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Call me stupid, but I don't quite understand the technicalities of that scheme. 1. They bought via TAS, but that's a promise to buy futures, no? So it's a prom

Call me stupid, but I don't quite understand the technicalities of that scheme. 1. They bought via TAS, but that's a promise to buy futures, no? So it's a promise on a promise? 2. They sold futures over the course of the day. 3. With a negative price, they bought futures again at the end of the day. Where did they get the futures from, they sold in point 2? Seems to me they did not have them yet, so they could only sell promises of promises again, so why was someone buying at that moment's price instead of buying at the closing price?

growse 6y ago
> Call me stupid, but I don't quite understand the technicalities of that scheme. > 1. They bought via TAS, but that's a promise to buy futures, no? So it's a promise on a promise? The TAS contract is a future itself to buy actual oil, but at a price determined in the future. The holder of the TAS ends up with physical oil, just like any other future. > 2. They sold futures over the course of the day. Selling a future is providing a place for the oil that you're going to end up with to go. Futures traders often don't want the actual commodity, so if they commit to buy something, they have to also commit to selling it to someone else. The trick is to buy low, sell high. I don't think there's any "future-on-a-future" thing here, it's just straightforward futures arbitrage. What makes it special is the mechanics of the TAS contract, which effectively means you're contracted to buy/sell oil at a price you don't know yet.
hdkrrkgk 6y ago
You can sell futures before having them (you will need to post some margin to cover a fraction of their worth). This will just create a negative position that must be made zero or positive before the contract expires.
dan-robertson 6y ago
Futures are created by trades so they don’t need to exist before they are sold. If you buy one of these oil futures then you are required to receive a certain amount of a certain kind of crude oil at Cushing, Oklahoma on a certain date after expiration. You don’t pay anything at that time as you already paid for the oil by buying the future. Likewise if you sell a future then you are required to deliver a certain amount of oil to Cushing, Oklahoma, and you were already paid when you sold the future. In this sense it is quite reasonable to hold a negative position in a future (you can have a negative position in a stock too but this requires selling short—you need to first borrow the stock from someone else). One thing to note is that futures are fungible: because the contract doesn’t say who you have to give oil to, you can sell a future at one price and buy it at another price and the two sides of the contract cancel out and you have no obligation to move any physical oil around. Most market participants cannot take or deliver physical oil and so they will make sure they get their position to 0 before the futures expire. It’s a weird question as to when futures are created. The invariant is that the total of everyone’s position is 0, so every obligation to deliver oil is matched by an obligation to take delivery, and you can then say that the number of created contracts is equal to the sum of all the positive balances, and each trade either creates or destroys futures depending on how the balances change.
- ampersandy 6y ago
  As a trading noob, what then happens when you sell a future but do not buy one later (and you obviously don't have X amount of crudge to deliver to Cushing)? Also, any suggestions on good books to learn more (not necessarily to start trading in futures, but just to understand the market dynamics)?

growse 6y ago

> Call me stupid, but I don't quite understand the technicalities of that scheme. > 1. They bought via TAS, but that's a promise to buy futures, no? So it's a promise on a promise? The TAS contract is a future itself to buy actual oil, but at a price determined in the future. The holder of the TAS ends up with physical oil, just like any other future. > 2. They sold futures over the course of the day. Selling a future is providing a place for the oil that you're going to end up with to go. Futures traders often don't want the actual commodity, so if they commit to buy something, they have to also commit to selling it to someone else. The trick is to buy low, sell high. I don't think there's any "future-on-a-future" thing here, it's just straightforward futures arbitrage. What makes it special is the mechanics of the TAS contract, which effectively means you're contracted to buy/sell oil at a price you don't know yet.

hdkrrkgk 6y ago

You can sell futures before having them (you will need to post some margin to cover a fraction of their worth). This will just create a negative position that must be made zero or positive before the contract expires.

dan-robertson 6y ago

Futures are created by trades so they don’t need to exist before they are sold. If you buy one of these oil futures then you are required to receive a certain amount of a certain kind of crude oil at Cushing, Oklahoma on a certain date after expiration. You don’t pay anything at that time as you already paid for the oil by buying the future. Likewise if you sell a future then you are required to deliver a certain amount of oil to Cushing, Oklahoma, and you were already paid when you sold the future. In this sense it is quite reasonable to hold a negative position in a future (you can have a negative position in a stock too but this requires selling short—you need to first borrow the stock from someone else). One thing to note is that futures are fungible: because the contract doesn’t say who you have to give oil to, you can sell a future at one price and buy it at another price and the two sides of the contract cancel out and you have no obligation to move any physical oil around. Most market participants cannot take or deliver physical oil and so they will make sure they get their position to 0 before the futures expire. It’s a weird question as to when futures are created. The invariant is that the total of everyone’s position is 0, so every obligation to deliver oil is matched by an obligation to take delivery, and you can then say that the number of created contracts is equal to the sum of all the positive balances, and each trade either creates or destroys futures depending on how the balances change.

ampersandy 6y ago
As a trading noob, what then happens when you sell a future but do not buy one later (and you obviously don't have X amount of crudge to deliver to Cushing)? Also, any suggestions on good books to learn more (not necessarily to start trading in futures, but just to understand the market dynamics)?