## Figuring P&L in Commodities: It All Makes Cents

### One of the most frustrating aspects of trading commodities is getting comfortable with how each futures and options 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 futures trader; particularly because stock traders enjoy the simplicity of consistent math regardless of the product being traded. I hope that the following explanations, and my years of experience as a commodity broker, help to shorten your learning curve. Additionally, I hope this article provides you with a good base of information to begin your journey in the challenging trading arena known as commodity options and futures.

Unfortunately, until recently there hadn't been much in the way of uniformity in the commodity industry. Today, the Chicago Mercantile Exchange Group (CME Group) owns and operates most U.S. futures exchanges, but it wasn’t always that way. Early on, there were a handful of major domestic futures exchanges working completely independent of each other. Each of the exchange had differing rules and procedures; further each commodity listed on those exchanges had, and still have, various contract sizes and specifications. As a result, the point value and quoting format varies widely. 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 merger of the Chicago Board of Trade, the Chicago Mercantile Exchange, and the New York Mercantile Exchange was a big step in bringing some congruency but, regrettably, reading and calculating commodity prices will never become easier.

# Reading and Calculating Commodity Prices

## Quoting Grain Futures

The grain complex is perhaps the easiest to remember when trading in futures 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 futures 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. If corn futures ticked lower, the new price would be 415, or \$4.15. It cannot trade at 415’1 because the minimum tick is a quarter of a cent.

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 \$5.70 3/4 it would be displayed on a quote board or price ticker as 570'6. Likewise, \$5.70 1/2 would be listed as 570'4. 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.