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I have a question, is there a master trader can answer this?


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I have a question, is there a master trader can answer this?

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  #1 (permalink)
New York, NY
 
 
Posts: 2 since Oct 2020
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I have been thinking about one thing and haven't figured it out yet.

In the futures market, are quantities of contracts always constant?

When you buy a contract, someone sells it to you. Likewise, when you short something, someone buys it.

Then where did these contracts initially come from? Can total number of contracts increase/decrease?

I guess it's very different from how stock market works.

Does anyone know how exactly market works?

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  #2 (permalink)
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HiddenPhilosopher View Post
When you buy a contract, someone sells it to you. Likewise, when you short something, someone buys it.

Then where did these contracts initially come from?

The contract is, effectively, an agreement between buyer and seller. That agreement comes from the parties to that agreement, who execute and settle their contracts through a centralized exchange acting as counterparty.


HiddenPhilosopher View Post
Can total number of contracts increase/decrease?

Yes. See "open interest"

I highly recommend the primers and other educational materials on the CME website for these types of questions.

See here: --> https://www.cmegroup.com/education/courses/introduction-to-futures/open-interest.html

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  #3 (permalink)
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HiddenPhilosopher View Post
I have been thinking about one thing and haven't figured it out yet.

In the futures market, are quantities of contracts always constant?

When you buy a contract, someone sells it to you. Likewise, when you short something, someone buys it.

Then where did these contracts initially come from? Can total number of contracts increase/decrease?

I guess it's very different from how stock market works.

Does anyone know how exactly market works?


Schnook View Post
The contract is, effectively, an agreement between buyer and seller. That agreement comes from the parties to that agreement, who execute and settle their contracts through a centralized exchange acting as counterparty.


Yes. See "open interest"

I highly recommend the primers and other educational materials on the CME website for these types of questions.

See here: --> https://www.cmegroup.com/education/courses/introduction-to-futures/open-interest.html

This is a good question, and often comes up. @Schnook explained it very well.

For a somewhat longer-winded explanation, I took a shot at it in this link:



The thing to understand is that futures contracts are not assets that, like stocks, already exist and that exchange hands when they are bought and sold. They are contracts, which exist because the parties enter into them. They have a relation to actual assets -- the underlying commodities or indices or currencies or whatever that they are agreements to buy or sell -- but, as contracts, they don't exist until someone enters into them.

This is why they are called "derivatives," which is also the case with option contracts, by the way: they exist because someone agreed to do something in the future.

Bob.

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Maybe obvious, but as an additional information point.

If A buys from B we have 1 open contract and then if C then buys from D we now have 2 open contracts.

but ...

If A buys from B we have 1 contract and then if B buys from C, we actually now only have 1 open contract, where A has bought from C, even though they never transacted with each ever.

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