Thanks to the CME Group (Chicago Mercantile Exchange); financial institutions along with investment managers, corporations, futures brokers, and private entrepreneurs have a regulated and centralized forum in which they can manage their risk exposure to changes in currency valuations. Naturally, where there are hedging opportunities there is also room for mass speculation and that is exactly what occurs every Sunday afternoon through Friday at the CME.
While many argue that the cash currency market, often referred to as Forex, is a much larger arena, I believe that the CME offers a very competitive trading environment in terms of execution. I also believe that the CME currency futures are superior in terms of transparency and credibility. This particular article isn’t intended to clarify the differences between Forex and currency futures, however, if you are interested in illumination of the arguments for and against each trading forum, be sure to read my book “Currency Trading in the FOREX and Futures Markets” published by FT Press (www.CurrencyTradingtheBook.com).
CME 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?" To illustrate, if the Euro is trading at 1.1639, it takes $1.16 39/100 U.S. greenbacks to purchase one Euro.
All currency futures contracts are categorized as financials, and therefore have a quarterly expiration cycle. Similar to Treasury bonds and stock indices, currency futures contracts expire in the months of March, June, September and December. Additionally, like the other financials, currency futures are traded nearly 24 hours per day. The CME halts trading for 45 minutes Monday through Thursday day between 4:15 and 5 PM Central time in order to maintain the electronic trading platform, and of course trade is halted on Friday afternoon in observance of the weekend.
Please note that the CME lists several currencies and even currency pairs (cross currency pairs that involve two currencies other than the US Dollar), that are not discussed within this article. The omission of such contracts was intentional. Many currency futures and pairs contracts are listed but do not have the ample liquidity necessary to make them a viable choice for speculators.
It is also important to realize that currency futures have no daily trading limits. Unlike raw or agricultural commodities, there is no limit to the amount in which currencies can appreciate or depreciate in a single trading day. There are arguments for and against price limits but in my opinion this is a positive characteristic because it prevents unnatural price floors and ceilings and avoids locked limit trade in which speculators are unable to exit a market. Of course there is a flip side, without price limits the currency markets can make very substantial moves on a daily basis. However, I will argue that in the long run a lack of price limits actually works to reduce market volatility. This is because a futures market that has gone “locked limit”, often accelerates panic felt by traders caught on the wrong side of the market and unable to exit their position.
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. This is true of a majority of the currency futures. The Swiss Franc and the Japanese Yen share the characteristic of a $12.50 tick value.
Once you know the tick value of any particular currency futures contract, it is easy to compute the dollar amount of risk, profit and loss. For example, a trader that is long the Euro from 1.1239 and liquidates the position at 1.1432 would be profitable by 193 ticks or $2,412.50 (193 x $12.50). This is calculated by subtracting the purchase price from the sale price (exit) and multiplying that figure by $12.50.
1.1432 – 1.1239 = 193 profit
193 x $12.50 = + $2,412.50 minus commissions and fees
Swiss Franc Futures
The contract specifications of the Swiss Franc futures are identical to that of the Euro. Accordingly, the contract size is 125,000 Swiss Franc and the tick value is $12.50. With that said, calculating risk and reward is also the same. The only significant difference between the Euro and the Franc futures contracts are the price at which they trade.
Therefore, a trader that is short the “Swissy” from 1.0375 (nearly at par with the U.S. Dollar) likely believes that the value of the Franc will diminish relative to the greenback. However, the trader may also want to place a stop loss order to mitigate the risk of being wrong. If the stop order is placed at 1.0440 the funds at risk would be $812.50 ignoring commissions and potential slippage in the stop fill. This is figured by subtracting the entry price from the stop price and multiplying by $12.50.
1.0440 – 1.0375 = 65 risk
65 x $12.50 = $812.50 commissions and fees and ignoring potential slippage are not included in this assumption of risk.
At this price, it takes about a little over $1.00 to purchase one Swiss Franc. If the Franc were trading at $1 it would be described as being in parity with the Dollar or simply “at par”.
The Japanese Yen is the most unique of the major currency futures contracts traded on the CME. The contract size is 12,500,000 Yen, yes that is right; twelve and a half million Yen. Despite the incredible contract size, the Yen has a tick value of $12.50 along with the Euro and the Swiss Franc. Thus, all calculations are treated in an identical manner.
On a side note, the massive contract size is necessary because the Yen is closer to being an equivalent to the penny than it is the dollar in U.S. currency.
British Pound Futures
The British Pound futures contract differs from the Euro in terms of contract specifications. A British Pound futures contract represents 62,500 Pounds Sterling (British Pounds). Just as the contract size is half that of the typical currency, so is the point value. Each point Pound of fluctuation represents a profit or loss of $6.25 to the futures trader.
The numbers are different, but the process is the same. A trader long the British Pound from 1.5732 but wanting to limit her risk to $1,000 would place a sell stop 160 points beneath the entry point at 1.5572. The number of points at risk can be determined by dividing the desired risk of $1,000 by the tick value, $6.25. Likewise, if the same trader later chooses to offset her long futures contract at 1.5643 (hopefully she remembered to cancel her stop), the realized profit would have been 71 points or $443.75. This is figured by subtracting the sale price from the purchase price and multiplying by $6.25.
1.5643 – 1.5572 = 71 profit
71 x $6.25 = +$443.75
The Commodity Currencies
Currencies in which their valuations are highly dependent on the exports of commodities are often dubbed as “commodity currencies”. The Australian Dollar and the Canadian Dollar are perhaps the most commonly traded commodity currencies. For instance, a relentless rally in crude oil and other commodities are generally supportive of the value of the Canadian Dollar, but sharp commodity declines will drag these two currency futures contracts lower. This is because Canadian and Australian exporters will likely sell products in terms of their domestic currency. The increased demand for their commodity products will have a direct impact on the demand for the Canadian currency and thus favor higher valuations of the “looney”. In fact, for the first time in decades, the Canadian Dollar traded at par with the U.S. Dollar in 2007 at the height of the commodity craze, and again in 2011 on a similar run in the commodity asset class.
Australian Dollar Futures
The Australian Dollar futures contract, often referred to as the Aussie, has a contract size of 100,000 Aussie Dollars. Consequently, the tick value of the contract is $10. Like the others, The Aussie futures expiration months are quarterly and there are no set price limits on daily trading.
Due to its convenient point value, risk and reward calculations can be figured by simply adding a zero or moving the decimal point one place to the right. To illustrate, a profit of 1 tick is equivalent to a profit of $10; likewise, if the market rallies 200 points a futures trader would be making or losing $2,000. For instance a move from .7298 to .7398 equates to 100 points, or $1,000 in profit and loss to a commodity trader.
Canadian Dollar Futures
The contract specifications for the Canadian Dollar are nearly identical to those of the Aussie Dollar futures. The contract size is 100,000 Canadian Dollars and the tick value is $10. Once again, working the math in this contract is as simple as adding a zero.
A trader that is short a Canadian Dollar futures contract from .7940 and subsequently gets stopped out of the position at .8400, the realized loss would have been 460 points or $4,600. Hopefully, you wouldn’t let your losses run to this extent but anything is possible.
.8400 - .7940 = 460 loss
460 x $10 = -$4,600 commissions and fees add to the loss
An Up and Coming Currency Futures Contract
Mexican Peso Futures
In the past the Mexican Peso futures contract offered questionable liquidity and few opportunities for speculators. However, the Peso has become much more popular among speculators and is worth taking a look at. Like the British Pound futures and the “commodity currencies”, the contract specifications for the Peso differ greatly from the norm.
If you have ever traveled to Mexico, you are aware that the valuation of the Peso is much lower than that of the dollar, typically about a 10th of a U.S. Dollar. Thus, it takes a small percentage of a dollar to buy one Peso. For this reason, the CME opted for a contract size of
500,000 which is a great deal bigger than those assigned to the Euro or the Swiss Franc futures. Each point in the Peso is equivalent to a $5 gain or loss for any trader with an open futures position.
Also unique to the Peso is the expiration months. The Peso has a contract listed (that expires in) each month as far as 13 months in advance. This is the only currency that allows traders to trade contracts expiring in each and every month of the year, they typically have quarterly expiration months. However, it takes more than an exchange simply listing a contract for speculators and hedgers to get involved. In fact, there is often very little, if any, open interest in any of the non-quarterly contracts (January, February, April, etc.). In other words, you should only trade the March, June, September, and December Mexican Peso futures contracts!
Despite all of the differences in the Peso relative to the other currencies, the calculations involved in trading it are very similar. Like the others you would simply take the difference between the purchase price and the sale price and multiply it by the tick value to reach the total profit or loss on a trade.
A trader that sells the Mexican Peso at .076425 and is forced to buy it back at a loss at .077385 would have realized a loss of 96 points or $480.
.077385 - .076425 = 96 loss
96 x $5 = - $480 commissions and fees add to the loss
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.
Calculating Profit and Loss in Grain Futures (Corn, Wheat, Soybeans)
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 futures from $4.00 with the current futures price at $4.01 the trade is profitable by exactly $50. To expand on this idea, 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 901'4 ($901 1/2) liquidates the position at 926'6 to net a profit of $1,262.50 before considering commissions and exchange fees. This is figured by subtracting 901'4 from 926'6 and multiplying that number by $50.
926'6 - 901'4 = 25'2
25'2 x $50 = $1,262.50 (minus commissions and fees)
The Odd Couple of Soybean Futures (Soybean Meal, and Soybean Oil)
The less talked about soybean contracts are the byproducts of the beans themselves. Soybeans are crushed to extract oil (soybean 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 soymeal futures are trading at 390.50 this is referring to three hundred ninety dollars and fifty cents per ton or $390.50. If the market drops by 30 cents (sometimes referred to as points) the new price would be 390.20. Each dime in price movement represents a $10 profit or loss per contract. Thus, if a trader sells soymeal futures at 395.20 and buys the contract back at 390.10 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.
395.20 - 390.10 = 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 soybean 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)
Livestock Futures (The Meats)
The complex known as "the meats" consists of feeder cattle, live cattle and lean hogs. Newer commodity traders are sometimes disappointed to learn the infamous pork belly futures contracts have been delisted from the exchange. Nevertheless, as an experienced futures broker I’m confident the trading community is better off without a futures contract written with pork bellies as the underlying asset. Prior to their delisting from exchange offered products, pork belly futures were thinly traded, involved wide bid/ask spreads, excessive volatility, and left countless traders maimed.
Each of the livestock futures 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 and lean hogs. An equivalent move in feeder cattle would yield a profit or loss of $500.
The meat futures contracts are commonly quoted with decimals which causes confusion. Don't assume 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 futures are trading at 210.90 this is equivalent to $2.10 and 9/10ths of a cent.
Let's look at an example on how profit and loss would be calculated when trading live cattle futures. A trader long live cattle from 199.30 gets filled on a limit order working to sell at 202.40. 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.
202.40 - 199.30 = 3.10
3.10 x $4 = $1,240 (before commissions and fees)
Foods and Fibers (The Softs)
Coffee, orange juice, cocoa and sugar all fall into a commodity futures category often referred to as the "softs". With the exception of cocoa, each of these futures 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; prices are not broken down into cents. In other words, if cocoa is trading at 3100, it is actually going for three thousand one hundred dollars per ton. There are ten tons in a contract, so multiply by ten or add a zero to get the true dollar amount. If the market closed higher 14 ticks in a trading session, a trader would have either made or lost $140.
Coffee futures trade in contracts of 37,500 pounds making each penny of movement worth $375 to the trader. For example, if prices move from 130.00 to 131.00 a trader would have made or lost $375 before considering transaction costs. Similar to livestock futures, 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 130.50 to 131.00 it has appreciated by half of a cent which is equivalent to $187.50 per contract to a commodity futures trader.
Orange Juice Futures
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 meat futures and coffee, orange juice is quoted in cents per pound with a decimal that simply represents a fraction of a cent. A tcopprader 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 futures (not Sugar #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 per pound 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 (sugar, cocoa, orange juice and coffee futures) due to the fact that it trades on the same exchange (Intercontinental Exchange, or ICE). 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. Prior to the Chicago Mercantile exchange eliminating open outcry futures trading pits, I can recall walking by the barely recognizable lumber futures trading pit. 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 futures 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 the lumber futures contract 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 futures 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 $1130.20 and rallies 60 cents the price will be 1130.80, or simply $1130.80. 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 at $100 per dollar of price movement, but the point value and contract size of platinum is half of that of gold and palladium. This is because of their futures contract size; a gold futures contract, as well as palladium futures, represent 100 ounces of the underlying commodity, but platinum is only 50 ounces.
In regards to gold futures, each penny of price movement results in a profit or loss of $10 to the trader. Therefore, each full dollar movement in price represents $100 of profit or loss. Accordingly, if gold rallies from $1149.20 to $1156.80 a long trader would have made $7.60 or $760 and a short trader would have lost that amount (not considering commissions and fees).
1156.80 - 1149.20 = 7.60
7.60 x $100 = $760 (minus commissions and fees)
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; for every penny that the futures market moves a trader will make or lose $50. Likewise, silver trades in dollars and fractions of a cent. If the price is quoted as 16.345 it should be read as $16.34 1/2. Please note that the traditional version of the silver contract traded on the COMEX division of the CME Group trades in halves of a cent, but there are mini versions of silver futures that trade 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 futures is identical to doing so in corn, wheat or soybean futures. 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).
Unlike the other metals which are referred to in terms of cents per ounce, copper futures are 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. There is a mini version of copper futures, which is probably more appropriate to most commodity traders due to it’s reduced contract size of 12,500 pounds.
Crude Oil Futures
Crude oil is one of the most talked about commodities but is also one of the most challenging of the futures markets to speculate. WTI (West Texas Intermediate) Light sweet crude (not to be confused with Brent crude oil) is quoted in dollars per barrel. From a commodity trading standpoint, it is relatively simple to calculate profit, loss, and risk in crude oil futures because 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 65.00 is just as it appears, $65.00 per barrel of crude. A drop in price from 65.00 to 63.00 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 Futures
Heating oil futures 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 futures are trading at 2.1060 ($2.10 6/10) and rallies to a price of 2.2140 ($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 Futures
Natural gas futures are 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 the natural gas futures market, the value of the contract appreciates or depreciates by $10,000. To illustrate, if the market rallies from 3.305 or $3.30 1/2 to 4.305 a trader would have made or lost $10,000 on one futures contract. This might be enough to deter you from this market, unless of course you have deep pockets and substantial risk tolerance.
Currency futures are listed on the Chicago Mercantile Exchange and are, for the most part, traded in "American terms". This simply
means that the currency prices listed in the futures market represent the dollar price of each 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 1.1639, it takes $1.16 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. Like the Euro futures contract, the majority of currency futures have a tick value of $12.50; others that share this characteristic are the Swiss Franc, and the Japanese Yen futures contract. 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 1.1239 and liquidates the position at 1.1432 would be profitable by 193 ticks or $2,412.50 (193 x $12.50).
Calculating profit, loss and risk in the stock index futures complex.
Before Putting Your Money on the Line…You Should Know the Basics. If you are like most people, you work hard for your money and the last thing you want to do is see it evaporate in your trading account. Throughout my journey in the markets, I have yet to find a fool proof way to guarantee profitable trading, but what I am certain of is that you owe it to yourself to fully understand the products and markets that you intend to trade before risking a single dollar. What you will learn from this article is merely a stepping stone to getting started in trading stock index futures, but without fully understanding the basic calculations of profit, loss and risk in the futures markets, you may never lay the foundation necessary to become a successful commodity trader.
When most people think of the commodity markets, they imagine fields of grain or bars of gold. However, a futures contract may be written on any commodity in which the underlying asset can be considered fungible. The term fungible purely means “interchangeable”, or having the ability to “comingle”, in trade. For example, you wouldn’t prefer to have one bushel of corn over another. According to the Chicago Mercantile Exchange Group, corn is corn as long as it meets the CME Group definition of a deliverable grade.
Financial products can be thought of in much of the same way. One unit of the S&P 500 index is just as valuable (or not) as the next. Therefore, financial products can also be considered commodities and trade similarly on futures exchanges around the world.
Don’t make the mistake of assuming because you are familiar with the equity markets, you can automatically apply that knowledge to trading in the future markets. Despite the underlying asset of stock index futures being based on indices which are household names, the manner in which they trade and the risk they pose to traders is dramatically different than their stock market counterparts.
Stock Index Futures Markets
In the U.S. there are four primarily traded futures contracts based on domestic stock indices; the Dow Jones Industrial Average (or simply the Dow), NASDAQ 100, Russell 2000, and the S&P 500. There are several other stock index futures available, but as a speculator you want to be where the liquidity is and many of them simply don’t offer that.
While stock index futures are all highly correlated in price, they have very distinct personalities. As a trader it is vital to be comfortable with the specifics of the futures contracts that you are trading and eventually the price characteristics of the underlying asset itself.
S&P 500 Futures
The S&P 500 futures contract traded on the CME, sometimes referred to as the “big board”, represents the widely followed Standard & Poor’s 500 index. This index is seen as a benchmark of large capitalization stocks in the U.S and is the most commonly traded stock index futures contract.
There are currently two versions of the S&P 500 futures contracts traded on the CME division of the Chicago Mercantile Exchange. Although the CME has ceased trading in most open-outcry futures pits on July 1st 2015, to make way for fully electronic execution in the futures markets, the futures exchange opted to keep the full-sized S&P 500 futures contract trading in a pit. Accordingly, traders can opt to execute their S&P 500 futures orders in the open outcry pit using the “big” S&P, or electronically using the e-mini S&P 500 futures contract.
The full-sized S&P futures contract has a point value of $250 with a minimum tick of .10. Floor brokers often refer to an S&P point as a “dollar”. For every point, or dollar, that the price moves higher or lower a trader will be making or losing $250. Thus, the contract size of the index is calculated by multiplying the index value by $250. For example, if the futures contract is currently trading at 2050.00 then one full sized S&P 500 futures contract is valued at $512,500. Similarly, a trader that goes long an S&P futures contract at 2089.40 and is forced to sell it due to margin trouble at 2053.20 he would have sustained a loss in the amount of 36.2 points or $9,050 plus the commissions paid to get into the trade. Once again, many traders aren’t willing to accept this type of volatility in their trading account and opt for the benefits of the e-mini version of the contract.
The e-mini S&P 500 is one fifth the size of its full-sized counterpart and unlike the larger version, the minimum tick is a quarter of a point or .25. With that said, the point value is $50 and the contract size is also one fifth the size of the original contract. If the e-mini S&P is trading at 2050.00 the value of the contract would be $102,500. Now that is more like it. An e-mini S&P futures trader is exposed to risk but relative to the “Big Board” contract it is much more controllable. When it comes to leverage, less is sometimes “more”.
A trader that goes long the e-mini S&P from 2035.00 and is able to sell the position at 2052.25 would have realized a profit of 17.25 points or $862.50. Again, this is figured by subtracting the sale price from the purchase price and multiplying the difference by $50.
2052.25 – 2035.00 = 17.25
17.25 x $50 = $862.5
Dow Jones Industrial Average Futures
Dow futures are listed and traded on the Chicago Board of Trade (CBOT) division of the Chicago Mercantile Exchange Group. The CBOT’s futures version of the Dow index closely follows the infamous Dow Jones Industrial Average comprised of 30 blue chip stocks.
In the past, the futures exchange provided futures traders with the ability to speculate on the DJIA in three different increments of risk and reward. However, in recent years the product listing has been streamlined a single Dow futures contract to increase efficiency; the mini-sized Dow (futures symbol YM). The DJIA mini-sized futures contract is often referred to in the industry as the “nickel Dow” because each point of movement in the futures market is worth $5 to a trader.
Unlike some of the true commodity futures contracts, the contract size of a stock index is not fixed. In fact, there is no contract size; instead, the contract value fluctuates with the market and is calculated by multiplying the index value by the point value (which is $5 in the case of the mini Dow futures contract). Accordingly, if the mini-sized Dow futures contract settled the trading day at 17,520 the value of the contract at that particular moment would be $86,250 ($5 x 17,520). Keep in mind that the margin for the mini-sized Dow is far less than $57,600 making it a highly leveraged trading vehicle. Margins are subject to change at any time, but the average seems to be between $4,000 and $5,000. As you can imagine, being responsible for the gains and losses of a contract valued at nearly $90,000 with as little as $4,000 could create large amounts of volatility in your commodity trading account. However, it is this leverage that keeps traders coming back to the futures markets for more. Unfortunately, it is the same leverage that has resulted in many bitter ex-futures traders.
Calculating profit and loss in the mini-sized Dow is relatively easy. Unlike many other commodities, or even financial futures, the Dow doesn’t trade in fractions or decimals; one tick is simply one point. Consequently, if a trader is long a mini-Dow futures contract from 17,257 and is able to liquidate the trade the next day at 17,348, the realized profit would have been 91 points or $455 (91 x $5). This is figured by subtracting the purchase price from the sale price and multiplying the point difference by $5.
17,348 – 17,257 = 91
91 x $5 = $455 (minus commissions and fees)
Not bad for a day’s work; regrettably, it isn’t always that easy. Had the commodity trader taken the exact opposite position by selling the contract at 17,257 and buying it back at 17,348 the loss would have been $455 plus commissions and fees.
NASDAQ futures are listed on the CME division of the Chicago Mercantile Exchange Group; it closely tracks the NASDAQ 100 index which includes the 100 largest non-financial stocks listed on the NASDAQ stock exchange. Prior to the closure of the futures trading pits at the CME, the exchange provided traders with two alternatives in speculation on the NASDAQ, a full sized contract and an e-mini version. However, the NASDAQ 100 futures contract now only trades in an e-mini version. This is probably a positive development to the retail trading community, because the original NASDAQ futures contract (full-sized), at $100 per point, was too large and volatile for most speculators.
The e-mini NASDAQ 100 futures contract comes with a point value of $20 (one fifth of the original $100 full-sized contract) reducing the contract size considerably. With the futures market at 4520.00, an e-mini NASDAQ contract is equivalent to $90,400 of the underlying index.
An e-mini NASDAQ trader long from 4505.50 and subsequently able to sell the position at 4532.75 would have been profitable by 27.25 points or $545. This is figured by subtracting the exit price by the entry price and multiplying the difference by $20.
4532.75 – 4505.50 = 27.25
27.25 x $20 = $545 (minus commissions and fees)
Generally speaking, the e-mini NASDAQ is the tamest speculative vehicle in the stock index futures complex in regard to daily profit and loss per contract held. Further, it also comes with the lowest margin requirement. For this reason, some beginning traders opt to trade the e-mini NASDAQ futures when dipping their toe into the futures arena. With that said, the NASDAQ 100 is far more susceptible to price moves dependent on a single stock (such as Apple) than a broader index such as the S&P 500 futures might be.
Russell 2000 Mini Futures
The mini Russell 2000 futures contract trades on the Intercontinental Exchange (ICE Exchange). It is the one and only stock index listed on ICE; consequently, it is also the most treacherous in regard to volatility. The Russell is believed to be a market leader, and it typically is, but sometimes leading the pack of stock index futures means excessive volatility.
A commodity trader long or short the Russell futures will make or lose $100 per full point of price movement. On an average day, the Russell will see a move from 3 to 8 points but on a volatile day it isn’t out of the question to see 15 to 25 points in price movement. If you’ve done the math in your head, you’ve realized that this equates to $1,500 to $2,500 in profit and loss per contract.
For instance, a trader that goes short a mini Russell Futures at 1221.00 and places a stop loss order at 1235.00 would be risking 14 points, or $1,400 before commission and fees.
1235.00 – 1221.00 = 14.00
14.00 x $100 = $1,400
If you are looking for a lot of bang for your buck, the Russell might be for you. Nevertheless, the massive and sudden market movements make it a risky venture.