T2W Trading Community

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.

Unfortunately, until recently there hadn't been much in the way of uniformity in commodities. With a handful of major U.S. futures exchanges working completely independent of each other, the industry has created an environment in which it is unsafe to assume anything. Each of the exchanges have differing rules and procedures and the size, point value and how each contract is quoted will carry similar confusion. For example, some commodities are referred to in fractions and others in decimals. Some decimals depict the difference between dollars and cents, others between cents and fractions of a cent. The recent merger of the Chicago Board of Trade and the Chicago Mercantile Exchange was a big step in bringing some of the exchange procedures into congruency; regrettably reading and calculating commodity prices will likely never become easier.

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)