Futures Contracts

Today I will cover what a Futures contract is. What the purpose of the contract is. I will also point out some of the various different commodity contract specifications. This will identify the specific sizes or "contract unit size" and "minimum tick fluctuation". Also will be the monetary amounts for each commodity selected.

Futures are contracts on commodities, stock market indexes, currencies and all of the other entities that I covered in Commodities. The contract is an attempt to predict the value of the commodity at some date in the future.Thus the term Futures.

Futures contracts come in all different sizes and shapes. However, they are standardized in quantity and quality. Let's look at some examples. We'll start with Corn Futures. One contract of corn is 5000 bushels i.e. 127 metric tons. the "grade" is described as this: #2 Yellow at contract Price, #1 Yellow at a 1.5 cent/bushel premium, #3 Yellow at a 1.5 cent/bushel discount. We won't be concerning ourselves with the grade of corn unless you are actually planning on receiving it on your front lawn. The pricing "unit" of corn is "cents per bushel" and the minimum "tick" is 1/4 of one cent per bushel or $12.50 per contract.

Another example is a familiar one under the header of "Energy". Let's look at "Light Sweet Crude Oil" or "WTI" as it is more popularly referred to. WTI stands for "West Texas Intermediate". It is used as a benchmark in oil pricing. It is low density and "SWEET". Sweet meaning it has a low sulfur content. So if you have read my earlier posts, you won't have to taste the oil to see if it is "sweet", or "sour". Back on track. A contract of WTI is 1000 barrels of oil. The minimum tick for oil is $0.01 per barrel and is quoted in U.S. Dollars and Cents per barrel. Can you figure out how much a minimum tick is worth for each contract of oil? If not, don't worry, I'll be covering that a later date.

Let's look at "Metals". More specifically GOLD, another hot commodity. Gold is traded in "troy ounces". The troy ounce or ozt is most commonly used to gauge the weight and therefore the price of precious metals. One troy ounce is equivalent to 31.1034768 grams. There are 32.1507466 troy oz in 1 kg. Again we will not concern ourselves on just exactly how much gold that really is unless you are actually planning on taking delivery of it. Each  contract size is 100 Troy ounces. The price is quoted in U.S. Dollars and Cents per troy ounce and the minimum fluctuation is $0.10 per troy ounce.

Cattle, hogs, pork bellies have contract sizes of 40,000 pounds or 18 metric tons. Different variations of how the product is identified or displayed is under each separate futures contract. A contract of milk is 200,000 pounds. How about lumber? A lumber contract size is 110,000 board feet or 260 cubic meters. The product description is: 2-inch by 4-inch lumber, 8-20 feet long. The pricing per unit is: Dollars per 1,000 board feet or mbf and the minimum tick size is: $.10 per mbf or $11 per contract. MBF is the term used used in the lumber industry to describe 1,000 board feet.

We covered bushels, barrels, ounces, pounds and board feet. I think you get the drift. Time to look at something different. How about something under the "Equity Index". Let's examine my favorite, The S&P 500. I'll cover this one in a little more detail. Don't worry if you don't quite understand all the "lingo" for I will be covering this index in greater depth at a later time. The S&P 500 has first public records going back to 1926 and it contains the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market exchanges: the New York Stock Exchange and the NASDAQ. The contract size is $250 x S&P 500 futures price. The tick minimum is 0.05 index points=$12.50 in a calendar spread but is 0.10 index points=$25 in an outright cry.

I now have covered just a few of the basics in what futures contracts are and their underlying meanings or contents. It is important to understand that when an individual is trading commodities there is a REAL, qualified product that is being traded. A certain commodity can and WILL be actually delivered to your doorstep if you are not careful. Of course there are safeguards in place so this does NOT happen. But "buyer beware", the potential is still there. There are also different ways to trade futures that are much safer than trading actual contracts and will limit your liabilities and make you a more confident and successful online commodities trader. See ya in the pits!