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Speaking as a 30+ year futures trader, former broker, former floor man, published author on futures and options trading, these contracts have a whole lot of problems.

Without going into a lot of technical details, just please consider a futures market in general. Arbitrarily, take wheat or Eurodollars.

Why are these markets successful? Because there exist both ''natural'' longs and ''natural'' shorts in these markets. The wheat grower is a natural short, because (if he's a brain in his head) he'll use the markets to lock in a price for his crop. The miller and the bread baker will use the markets to lock in their cost of input product. The specs and the funds grease the wheels (insure liquidity) for such markets.

The principal problem with housing/real estate index futures is that there is only one natural group of players, in theory: those who own homes in the index-covered areas. These are natural shorts.

Who are the natural longs? Damned if I know. Certainly not builders, who wouldn't fork over a dime to develop some land unless the numbers had already crunched correctly beforehand. Certainly not bankers or mortgage lenders, who don't give a warm damn about housing/real estate per se, only about the spreads that can be earned by lending in this area, and in ANY are more likely to use such markets on the short side to limit their exposure just in case housing/real estate should undergo a bit of slump at some point.

There are **no** ''natural'' longs in these markets, which means directly that, unless there comes to be a huge spec interest on the long side, these markets are absolutely and utterly doomed to fail.

I stand by every word of this post, and will gladly wager anyone here a cold beer against a $50 bill that, absent rampant spec by the funds, these markets don't exist for 3 years without MAJOR contract rewriting...and probably not even then.

Thanks for the miniprimer on futures. I understand options but not so much about futures.

Could you explain the difference between writing (selling) or buying options and selling or buying futures?

For example, to hedge myself against the downside of an equity I would write a call or buy a put.

In the futures market, would I purchase a contract to protect my downside?

Using your analogy of the wheat grower, you say they are the natural short for futures. Does that mean they sell or purchase a contract?

From the perspective of cash direction in equity options, if I write a call, the cash comes to me with the call contract. If I buy a put, the cash flows from me to the put writer. How does cash flow for future contracts? TIA.

There are **no** ''natural'' longs in these markets, which means directly that, unless there comes to be a huge spec interest on the long side, these markets are absolutely and utterly doomed to fail.

Hi Stu.

Your post is very logical on the first read. After some thought and re-reading, I have a question for you:

Who are the natural longs for the stock index futures?

We both know just how successful these contracts have been, yet I can't come up with an answer.

By the way, your service looks very interesting. I may give it a try sometime soon. I'm just too busy right now.

bank

Thanks for your insights on this thread!

Without going into a lot of technical details, just please consider a futures market in general. Arbitrarily, take wheat or Eurodollars.
Why are these markets successful? Because there exist both ''natural'' longs and ''natural'' shorts in these markets. The wheat grower is a natural short, because (if he's a brain in his head) he'll use the markets to lock in a price for his crop. The miller and the bread baker will use the markets to lock in their cost of input product. The specs and the funds grease the wheels (insure liquidity) for such markets.
The principal problem with housing/real estate index futures is that there is only one natural group of players, in theory: those who own homes in the index-covered areas. These are natural shorts.
Who are the natural longs? Damned if I know. ...

I've been mulling this over all day, and when I think of the stock market, I can't figure out what are the "natural" longs & shorts by your definition. (Which I read as: Anyone except speculators.) A long position in a dividend-paying stock is an investment in future cash flow of course, but aside from that what are the reasons to go long or short on a stock besides speculation, when you come down to it?

Hedging a long position is better done thru buying puts, isn't it? You can go long one stock & short another, but that doesn't strike me as being pervasive enough to offset the "natural longs".