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Can someone explain how the bid/ask and data for futures can be interpreted? Sorry futures noob here.

• philipwhiuk 9y ago
  First: A future is a contract to buy or sell something at a set price. So for example a Crude Oil Jan 1st buy future requires that you buy Crude Oil at a set price on January 1st. Now, if you want to own crude oil on January 1st, you buy a future locking in a price. This means the cost of your crude oil is predictable ahead of time. It also means if crude oil is more expensive then you save money. But if it's cheaper you've lost out. Businesses benefit a lot from predictable pricing - for example if you're a farmer you can sell grain futures at a set price. Then you know that your grain will get you an amount of money - guaranteeing incoming. This is the mainstay of what CBOE and CME does. Bitcoin is a cash-settled future. So instead of actually owning a bitcoin, the way it's settled is based on the market price of bitcoin at the time. So I put a bid in for a 1 week Bitcoin future at $20,000. I'm matched with a seller for a 1 week Bitcoin future asking for $20,000. After a week the price for Bitcoin is checked. It's actually $21,000. The seller has to pay me $1,000. In reality no-one is going to be doing 1 week BTC initially - BTC is just too volatile. The exchange rules on CME are apparently if BTC rises/falls more than 7% trading stops. (So on the volatile days last week it would have stopped multiple times in the same day!). 7% is really high for a normal financial instrument - but BTC is very very volatile.