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:

• Euro FX (/6E): $12.50
  
• RBOB Gas (/RB): $4.20
  
• WTI Crude (/CL): $10.00
  

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.

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

What Is Margin?

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