I don’t know much about the world of options trading. It’s about buying and selling contracts that lock in future transactions, as I understand it. So if you’re going to sell 10,000 pork bellies later this year you may sell a futures option contract on those bellies for maybe $500 a belly. If commodities investors decide there will be a shortage of pork bellies, but your delivery date will be met, then maybe whoever bought your contract will sell it to someone else for $550 a belly, making a profit before the bellies are bought and paid for.
The stock market has something similar to commodities trading. If you think a stock price will be trading around $50 a share in a few years (or months) you may be able to make a profit if you can buy them for less before then. But you can pick up some extra money if you sell an option to someone else to buy those shares from you at $48 when everyone else has to pay $50.
Options contracts are all about someone getting a better price than the market is willing to pay. These deals have to be arranged in advance and at least one person will always make a profit unless they have to sell their investments too soon to cover some other losses.
The commodities trading industry was featured in the classic Dan Ackroyd/Eddie Murphy movie “Trading Places”, where they became fabulously wealthy by stealing orange futures information and cornering enough of the market before a government report was released. It’s a great movie that pokes fun at racism and high finance snobbery.
According to this New York Times article the great Chicago commodities trading marketplace will be closing down this year because all the commodities are now being traded by computer. Some of the pit traders will try to join the Standard and Poor 500 index trading pit on the stock exchange. According to the article they may not be welcome there.
Trading in stock options is not exactly the same as trading in commodities options but these old time traders may come in with some advantages over new stock options traders. At least they will know what it is like to compete in a tight space, if they were in the trading pits back when they were still crowded.
Having read a few options trading Websites I know enough to say that I probably would not survive in this world. That is because I can’t get my head around how you figure out what a stock would trade for in the future. I guess you could look at the history of the stock market and maybe guess whether an industry is going to have a good year or a bad year.
In “Trading Places” they made it sound like the commodities traders have to guess how well supply matches up to demand. So if you think that the orange industry will have a bad year then you will buy futures on the assumption that the price of oranges will be high.
But there is no supply and demand in stock index funds. You can buy and sell as many shares in a mutual fund as you need to. The Standard and Poor 500 index itself may have a limited number of shares in the 500 stocks that are tracked but no one is going to buy them all.
Stock prices depend more on the profit forecasts for the companies, or maybe the release of new products. If you’re going to move into the S&P 500 futures market you have to study a lot of companies to see which ones are on a real growth track. I honestly don’t see how these guys do it.