Oats Futures Trading Basics

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Futures Trading Basics | Understanding Futures Products

| FRI JUN 12, 2020

Many traders are familiar with investment choices like stocks, bonds, and options, but less are familiar with futures. To get a better understanding of futures products, Pete explains the basics of futures contracts and explains some of the different terms used in the futures world.

What is a Futures Contract?

A futures contract is an agreement between two parties, a buyer and a seller.

  • Short Position (Seller) – delivers the commodity
  • Long Position (Buyer) – receives the commodity

A futures contract is a standardized contract comprised of:

  1. The quantity of the commodity/index
  2. The quality of the commodity/index
  3. The date of delivery and the method of delivery

What Is A Futures Tick Value?

A tick value is the minimum amount that a futures contract can fluctuate. Tick values vary depending on the product traded. For example in WTI Crude (/CL) it is $0.01 which is = to $10.00.

As the market moves, it can move in multiple ticks between trades, but the smallest movement the contract in the example above could make is to 52.00 to 52.01

Each product will have its own dollar value assigned to a tick. Some products have significantly high tick values than others. Here are some example tick values:

Before trading any futures product, be sure to understand the tick value of the instrument you are trading.

Calculating The Tick Size (In Dollars)

To find the monetary value of a tick, you must multiply the size of the contract by the minimum price movement of the underlying commodity/index.

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For example – if you wanted to find out the tick size for wheat futures, you would have to find out how many bushels one contract represents, then find out the minimum price fluctuation for a bushel of wheat. In this case, a bushel of wheat can trade in increments as small as $.0025. One wheat futures contract represents 5,000 bushels so the tick value would be $.0025 x 5000 = $12.50.

Futures Ticker Symbol Meaning (See Slides For Visual Representation)

Did you know that the ticker symbol when looking at specific futures contracts have unique meanings depending on the letters or numbers amended to the end of the symbol?

This is a little confusing, here’s an example to clarify. let’s get back to EURO FX futures.

The normal symbol for Euro FX futures is /6E. If you look up /6E you will see that there are several choices in products based on expiration. Some of the other products are: /6EU5, /6EZ5, and /6EH6. These are all Euro FX futures, but with different expiration months and years.

In the examples above, the third letter represents the contract expiration month, and the last number represents the contract expiration year. Each month has its own ‘month code’ (can be seen in the video) and the number represents the last digit of the year the contract is in.

What Is Notional Value?

Notional value is the value that a futures contract actually represents (remember that futures are highly leveraged instruments and are a multiplier of the actual value of the underlying).

Notional value can be calculated by multiplying the contract size (how much of the commodity the futures contract represents) by the current price of the underlying.

Notional Value Calculation Example

To find out the notional value of a contract, you need to first find out, how much of a given commodity/index that a futures contract represents. You can find this on the CME Group website here by selecting which product you want, then making sure that you are looking at the future specs (not the option specs).

For example, if we wanted to find the notional value of the Euro FX (/6E), we would need to find the contact specs, and then find the price. To find the contract specs, you go here, then you would go to your trading platform of choice and see where the underlying is trading at.

We see that /6E represents 125,000 Euros and the price is at $1.1236. Then, we multiply them to get the notional value:
125,000*$1.1236 = $140,450

Each and every time that you open a futures contract, the futures exchange will require a minimum amount of money be in your brokerage account. The margin is determined by the futures exchange, but is typically about 5-10% of the futures contract.

The original amount needed to place the trade is called the initial margin. Once the trade is placed, the margin needed to keep the trade on is called the maintenance margin. This is lower than the initial margin and represents the lowest the account can go before needing to add more funds.

Looking again at Euro FX futures (/6E) the initial margin would be $3,630 and the maintenance margin would be $3,300.

Once you liquidate your futures contract, you will be credited the margin, plus or minus any gains/losses accrued during the time you held the contract.

Options On Futures

Options on futures are one of the most versatile trading products out there and if you’re already familiar with options, the concepts, price, behavior and terminology, then they are very easy to use.

Types Of Futures Strategies

There are several types of futures strategies that you can use to speculate or hedge risk. They can be categorized as:

  • Calendar Spread: the simultaneous purchase and sale of 2 futures of the same type, but with different delivery (expiration) dates.
  • Intermarket Spread: buying 1 market and selling a related product. (i.e. long WTI and short Brent crude)
  • Inter-Exchange Spread: any spread in which the positions are created in different exchanges. (i.e. going long CBOT wheat and short KCBT wheat)

Strategy: Short Call Spread

Products Discussed In This Episode: /6E, /M6E

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Oats Futures Trading Basics

A futures contract is an obligation to buy or sell a commodity at or before a given date in the future, at a price agreed upon today. While the term “commodity” is usually used when referring to contracts like corn, or silver, it is also defined to include financial instruments and stock indexes. One of the benefits to the futures industry is that contracts are traded on an organized and regulated exchange to provide the facilities to buyers and sellers.

Exchange-traded futures provide several important economic benefits, but one of the most important is the ability to transfer or manage the price risk of commodities and financial instruments. A simple example would be a baker who is concerned with a price increase in wheat, could hedge his risk by buying a futures contract in wheat.

Not all futures contracts provide for physical delivery, some call for an eventual cash settlement. In most cases, the obligation to buy or sell is offset by liquidating the position. For example, if you buy 1 S&P500 e-mini contract, you would simply sell 1 S&P500 e-mini contract to offset the position. The profit or loss from the trade is the difference between the buy and sell price, less transaction costs. Gains and losses on futures contracts are calculated on a daily basis and reflected on the brokerage statement each night. This process is known as daily cash settlement.

US futures trading is regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). The CFTC is an independent federal agency based in Washington, DC that adopts and enforces regulations under the Commodity Exchange Act and monitors industry self-regulatory organizations. The NFA, whose principal office is in Chicago, is an industry-wide self-regulatory organization whose programs include registration of industry professionals, auditing of certain registrants, and arbitration.

If you are new to futures trading, be sure to check out our tips for futures traders & watch our FAQ video below. Get answers to common questions such as the role of commission in overall trading costs and learn how leverage can impact margin requirements.

For a free educational guide to “Trading Futures and Options on Futures”, provided by the National Futures Association (NFA), please click here.

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NinjaTrader Group, LLC Affiliates: NinjaTrader, LLC is a software development company which owns and supports all proprietary technology relating to and including the NinjaTrader trading platform. NinjaTrader Brokerage™ is an NFA registered introducing broker (NFA #0339976) providing brokerage services to traders of futures and foreign exchange products.

Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. View Full Risk Disclosure.

How to Get Started Trading Futures

A futures contract is an agreement to buy or sell an asset at a future date at an agreed-upon price. All those funny goods you’ve seen people trade in the movies — orange juice, oil, pork bellies! — are futures contracts.

Futures contracts are standardized agreements that typically trade on an exchange. One party agrees to buy a given quantity of securities or a commodity, and take delivery on a certain date. The selling party to the contract agrees to provide it.

The futures market can be used by many kinds of financial players, including investors and speculators as well as companies that actually want to take physical delivery of the commodity or supply it. To decide whether futures deserve a spot in your investment portfolio, consider the following:

How do futures work?

Futures contracts allow players to secure a specific price and protect against the possibility of wild price swings (up or down) ahead. To illustrate how futures work, consider jet fuel:

  • An airline company wanting to lock in jet fuel prices to avoid an unexpected increase could buy a futures contract agreeing to buy a set amount of jet fuel for delivery in the future at a specified price.
  • A fuel distributor may sell a futures contract to ensure it has a steady market for fuel and to protect against an unexpected decline in prices.
  • Both sides agree on specific terms: To buy (or sell) 1 million gallons of fuel, delivering it in 90 days, at a price of $3 per gallon.

In this example, both parties are hedgers, real companies that need to trade the underlying commodity because it’s the basis of their business. They use the futures market to manage their exposure to the risk of price changes.

But not everyone in the futures market wants to exchange a product in the future. These people are investors or speculators, who seek to make money off of price changes in the contract itself. If the price of jet fuel rises, the futures contract itself becomes more valuable, and the owner of that contract could sell it for more in the futures market. These types of traders can buy and sell the futures contract, with no intention of taking delivery of the underlying commodity; they’re just in the market to wager on price movements.

With speculators, investors, hedgers and others buying and selling daily, there is a lively and relatively liquid market for these contracts.

» Ready to get started? Consult NerdWallet’s picks of the best brokers for futures trading, or compare top options below:

Basics of Futures Spread Trading

Futures Spread Trading has traditionally been known as a professional’s trading strategy. However, we feel it is a trading method that should be in everyone’s arsenal. Our goal here is to layout the basics of spreading so you will have a solid foundation of knowledge in this essential trading strategy.

Types of Commodity Futures Spreads

Inter-Commodity Futures Spread

Futures contracts that are spread between different markets are Inter-Commodity Futures Spreads. One example of this is Corn vs. Wheat. Let’s say the trader thinks that the Corn market is going to have higher demand than the Wheat market. The trade would buy Corn and sell Wheat. The trader does not care if the prices of Corn and Wheat go up or down; the trader only wants to see the price of Corn appreciate over the price of Wheat. If the grain markets sell off, the trader wants to see Corn hold its value better than Wheat. If the grain markets are bullish, the trader wants to see Corn advance farther than Wheat.

Intra-Commodity Calendar Spread

An Intra-Commodity Calendar Spread is a futures spread in the same market (i.e. Corn) and spread between different months (i.e. July Corn vs. December Corn). The trader will be long one futures contract and short another. In this example, the trade can either be long July Corn and short December Corn OR short July Corn and long December Corn. In order to be in an Intra-Commodity Calendar Spread, the trade must be long and short the same market (i.e. corn) but in different months (i.e. July vs. Dec).

Bull Futures Spread

A Bull Futures Spread is when the trader is long the near month and short the deferred month in the same market. Let’s say it is February of 2020. You buy May 2020 Corn and sell July 2020 corn. You are long the near month and short the deferred month (May is closer to us than July). It is important to note that the near months for futures contracts tend to move farther than faster than the back months. If corn is in a bull market, May (near month) should go up faster than July (deferred month). That is why this strategy is called a Bull Futures Spreads. Since the front months tend to outperform the deferred months, a trader who is bullish on corn would buy the near month, sell the deferred month, and would like for the near month to move faster and farther than the deferred months.

This relationship between the near and deferred months is not always true 100% of the time, but it is the majority of the time. That is why when you are long the near month and short the deferred, it is called a bull futures spread. The spread should go in your favor when prices are rising.

Bear Futures Spread

A Bear Futures Spread is when the trader is short the near month and long the deferred month. This is the opposite of our Bull Futures Spread. Again, let’s say it is February of 2020. You sell May 2020 Corn and buy July 2020 Corn. You are short the near month and long the deferred month. This is a bear spread because the near months ten to move faster and farther than the deferred months. If Corn is in a bear market, May (near month) should go down faster than July (deferred month). This is not always true 100% of the time, but it is the majority of the time. That is why when you are short the near month and long the deferred month, it is called a Bear Futures Spread. This spread should go in your favor when prices are declining.

Futures Spread Trading Margins

Margins for individual contracts may be reduced when they are part of a spread. The margin for a single contract of corn is $2025. However, if you are long and short in the same crop year, the margin is only $200. If you are long or short corn between different crops year (July vs. Dec) then the margin is $400. The crop year for corn is December through September.

Futures Spread Pricing

Spreads are priced as the difference between the two contracts. If May Corn is trading a 600’0 a bushel, and July is trading at 610’0 per bushel, the spread price is 600’0 May – 610’0 July = -10’0 . If May was trading at 620’0 and July was 610’0, the spread price is 620’0 May – 610’0 July = +10’0 .

Futures Spread Quotes

When pricing spreads, you always take the front month and subtract the deferred month. If the front month is trading lower than the deferred (like our first May vs. July example), the spread will be quoted as a negative number. If the front month is trading higher than the deferred month (like our second May vs. July example), the spread will be quoted as a positive number.

Futures Spread Tick Values

Tick Values are the same for spreads as they are for the individual contracts. If the spread between May Corn and July Corn is -10’0 cents, and the spread moves to -11’0 cents, that is a 1 cent move. 1 cent in corn is $50 for all months and spreads in the standard 5000 bushel contract. The tick values are the same for spreads as they are for their individual contracts.

Contango Markets

A market is in Contango when the front months cost less than the deferred months. This is also known as a “normal” market. If a bushel of corn in May costs 600’0 and a bushel of corn in July is 610’0, that market is in Contango. In normal markets, the deferred month should cost a little more than the front month due to the cost of carry, which is made up of storage costs, insurance on stored commodity, and interest rates payments for the capital needed to own and store the commodity.

Backwardation

When markets are in Backwardation, the near months are trading higher than the deferred months. Markets in Backwardation are also called “inverted” markets. They are the opposite of Contango or “normal” markets. Backwardation typically occurs during bull markets. When there is a substantial supply issue or increase in demand, the front months of a commodity will start to go up faster than the back months. The front months are more sensitive to changes in supply and demand because the front months are the commodity months that are coming to the market for deliveries. If there are supply decreases or demand increases, it is easier for the market to account for these in the deferred months, especially in the next crop year, also known as the “new crop”.

For example, let’s say it is February of 2020 and there is a shortage of corn. The “old crop” months are March, May, July and September. The “new crop” starts in December. There is not much the market can do about the supply from March to September, when Corn is being planted, grown and harvested. The corn that is made available during these months is coming out of stocks and storage. However, the market does have some control over December and the months going into 2020, like using more farming acres for Corn.

New acres devoted for corn will help the new crop keep prices stabilized for the deferred months. The near months will still increase because corn can not be harvested until the fall, but the deferred months should be able to help with demand and will not go up as fast as the near months.

Futures Spreads and Seasonality

Many commodities markets have seasonal periods of supply and demand. Some commodities are in higher demand during the summer, like Gasoline and Crude Oil, while some have a higher demand in the winter, like Natural Gas, Heating Oil and Coffee. Commodities also may have seasonal periods of supply, like the grain markets. The Corn market has the greatest supply right after harvest in the fall, which can lead to lower prices during that time of year.

Traders will use spreads and try to take advantage of these seasonal supply and demand changes. They look at the performance of spreads over the year during specific time frames to estimate the risk, reward, and probability of success. If you would like to know more about Seasonal Futures Spread Trading please read my previous article, “Seasonal Futures Spread Trading”.

Finally, if you like this post, you may also like my other article, “The Wonderful World of Futures Spread Trading”.

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