Tips On How to Use Arbitrage Opportunities in Commodities

It is common for an asset to be available in various markets at various prices. These differences in prices can occur due to supply and demand figures or inefficient pricing. These price differences create what is known as an “arbitrage opportunity”, meaning it provides a way for you to accumulate returns by selling and buying assets in various markets and at differing prices.

While dealing with financial markets, you might choose to apply different trading strategies. The common ones include long-term investment, arbitrage, or even purchase and sale. The strategy that you choose might depend on your tenure, the capacity of investments, financial objectives, or risk tolerance. In an unstable market, it becomes possible to trade with minimum risks and good returns when using an arbitrage strategy.

Keep reading to gain an understanding of arbitrage trading along with its strategies:

What Is Arbitrage Trading?

Arbitrage is a term that refers to selling and buying assets to generate profits from price differences relating to an asset in various markets. These are assets that could be a currency, security, or commodity that you can buy and sell across markets simultaneously. Arbitrage assists with improving market liquidity and efficiency for trading. Arbitrage funds share a few similarities with equity funds and are also made available to investors that are interested in investing in the arbitrage of shares and securities.

Arbitrage Trading with Commodities

In most cases, commodities require transportation and storage space to ensure they are available around the world. They are also traded in various forms across different markets. In most cases, there are differences in the prices of one commodity in futures and spot markets and across exchanges.

These price differences are what create arbitrage opportunities where the commodity can be sold or purchased in various markets at differing rates. The goal of this involves generating returns with no or minimal risk for investors. Individuals that can identify arbitrage opportunities across different markets and are also involved in trading commodities are known as arbitrageurs.

We have added a lot of useful information to this article, but this is an in-depth topic.  If you would like to learn more about this, you may want to visit a site like USA Futures which is dedicated to teaching investors how to trade commodity futures in a safe manner.

What to Look for in an Arbitrage Opportunity:

Below are some green lights to look for an arbitrage opportunity to be present:

• The asset in question has prices that vary across the various markets.

• Two assets that have similar cash flows have to trade at prices that are different.

• The asset must have different current and future trading prices.

Let’s now take a closer look at some of the arbitrage methods you can choose when you trade in commodities.

Cash And Transport Arbitrage

The Cash and Transport method is aimed at taking advantage of inefficiencies in prices for a specific asset price action in the futures and spot market to accumulate profits without risks. The arbitrageur will purchase a long position with the commodity and then at the same time sell a position using a futures contract with this same asset. The investor will carry the asset to the date the contract expires and deliver it according to the futures contract. Sometimes this is referred to as a basic exchange.

For example, if an asset is currently trading at Rs 100 with the added cost of Rs 6 as the carrying cost. At the same time, the same asset is available in a futures contract at Rs 105. On finding this opportunity, the arbitrageur invests using the cash-and-transport strategy to secure a profit which in this case would be Rs 4.

This strategy can only be profitable when the inflow of cash on selling according to the futures contract has exceeded the carrying cost and acquisition of this asset. At the same time, this is a strategy that is not nearly risk-free. The added carrying costs might in some cases increase, and that will reduce your profit margin.

Futures Spread

With this strategy, arbitrageurs take advantage of price differences that occur between the same commodity or asset but between 2 future contracts. This strategy involves buying futures contracts for an asset or commodity and then selling them as per a different futures contract that can accumulate profits. Other trades, known as spreads, tend to be lower in risks and less volatile in trading when compared to other strategies such as normal futures trading.

Here is an example, if a commodity X April 2020 contract is currently trading at Rs 600 per unit, yet another contract for this same commodity X July 2020 trades at Rs 540 per unit. The investor can now decide when the April 2020 contract expires whether he/she wants to sell the April futures contract along with buying the July futures contract. This will usually depend on the way the arbitrageur predicts future prices.

Inter-Exchange Method

This is another popular method that can assist you with arbitrage commodity trades. With this method, arbitrageurs exploit the difference in prices for one commodity for the contract that expires at the same time but on other exchanges. These differences in prices across the exchanges are what create arbitrage opportunities. When one commodity has differences in prices it mainly occurs due to instability, specifications of a contract, or liquidity.

Here’s an example, if ABC April 2020 futures contract is currently trading at Rs 600 per unit on one of the exchanges but is trading at Rs 450 per unit on another exchange, the investor can make profits of Rs 250 per unit.

Lower Risk Commodity Trading

Because arbitrageurs sell and buy commodities at prices that differ from what they know about in the different markets, the risks are less. The only problem with commodities, which is rare but it does happen, is that in some cases there are extra costs linked with maintenance and storage until sold. In some cases, this can slightly affect the profit margins.

Even though the risks are limited, it is still a good idea to gain a thorough knowledge of the markets that relate to a commodity that you are interested in. You should be focused on taking maximum advantage when it comes to price differences by making sure you exploit suitable trading strategies.

Top Reasons To Roll Over Your 401k To An IRA

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If you have decided to change jobs, you have several different options when it comes to your 401(k) plan. Of the four options available, one of the best is to simply roll this over into an IRA. You could cash out your entire 401(k) plan and pay the taxes, along with the penalty for early withdrawal, or you could simply leave it with your ex-employer or transfer it to a new 401(k) if that is an option. For most people, simply rolling over your 401(k) plan makes everything easier, and you can do the same if you have a 403B instead. This article explains what you need to do.

Convert Your 401k Into a Precious Metals IRA

Gold and silver have been used as a store of value for thousands of years.  Especially in today’s inflationary environment it is important to have a percentage of your assets in precious metals.  This is easy to with a self-directed IRA that can hold physical precious metals.  These types of accounts can be a bit complicated to set up so you should read this 401k to gold IRA rollover guide to start your learning process.

More Investment Choices

When you have a 401(k) plan, you have somewhat limited choices regarding this investment. In those cases, it is using mutual funds to generate the funding. However, if you do have an IRA, it’s not possible to simply invest it wherever you want to. Additionally, there are many other types of investments that you can choose from outside of mutual funds which will include exchange-traded funds, bonds, and stocks

Selling your holdings at any time is also an option, along with buying additional holdings. In most cases, your 401(k) will limit how many times you can adjust your portfolio, or they may restrict you to only doing this at certain times of the year.

Better Communication

If you are going to leave your existing 401(k) plan with your prior employer, you may discover that you are treated much like a second-class citizen, yet this is not deliberate. It’s just going to be more difficult to communicate with the people that your worksite and connecting with an administrator or advisor could be problematic. If you want to have access to this information if something does go wrong, you must connect with your old workplace.

Most of the 401(k) plans have specific rules that state if you have less than $1000 in your account, your employer will be able to cash it out and provide you with -20% tax withholding. If you have as much as $5000, then your employer can move this into an IRA.

Lower Fees and Costs

If you’re going to roll your money over into an IRA as mentioned, this tends to make it easier when it comes to administrative fees management aspects of having an individual retirement account which will be a good return on investment over time. Many of the funds that are connected to your 401(k) plan may be much more expensive than their asset class. Additionally, the overall annual fee must continually be paid.

If you have millions of dollars to invest, and you have a larger 401(k) plan, you will likely have access to what is called an institutional class funding account that will charge much lower fees. Keep in mind that your IRA is never going to be free of every possible fee. However, you are simply going to have more choices and control when you are investing more money such as when you can invest, what you will pay, and how you can invest funding.

The Option to Convert to a Roth

When you do an IRA rollover, switching to a Roth account might be the best option for you. Many of the Roth 401(k) plans are rollover into a Roth IRA. When you have one of these, the taxes must be paid on the money you are contributing the moment that you place this into your account, but you will not have to pay any taxes when you withdraw the money which is completely different from a regular IRA. You are also not bound by rules that have required minimum distributions, such as at the age of 72, and you will not experience this with a Roth IRA.2

For those that will soon be in a much higher tax bracket, or if you are predicting that tax rates are going to be higher the year that you will need to access your IRA money, you may want to switch over to a Roth account, simply pay your taxes now, and benefit financially in the future.

For those that are currently under the age of 59 1/2, you can easily withdraw funds from a Roth IRA, especially in comparison to a standard IRA. Most people will not encounter withdrawal penalties for any of their contributions, however, you will need to pay penalties if you are extracting any of your investment earnings.5

When looking at some 401(k) plans, you may have rules that only permit a rollover that will place your money in an IRA. If that is the case, you must do that initially, and then convert the IRA into a Roth subsequently. There are certain strategies that you can use for determining how and when to do this so that you can minimize your overall tax burden. If the market is currently experiencing a significant downturn, going back to an IRA, if you convert 20% or more of this into a Roth account, you are not liable for paying more taxes when you converted. If you are simply going to hold onto your funds as they are recovering, this might be the best strategy for you.

However, writing this out could be very tricky and you could lose a substantial amount of money which is why it is a good idea to work with your financial advisor.

Cash or Other Incentives

There will always be additional financial institutions that will be eager to work with you. They may try to entice you to bring all of your retirement money to them, but in the process of doing so, throw some of your cash away. An example of this is from 2021 when the company was offering bonuses that were as high as thousands of dollars if you decided to work with them when rolling over your 401(k) into an IRA.6 If it’s not money, then they may also provide you with trades or free as part of your package for switching over.

Clearer and Fewer Rules

Understanding your 401(k)’s rules is very important, but it’s very difficult to do because many employers have a lot of leeway regarding how they decide to set this up. In contrast to this, IRA regulations are standardized by the IRS. Therefore, an IRA at any financial institution is going to follow the same rules.

There is an often-overlooked variation when looking at IRAs and 401(k)s regarding taxes that must be paid to the IRS. For example, the IRS is going to require 20% of distributions from any 401(k) to be withheld so that taxes can be paid.7 If you decide to distribute your IRA, you can then opt for no tax withheld.1

For some people, it would be a wiser decision to withhold taxes than to have to pay a large bill at the end of the year which may include penalties for underpayment or owing interest on unpaid balances. If you choose to withhold money, preferably more than you will owe, this could be beneficial far above the automatic 20% that is usually taken out. The primary benefit of doing so is that you are not going to completely deplete your retirement account too quickly, plus you are allowing that money to compound on a tax-deferred basis.

To Sum it Up

Many people that are switching jobs may want to take advantage of the process of rolling over their 401(k) into an IRA. However, it is advantageous to shop around and look at the many different IRA providers that may have the lowest possible expenses. This can be a substantial difference with how much money you will have at your disposal once you reach retirement age.

On The Nature of Things

In his essay entitled On The Nature of Things, Lucretius determined that the individual “must use observation to see, reasoning and judgment to foresee, activity to gather materials for decision, discrimination to decide, and when he has decided, firmness and self-control to hold to his deliberate decision.”

Unfortunately, today’s philosophy students find themselves lost at step one while trying to write term papers on Lucretius’s theories. Without the ability to foresee, they cannot gather the materials necessary for proper decision-making.

An inability to make decisions about one’s thesis soon becomes symptomatic of term paper anxiety…But OUR PHILOSOPHY EXPERTS CAN HELP ANYONE! Even if you can’t find what you need among our existing papers, WE CAN STILL BE CALLED UPON TO WRITE SOMETHING NEW! Just use the “custom essays” button to tell us what you’re writing about and to describe the time constraints under which you’re writing.

One of our philosophy experts will start working with you whenever they get around to it, maybe… producing a paper designed specifically to help YOU with YOUR topic