One of the most frustrating aspects of trading commodities is getting comfortable with how each contract is quoted, what the point value or multiplier of each contract is and most importantly how to calculate the profit, loss and risk of a trade.
Each commodity futures contract is standardized but in comparison to those with differing underlying assets, they are often worlds apart. This can be extremely overwhelming for a new trader; I hope that the following explanations shorten your learning curve and give you the information that you need to begin your journey in the challenging yet lucrative trading arena known as options and futures.
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Quoting Grain Futures
The grain complex is perhaps the easiest to remember simply because four of the major contracts included are similarly quoted. Wheat, corn, soybeans and oats are all priced in dollars and cents. This is true for both futures and the corresponding option contracts. If you are proficient in adding and subtracting fractions, these contracts should be a breeze; if not it may take you a while to become familiar enough with the pricing method to begin trading.
Each of the grain contracts listed above are quoted in fractions using eight as a denominator. In other words, they are referred to in eighths of a cent. Because eight will always be the denominator, the fractions are not reduced. The minimum tick for these contracts in the futures market is a quarter of a cent or 2/8ths. Thus, if corn was trading at $4.15 1/4 (four dollars and fifteen and a quarter cents) the price would be displayed on a quote board as simply 415’2. The two represents the un-reduced fraction 2/8.
With this information, you have probably realized that a half of a cent is denoted by 4/8ths and three quarters of a cent would be displayed as 6/8ths or simply 6. In other words, if wheat was trading at $7.70 3/4 it would be displayed on a quote board or price ticker as 770’6. Likewise, $7.70 1/2 would be listed as 770’4. If fractions aren’t your thing, you can avoid using them in your calculations by simply replacing the fraction with .25, .50 and .75 respectively.
Calculating Profit and Loss in Grain Futures
Each penny of movement in these grain futures will result in a profit or loss for the trader in the amount of $50. To illustrate, being long corn from $4.00 with the current futures price at $4.01 the trade is profitable by exactly $50. Thus, the minimum tick of a quarter of a cent (2/8ths) results in a profit or loss of $12.50. Once you are armed with this knowledge, computing profit, loss and risk in terms of actual dollars in your trading account is relatively simple.
A trader long soybeans from 701’4 ($701 1/2) liquidates the position at 726’6 to net a profit of $1,262.50 before considering commissions and exchange fees. This is figured by subtracting 701’4 from 726’6 and multiplying that number by $50.
726’6 – 701’4 = 25’2
25’2 x $50 = $1,262.50 (minus commissions and fees)
The Odd Couple
The less talked about soybean contracts are the byproducts of the beans themselves. Soybeans are crushed in order to extract the oil (bean oil), what is left is a substance known soybean meal. Soybean oil can be found in many of the foods that you consume on a daily basis while soy meal is most often used as animal feed.
Soybean Meal Futures
While both of these products are derived from the same bean, in terms of futures trading they have few similarities. Soybean meal is quoted in dollars and cents per ton based on a contract size of 100 ton. To clarify, if soy meal futures are trading at 190.50 this is referring to one hundred ninety dollars and fifty cents per ton or $190.50. If the market drops by 30 cents (sometimes referred to as points), the new price would be 190.20.
Each dime in price movement represents a $10 profit or loss per contract. Thus, if a trader sells soy meal futures at 195.20 and buys the contract back at 190.10 he realizes a profit of $510 per contract. This is calculated by subtracting the purchase price from the sale price and multiplying it by $100. This makes sense because if each dime in the commodity price is equivalent to $10 in your trading account, then each $1 change in the commodity price will represent a profit or loss of $100 before considering transaction costs.
195.20 – 190.10 = 5.10
5.10 x $100 = $510 (minus commissions and fees)
Soybean Oil Futures
Soybean oil futures trade in contracts of 60,000 pounds and are quoted in cents per pound. If you see a price of 38.20 it is actually referring to INITIAL_CONTENT.3820 or .38.20 cents per pound. If the daily change was a positive .10, this represents a tenth of a cent price appreciation. Each 1/100th of a cent is worth $6 to the trader; thus each full handle or cent is equivalent to a profit or loss of $600 in the futures market. For example, if a trader went long bean oil futures from 37.00 and was forced to sell the position at 36.20 at a loss, the total damage to the trading account of the speculator would have been $480. This is figured by subtracting the purchase price from the sale price and then multiplying by $6.
37.00 – 36.20 = .80
80 x $6 = $480 (minus commission and fees)
The complex known as “the meats” consists of feeder cattle, live cattle, lean hogs and the infamous pork bellies. Although new traders are naturally drawn toward pork belly trading I typically don’t recommend it. Pork belly futures are thinly traded, leaving wide bid/ask spreads and excessive volatility.
Each of the meats are quoted in cents per pound and there are one hundred points to each cent. With the exception of feeder cattle which have a point value of $5, the meats have a point value of $4. Therefore, a penny move (100 points) would be equivalent to $400 in profit or loss in live cattle, lean hogs and pork bellies. An equivalent move in feeder cattle would yield a profit or loss of $500.
The meat contracts are commonly quoted with decimals and can cause confusion. Don’t assume that because there is a decimal in the quote that it is meant to depict dollars and cents. The digits beyond the decimal point are referring to the fraction of a penny in which the price is trading. For example, if feeder cattle are trading at 110.90 this is equivalent to $1.10 and 9/10ths of a cent.
Let’s look at an example on how profit and loss would be calculated when trading live cattle. A trader long live cattle from 99.30 gets filled on a limit order working at 102.40. This trade was profitable by 3.1 cents or $1,240 and can be calculated subtracting the entry price from the sales price and multiplying the difference by the multiplier. In the case of live cattle it is $4 a point or $400 per penny.
102.40 – 99.30 = 3.10
3.10 x $4 = $1,240 (before commissions and fees)
This content is a glimpse into Carley Garners’ book “A Trader’s First Book on Commodities“.
***There is substantial risk in trading options and futures. It is not suitable for everyone.
Carley Garner is Senior Market Analyst and Broker with DeCarley Trading, and a columnist for Stocks and Commodities. The co-author of Commodity Options and author of the upcoming book, A Trader’s First Book on Commodities, Garner writes two widely-distributed e-newsletters, The Stock Index Report and The Bond Bulletin. She provides free trading education to investors at www.DeCarleyTrading.com. Garner is a Magna Cum Laude graduate of the University of Nevada Las Vegas.
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