When I first started learning about futures, I was overwhelmed. If you made it through the article on options then learning about futures should be a cake walk. But just in case, I’m going to break this up into 3 parts.
Do you remember Little House on the Prairie? I don’t know if you’ve ever read the books by Laura Ingalls Wilder about her life when her family moved west, but it’s a must for nostalgia’s sake. (I mean, who do you know today that makes their own clothing, churns their own butter, and takes their lunch to school in a bucket?)
Times are Good
I used to watch the TV episodes with my mom when I was little. I remember an episode when Pa had a great crop and the family was really happy; they were going to have lots of money once he sold the crop. They were planning on buying new shoes for the kids; Ma was going to get some new material for a new Sunday dress; and I think Pa was even planning to get a new fiddle. They were really about to live it up!
And Then the Bottom Drops Out
The next thing you know, it starts to hail the night before Pa is supposed to harvest this bumper crop. Everything is ruined! No crops to sell, no new shoes, no new dress and no new fiddle!
The Moral of the Story
For those of you who like happy endings, at the end of the episode Pa goes off to find work along with the other men of the town. The women of the town thresh what they can of the destroyed wheat and everyone comes together. We laugh we cry, we learn to join together in a crisis, yada yada yada.
How This Relates to the Futures Market
If Pa had known about the futures market he could have made money selling a futures contract at the market price before the harvest and his two daughters wouldn’t have to walk to school barefooted. In Part 2 we’ll take a look at why.