THE ELEMENTS OF A FUTURES CONTRACT
There are several elements that make up a futures contract:
CONTRACT SIZE
This is one of the most important elements of a futures contract because it is this that creates leverage. For example, the Gold contract on the NYMEX is 100oz per. Therefore, for every $1 move in the Gold futures contract you make or loss $100.
(in essence you are leveraging 100oz not just one)
Unfortunately, every commodity has its own contract size and to complicate matters, sometimes a commodity may trade on several exchanges and there may exist mini contracts as well.
However, if you do the math it's quite easy. Just use the contract size as the multiplier.
Soybeans contract size on the CBOT is 5000 bushels. Therefore, if the Soybean contract moves 1 penny you make or lose 5000 pennies ($50).
TICKS - SIZE AND VALUE
In futures trading we use the term "tick" to represent the smallest incremental move of a contract.
For example, in NYMEX Gold the tick size would be $0.10 - Gold cannot move in pennies, ten cents is the smallest move. Therefore, if the Gold contract was trading at $770.30 it would look like something like this:
770.3
For CBOT Soybeans the smallest incremental move is actually a quarter of a penny. Therefore, the tick size would be .25 [sometimes represented as a fraction 1/4 or even as a number (2 would represent 2 or 8 or a 1/4)]. The tick value would be .25 of a penny - since a penny move is $50 we can figure out that the tick size is $12.50.
Soybeans generally is displayed like this:
550.25 or 550 1/4 or 5502
Confused yet? Don't worry, futures can be difficult the first time you look at them but, the light bulb will turn on. We promise.
CONTINUE... TO THE BASICS OF TRADING FUTURES MARKETS PART 3
* Some information is compiled from public sources and believed to be reliable but is not guaranteed as to its accuracy or completeness. No responsibility is assumed for the use of this material and no express or implied warranties are made. Nothing contained herein shall be construed as an offer to buy/sell, or as a solicitation to buy/sell, any security, commodity or derivatives instrument. Instruments such as Futures, Forex, Options, and CFD trading involve a substantial risk of loss and is not suitable for all investors. Please carefully consider your financial condition prior to making any investments.
