is somehow distasteful for people to take short positions in securities, although this is not only acceptable but healthy for markets, as it adds a lot of liquidity, bringing in many people who would not otherwise participate.
With futures, a contract absolutely requires parties to be on either side of the trade, one speculating or having an interest in the price going up and one on the price going down, otherwise these contracts would never be agreed to.
There’s nothing that says that trading securities need involve betting that something will go up, and that there is anything that makes this more valid or preferable over betting something will go down, and any biases that traders or investors may have about this are based upon a fundamental misconception of financial markets.
While the stock market can be said to have a strong bias toward the long side, mostly from having so many investors committed to that side, and we may even see rules restricting short selling at times, with futures, there is no real distinction between the long and short sides, no rules involved which limit one or the other, and traders are completely welcome to take either side as they see fit.
Considerations In Platinum Futures Trading
Not restricting oneself to one side or the other of a market allows for both the maximum amount of potential for capital gains for all parties regardless of their outlook on the platinum market, especially with the large amount of leverage that is available to platinum futures traders.
With amplified potential for gain comes amplified risk as well, and traders need to tread carefully when they select higher leveraged positions, even though one not necessarily expose themselves to the full leverage and full risk involved in platinum futures trading.
Instead, one can keep larger amounts on deposit to deal with price fluctuations, to the degree that one is comfortable. This means trading less contracts per amount on deposit than one could, and in some cases, a significantly less amount.
Futures traders can also manage risk by setting tighter stop losses on their trades, such that any given trade will only have the potential to produce smaller losses, small enough for one to be comfortable with as a percentage of their trading funds available.
This still requires traders to be profitable overall though, in other words to trade with an advantage, to have one’s trading skills be sufficient to produce a positive expectation overall. The futures market is rife with skilled traders though and to be in the upper half of this group skill wise is no easy task, and at a minimum generally requires sufficient experience and dedication.
Many futures traders jump in without a good enough idea of the challenges that successful platinum futures trading involves, and end up making their lessons more expensive than they should have been, if they had traded with smaller amounts prior to establishing whatever advantage they may think they have.
Many traders do find success trading futures though, although in many cases the money flows from the more to less skilled overall, like it does with poker players over time.
Platinum is already pretty volatile and therefore risky, and the high amount of leverage that platinum futures trading offers can add greatly to this, so it becomes even more important to ensure that you don’t expose yourself to unacceptable losses when seeing to sufficiently master this form of trading.