It All Makes Cents

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)

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 \$0.3820 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 Meats
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)

Foods or Softs
Coffee, orange juice, cocoa and sugar all fall into a category often referred to as the "softs". With the exception of cocoa, each of these contracts are quoted in cents per pound. Accordingly, although the multiplier will be different the methodology in figuring out profit, loss and risk on a trade will be very similar to that of the meats. Cocoa, on the other hand is quoted in even dollar amounts per ton and prices are not broken down into cents. In other words, if cocoa is trading at 2100, it is actually going for two thousand one hundred dollars per ton. There are ten tons in a contract, so if the daily price change is +14, multiply by ten or add a zero to get the true dollar amount. In this case a trader would have either made or lost \$140. If this confuses you, you can simply multiply the change in price by \$10.

Coffee trades in contracts of 37,500 pounds making each penny of movement worth \$375 to the trader. For example, if prices move from 120.00 to 121.00 a trader would have made or lost \$375 before considering transaction costs. Similar to the meats, the decimal point isn’t meant to separate dollars from cents it is a way of breaking each penny into fractions of a penny. Thus, if the price rises from 120.50 to 120.00 it has appreciated by half of a cent.

An orange juice contract represents 15,000 pounds of the underlying product. Therefore, each cent of price movement results in a profit or loss of \$150 to a trader. Like the meats and coffee, orange juice is quoted in cents per pound with a decimal that simply represents a fraction of a cent. A trader long orange juice from 120.00 with the current market price at 118.50 has an unrealized loss of 1.5 cents or \$225 (1.5 x \$150).

Sugar #11 (not #14) futures are traded based on a contract size of 112,000 pounds. With that said, each tick in sugar is worth \$11.20 to the trader and each full handle of price movement (or penny) is equivalent to \$1,120. Once again, don’t mistake the decimal for separation of dollars and cents. If sugar is trading at 12.20 cents it will be displayed by a quote service as 12.20. A trader long from 11.95 would be profitable at 12.20 by .25 cents, or \$280, figured by multiplying the difference between the current price (12.20) and the purchase price (11.95) by the point value (\$11.20).

Cotton isn’t a food, it is a fiber. Nonetheless it is most often grouped with the softs due to the fact that it trades on the same exchange. Cotton futures trade in 50,000 pound contracts and are quoted in cents per pound; again, the decimal point isn’t intended to separate dollars and cents. Rather it separates cents from fractions of a cent. In other words, if cotton is trading at 68.50 it is read as 68 1/2 cents. Due to the contract size, each tick of price movement is worth \$5 to a trader; therefore if a speculator sells cotton at 65.40 and is stopped out with a loss at 67.30 the total amount of the damage would be 1.9 cents or \$950 (190 points x \$5).

Lumber futures are not traded on ICE with the other softs, but are often referred to in the same category. For reasons unknown, lumber futures attract beginning traders. Perhaps it is because it is the epitome of the definition of a commodity due to its widespread usage. Nonetheless, it is a sparsely traded contract by speculators and until liquidity improves I don’t necessarily recommend trading it. I have only walked by the lumber trading pit once (at the CME before merging floors with the CBOT) and there were a total of three market makers passing the time by reading a newspaper. As a speculator, it is never a good idea to trade in a market in which your order will be one of a handful of fills in the entire trading day.

If you do insist on trading lumber you must be willing to accept wide bid/ask spreads and a considerable amount of slippage getting in and getting out of your position. The contract size for lumber is 110,000 board feet and it is quoted in dollars and cents. Accordingly each tick of price movement represents \$11. In this case, the decimal is used in its usual context. If the market is trading at 246.80, it is interpreted as \$246.80.

Precious Metals Futures
Gold, Platinum and Palladium Futures Gold, platinum and palladium are quoted just as they appear, the decimal included in the quotes are intended to separate dollars and cents. The numbers to the left of the decimal are dollars and the numbers to the right are cents. In other words, a point in these metals contracts is synonymous with a cent. For example, if gold is trading at 830.20 and rallies 60 cents the price will be 830.80, or simply \$830.80. Platinum and palladium are treated the same; there are no surprises here. However, their point values do differ. Palladium has an equivalent point value as gold, \$100 per dollar of price movement but the point value and contract size of platinum is half of that of gold and palladium.

A gold futures contract represents 100 ounces of the underlying commodity. Each penny of price movement results in a profit or loss of \$10 to the trader and each full dollar movement in price represents \$100 of profit or loss. Accordingly, if gold rallies from \$849.20 to \$856.80 a long trader would have made \$7.60 or \$760 and a short trader would have lost that amount (not considering commissions and fees).

856.80 – 849.20 = 7.60
7.60 x \$100 = \$760 (minus commissions and fees)

Silver Futures
The manner in which silver futures are quoted is more similar to grains such as corn and wheat than it is the other precious metals. A silver contract represents 5,000 ounces of the underlying commodity creating a cent value of \$50. With that said, for every penny that the futures market moves a trader will make or lose \$50. Likewise, silver trades in fractions of a cent. If the price is quoted as 1634.5 it should be read as \$16.34 1/2. Please note that the CBOT version of the silver contract trades in tenths of a cent such as 1634.1 or sixteen dollars and thirty four and one tenth of a cent.

Calculating profit and loss in silver is identical to doing so in corn, wheat or soybeans. If you sell silver at 13.450 (\$13.45) and are stopped out at 1362.5 (\$13.62 1/2) you would have lost 17.5 cents or \$875 (\$50 x 17.5).

Copper Futures
Unlike the other metals which are referred to in terms of cents per ounce, copper is quoted in cents per pound. The contract size is 25,000 pounds making the multiplier \$250 for a penny move. Simply put, if copper rises or falls by one cent a futures trader would make or lose \$250. This makes sense because if the price of copper goes up by 1 penny you would make 25,000 pennies on a long futures position. Also unlike gold futures, copper prices trade in fractions of a cent. If you see copper quoted at 3.055 it is trading at \$3.05 1/2. Likewise, if copper rallies from this price to 3.450, it represents a gain of 39.5 cents or \$9,875 (\$250 x 39.5) per contract. This sounds great if you happened to be long, but a short trader during this move likely lost a lot of sleep.

The Energies
Crude oil is one of the most talked about commodities but is also one of the most challenging markets to speculate. Light sweet crude (not to be confused with brent crude) is quoted in dollars per barrel. From a trading standpoint, it is relatively simple to calculate profit, loss and risk due to the fact that it is quoted in dollars and cents as we are accustomed to in everyday life. The contract size is 1,000 barrels, so each penny of price movement in crude represents \$10 of risk to a commodity trader.

A price quote of 120.00 is just as it appears, \$120.00 per barrel of crude. A drop in price from 120.00 to 118.00 is equivalent to a \$2,000 profit or loss for a futures trader. Remember, each penny is worth \$10 to a trader and a \$2 move in price is 200 cents.

Heating oil and unleaded gasoline are much more complicated to figure. Both are quoted in cents per gallon, similar to how it is displayed to you at a gas station pump. Consequently, in both cases the decimal point separates the dollars from the cents and each of them trade in fractions of a cent. The contract size for each is 42,000 gallons, so each point in price movement is worth \$4.20 cents to a futures trader and each penny (100 points) is worth \$420. For example, if heating oil is trading at 4.1060 (\$4.10 6/10) and rallies to a price of 4.2140 (\$4.21 4/10) the futures contract has gained 10.8 cents or \$4,536 (10.8 x \$420). By this example you can see how easily money can be made or lost in the futures market. A price move of less than 11 cents could result in a profit or loss of several thousand dollars.

Natural gas is quoted in BTU’s or British Thermal Units which is a measurement of heat and has a contract size of 10,000 mmBTU or million BTU’s. Each tick of price movement in this contract is valued at \$10 and there are 1000 ticks in a dollar of price movement. Thus, for every dollar move in natural gas the value of the contract appreciates or depreciates by \$10,000. To illustrate, if the market rallies from 7.305 or \$7.30 1/2 to 8.305 a trader would have made or lost \$10,000 on one futures contract. This should be enough to deter you from this market, unless of course you have deep pockets.

Currency Futures
Currency futures are traded electronically on the CME’s Globex platform and are, for the most part, traded in "American terms". This simply means that the prices listed in the futures market represent the dollar price of each foreign currency or how much in U.S. dollars it would cost to purchase one unit of the foreign currency. In order to understand the point of view of the futures price ask yourself; "How much of our currency does it take to buy one theirs?"

If the Euro is trading at 1.4639, it takes \$1.46 39/100 U.S. greenbacks to purchase one Euro. The value of one futures contract is 125,000 Euro so each tick higher or lower changes the price of the contract by \$12.50 and translates into a profit or loss to the trader in that amount. A majority of the currency futures contracts have a tick value of \$12.50; others that share this characteristic are the Swiss Franc, Japanese Yen, and the Mexican Peso. The Australian Dollar and the Canadian Dollar both have a tick value of \$10 and the British Pound fluctuates in ticks of \$6.25. Once you know the tick value of each of these contracts, it is easy to compute the dollar amount of risk, profit and loss. For example, a trader that is long the Euro from 1.4239 and liquidates the position at 1.4432 would be profitable by 193 ticks or \$2,412.50 (193 x \$12.50).

***There is substantial risk in trading options and futures. It is not suitable for everyone.

Carley Garner

Carley Garner is the Senior Analyst at DeCarley Trading LLC where she also works as a broker.  Her book, "Commodity Options" published by FT Press will be on shelves in January 2009. Visit www.DeCarleyTrading.com for your free subscription to Carley's e-newsletters and for details on the services she provides.  Carly is a Magna Cum Laude graduate of the University of Nevada Las Vegas, from which she earned dual bachelors degrees in both Finance and Accounting.Carley jumped into the options and futures industry with both feet and has become one of the most recognized names in the business.  Within months in the industry, she had published her first article in a nationally distributed periodical and hasnt slowed down since.  She has been featured in the likes of Stocks and Commodities, Futures, Active Trader, Option Trader, Your Trading Edge, and Pitnews Magazine.  Carley is often interviewed by news services such as Reuters and Dow Jones Newswire, and has been quoted by the Investors Business Daily and the Wall Street Journal.  She has also been known to participate in Radio interviews.

Carley Garner is the Senior Analyst at DeCarley Trading LLC where she also works as a broker.  Her book, "Commodity Options" published by F...

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