Futures and Options Trading Analysis for Desklib

FUTURES AND OPTIONS (FIN60804)
1

Introduction
In a trade simulation game such as this one, a demo account is created in http://www.plus500.com.my then
transactions are made for 4 different contracts (Ni, Pan & Poteshman, 2008). The contracts are included from four
different asset class categories; the contract includes open position and then subsequently close positions to realize
profits or loss. Trading in virtual account with virtual money has enabled understanding related to technical analysis
and trading strategy and fundamental analysis has been ignored in totality, this can be used for future trading.
Technical analysis using candlestick patterns has been undertaken. The transactions were conducted to provide a
hedge position against market condition for index, forex, equity futures and commodity. Each transaction has been
analysed with the concept from Contract for Differences (CFD) along with the risks involved ( Xing, Zhang & Zhao,
2010). Risks in futures considerations are generally higher compared to equity shares as downsides can be
considerable.
Analysis
Trading in equity, forex, commodity or future and options market requires some knowledge of technical analysis. In
all types of trading, the fundamental underlying factor has to be known and understood, which is of demand and
supply factors (Goyal & Saretto, 2009). Technical analysis encompasses understanding of price and price related
behaviours. A contract for difference (CFD) is a contract between an investor and an investment bank. CFD and
trading in futures seem to be similar product categories. When the contract is drawn to close, the parties to the
contract exchanges difference between the opening and closing price for the specified financial instrument such as
forex, commodity, equity futures and so on. CFDs allow investors to gain economic exposure to a listed company for
a fraction of cost, which is need in buying of shares (Brown, Potoski & Van Slyke, 2008). In these cases investors do
not need to pay stamp duty, but only takes a bet for buying in longer position or selling in short position.
In the current analysis, transactions have been done for the following trades, a depiction of which is given in the
attached figure and the description follows;
Justification for each trading transactions and their outcome has been justified as below;
1. Equity F/O: On 17/10/2018 Buy position of Arcelor Mittal where loss is RM-473.85
2

Figure 1: Analysis of Arcelor Mittal Price
Figure 2: Trading Picture of Arcelor Mittal from Plus500
The above trades have been conducted by analysis of past trends prevailing in the market. Analysing the first trade of
Equity F/O of Arcelor Mittal, it was seen that the future contract price of the Company had risen in the past week.
Technical analysis of the future price reflects bullish candlesticks, which then gradually reversal in market trend.
There is a strong support level of the future price at 24.75. The price, at which the contract Buy was undertaken, was
estimated to rise when the contract will be closed towards end of the day. However, the Future price of Arcelor
Mittal closed at a low, which led to the loss. The contract was entered into for 470 shares estimating that the price for
the futures will be 25.30, but the price upon closing came down to 24.98. The position was estimated to yield better
returns however, the downside risks was considerably low when compared against equity markets (Chang, Hsieh &
Lai, 2009). In the equity markets, purchasing 470 shares would have required considerable amounts of funds,
3

diversification would have been difficult. In futures market, easily exposure to a large cap well-known company
could be opted for at a nominal rate of 25.19 only. The purchasing of the contract was expected to provide a leverage
position in the market by setting a level price. However, the contract price fluctuations in the futures market led to
the balancing of loss.
2. Equity F/O: On 17/10/2018 Buy Capita where RM-2077.37
Figure 3: Analysis of Capita Price
Figure 4: Capita's Analytical Data from Plus500
4