Rapeseed Futures Trading Basics

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Fun with Futures: Basics of Futures Contracts, Futures Trading

At first glance, futures trading may seem complex. Let’s explore what goes into trading futures contracts.

Key Takeaways

  • Futures contracts have standardized delivery terms
  • Futures market participants include professionals looking to mitigate risk and speculators looking to profit from price movement
  • Buying or selling a futures contract requires the posting of margin sufficient to cover potential losses

At first glance, the futures markets may appear arcane, perilous, suited only for those with nerves of steel. That’s understandable, as some tend to be more volatile in price than many traditional stocks and bonds.

But we often fear what we don’t know. Many futures contracts—such as those based on crude oil, gold, soybeans, and more—have origins quite literally at ground level (or below ground). What futures markets do over the short- and long-term can tell investors a lot about what’s going on in the world (how much it will cost to fill your gas tank before your summer road trip, for example).

Understanding how futures markets work, and perhaps even trading futures at some point, starts with some basic questions. What are futures and how do you trade futures? Let’s explore.

What Is a Futures Contract?

A futures contract is a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month. Typically, futures contracts are traded electronically on exchanges such as CME Group, the largest futures exchange in the U.S.

Most futures contracts are “standardized,” or effectively interchangeable, and spell out certain specifications, including:

  • Quality and quantity of a commodity
  • Unit pricing of the asset and minimum price fluctuation (tick size)
  • Date and geographic location for physical “delivery” of the underlying asset (but actual delivery rarely happens, as most contracts are liquidated before the delivery date)

For example, a December 2020 corn futures contract traded on CME Group represents 5,000 bushels of the grain (trading in dollars per bushel) to be delivered by a certain date in December 2020. Crude oil futures represent 1,000 barrels of oil, and are quoted in dollars and cents per barrel.

Who Trades Futures Contracts, and Why?

According to Adam Hickerson, Manager, Futures and Forex, TD Ameritrade, “Futures have such a robust market. There are so many different parties and individuals trading futures, who combined provide access to deep liquidity, making it easier for all participants to conduct business and trade.” The first group of traders are commodity producers and processors (aka, “commercials”) such as oil companies, grain millers, and precious metals miners. There are also speculators, such as big banks, hedge funds, and individuals who trade for a living along with retail traders.

The various market “players” have their own motivations for buying and selling futures—say, a grain processor that wants to “hedge,” or protect, against the prospect of a severe summer drought in the farm states of the U.S. Midwest that could send corn and soybean prices soaring.

Speculators, meanwhile, aim to make money—to “buy low and sell high” (or vice versa). Just like in the equities markets, speculators are looking to capitalize on the price fluctuations of the futures contract. They’re trying to turn profits on price moves.

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Both commercials and speculators are essential to generate the necessary liquidity for properly functioning futures markets. They provide ample numbers of willing sellers for willing buyers. (A similar principle applies in stock and bond markets.)

What’s the History of Futures and How Did They Evolve?

Early versions of futures contracts have been traced back to rice markets in Japan in the early 1700s. But futures trading as we know it today began around 1848, when a group of grain merchants established the Chicago Board of Trade (CBOT).

A few years later, the CBOT established the first recorded “forward” contract—a predecessor of the futures contract—based on 3,000 bushels of corn. CME Group has since purchased the CBOT and several other exchanges over the past decade.

Why did futures take root in Chicago? The city’s location in the middle of the nation’s breadbasket made it a convenient place for buyers and sellers to meet.

“Farmers raised livestock and grew crops and other agricultural commodities and brought them to market to sell to commercial entities,” according to MarketsWiki, a derivatives market database. “Substantial risk existed on both sides of that process. Buyers were vulnerable to the delivery of substandard products, or no products at all if the growing season had failed to produce enough of the commodity.”

Buyers “needed a way to ensure that the quantity and quality of commodity they needed would be available when they needed it. Farmers needed a way to know that a glut of available crops would not put them out of business.”

What’s the Role of Futures Exchanges?

Exchanges provide a central forum for buyers and sellers to gather—at first physically, now electronically. For the first 150 years or so, traders donned colorful jackets, stepped into tiered “pits” on the trading floors of the CBOT and other exchanges, and conducted business by shouting and gesturing. Today, so-called open outcry trading has largely been replaced by electronic trading.

Exchanges play another other important role in “guaranteeing” futures contracts will be honored; many exchanges operate “clearinghouses,” which serve as backstops or “counterparties” in every trade. The basic idea is to reduce or eliminate counterparty risk and ensure confidence in the markets.

What About the Role of Margin in Futures Trading?

In the equity markets, buying on margin means borrowing money from a broker to purchase stock—effectively, a loan from the brokerage firm. Margin trading allows investors to buy more stock than they normally could.

Margin works similarly, but is different in futures markets. When trading futures, a trader will put down a good faith deposit called the initial margin requirement. The initial margin requirement is also considered a performance bond, which ensures each party (buyer and seller) can meet their obligations of the futures contract. Initial margin requirements vary by product and market volatility and are typically a small percentage of the notional value of the contract.

An individual or retail investor who wants to trade futures must typically open an account with a futures commission merchant (FCM) and post the initial margin requirement, which, in turn, is held at the exchange’s clearinghouse.

If prices move against a futures trader’s position, that can produce a margin call, which means more funds must be added to the trader’s account. If the trader doesn’t supply sufficient funds in time, the trader’s futures position may be liquidated.

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Futures Measures

Futures Trading Basics | Understanding Futures Products

| FRI JUN 12, 2020

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:

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

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

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The Basics of U.S. Treasury Futures


CBOT Treasury futures are standardized contracts for the purchase and sale of U.S. government notes or bonds for future delivery. The U.S. government bond market offers the greatest liquidity, security (in terms of credit worthiness), and diversity among the government bond markets across the globe. The U.S. government borrows through the U.S. bond market to finance its maturing debt and its expenditures. As of December 2020, there was $15.6 trillion of U.S. government bonds and notes outstanding as marketable debt.

The U.S. government borrows money primarily by issuing bonds and notes for a fixed term, e.g. 2-year, 5-year, 10-year, and 30-year terms at fixed interest rates determined by the prevailing interest rates in the marketplace at the time of issuance of the bonds. Strictly speaking, U.S. Treasury bonds have original maturities of greater than 10 years at time of issuance, and U.S. Treasury notes have maturities ranging from 2-Yrs to 10Yrs (2, 3, 5, 7 and 10yr). For the purpose of this note, U.S. Treasury bonds and notes are applicable for general references to the U.S. bond market or U.S. bonds unless described otherwise.

U.S. Treasury bonds trade around the clock leading to constant price fluctuations. In general, bond prices move in inverse proportion to interest rates or yields. In a rising rate environment, bondholders will witness their principal value erode; in a declining rate environment, the market value of their bonds will increase.

IF Yields Rise ▲ THEN Prices Fall ▼
IF Yields Fall ▼ THEN Prices Rise ▲

U.S. Treasury futures and options contracts are available for each of the Treasury benchmark tenors: 2-year, 5-year, 10-year, and 30-year. Additionally, CME Group offers Ultra 10-Year Note and Ultra T-Bond futures which offer greater precision for trading the 10-year and 30-year maturity points on the yield curve respectively..

Each of the bond and note future contracts has an associated delivery bond basket that defines the range of bonds by maturity that can be delivered by the seller to the buyer in the delivery month. For example, the 5-year contract delivers into any U.S. government fixed coupon bond that has a remaining maturity of longer than 4 years and 2 months and an original maturity of no more than 5 years and 3 months. The delivery mechanism ensures the integrity of futures prices by ensuring that they are very closely tied to the prices of U.S. government bonds and their yields (interest rates). In practice, most participants trade U.S. Treasury futures contracts with the intent of either closing out the futures position or rolling them into longer expiry futures contracts. U.S. Treasury futures are listed on the March, June, September, and December quarterly cycles. Since 2000, only about 7% of Treasury futures positions result in physical delivery at expiration.

Table 1: CBOT Treasury Futures Contract Details

2-Year T-Note Futures

5-Year T-Note Futures

10-Year T-Note Futures

Ultra 10-Year T-Note Futures

Ultra T-Bond Futures

1 3/4 to 2 years

4 1/6 to 5 1/4 years

6 1/2 to 10 years

9 5/12 to 10 Years

15 years up to 25 years

25 years to 30 years

March quarterly cycle: March, June, September, and December

Electronic: 5:00 pm – 4:00 pm, Sunday – Friday (Central Time)

Last Trading & Delivery Day

Last business day of contract month; delivery may occur on any day of contract month up to and including last business day of month

Day prior to last seven (7) business days of contract month; delivery may occur on any day of contract month up to and including last business day of month

In percent of par to one-eighth of 1/32nd of 1% of par

In percent of par to one quarter of 1/32nd of 1% of par

In percent of par to one-half of 1/32nd of 1% of par

In percent of par to one-half of 1/32nd of 1% of par

In percent of par to 1/32nd of 1% of par

In percent of par to 1/32nd of 1% of par

Minimum Tick Value

Each U.S. Treasury futures contract has a face value at maturity of $100,000 with the exceptions of 2-year and 3-year U.S. Treasury futures contracts which have face value at maturity of $200,000. Prices are quoted in points per $2000 for the 2-year and 3-year contract and points per $1000 for the all other U.S. Treasury futures. The fractional points are expressed in 1/32nd in line with the convention in US government bond market. The minimum tick size for the 30-year (T-Bond) and Ultra T-Bond contracts is 1/32nd of one point ($31.25), 10-Year and Ultra 10-Year is half of 1/32 nd of one point ($15.625), 5-year is one-quarter of 1/32nd of one point ($7.8125), and 2-year is one-eighth of 1/32 nd of one point ($7.8125).

Treasury futures are standardized, highly liquid, and transparent instruments. In 2020, CBOT U.S. Treasury Futures traded an average of 4.2 million contracts daily. In addition, futures are a neutral security, which can be easily traded from the long or short sides. Treasury futures positions provide the security of facing CME Clearing, which acts as the counterparty to every trade*. Finally, U.S. Treasury futures provide easy access to leverage and both capital and operational efficiencies. These are among the reasons U.S. Treasury futures have a broad and diverse mix of customer types including Asset Managers, Banks, Corporate Treasurers, Hedge Funds, Insurance Companies, Mortgage Bankers, Pension Funds, Primary Dealers, & Proprietary Traders. The vast hedging and speculative activity in U.S. Treasury futures create nearly constant price fluctuations providing excellent opportunities trading for individual traders in addition to institutional trading accounts.

Trading Examples – U.S. Treasury futures:

Historically, when the economy strengthens, interest rates are likely to rise for a number of reasons such as:

  • increased demand for loans
  • asset allocation out of bonds (typically considered a safe asset class) into stocks (typically considered a risky asset class)
  • increased likelihood of interest rate increases by the Federal Reserve Board

When interest rates rise, U.S. Treasury futures prices fall.

Similarly, when the economy weakens, interest rates are likely to fall for reasons such as:

  • decreased demand for loans
  • asset allocation out of stocks into bonds
  • increased likelihood of interest rate cuts by the Federal Reserve Board

The US economy is more like a cruise liner than a speed boat in that it often stays on a path of strengthening or weakening for several months to a few years. This causes broader moves in interest rates that are spread over considerable time periods as opposed to very short periods. Nevertheless, U.S. Treasury futures produce short term trading opportunities, as demonstrated in the following examples.

Example 1: A trader believes that the U.S. economy is strengthening and intermediate Treasury yields will increase (5-Yr and 10-Yr).

This trader sells 10 contracts of March 2020 5-year T-Note futures at 114 25/32.

The trader’s view proves correct. The economic numbers continue to show that the US economy is strengthening. 5-Yr Treasury yields rise, and the March 2020 5-year T-Note futures price declines. The trader buys back the 10 March 2020 5-year T-Note futures contracts at 114 03/32.

Profit on this example trade = 10 * (114 25/32 – 114 03/32) * $1000 = $6,875

(Profit or Loss = Number of contracts* Change in price * $1000)

The profit calculation in this example can also be expressed in terms of minimum ticks or simply referred to as ticks. The tick size for 5-year contract is ¼ of 1/32nd of 1 point.

The $ value for minimum tic of the 5-year contract is $7.8125.

Number of ticks made on the trade = (25/32 – 3/32) * 4 = 88 Ticks

Profit on this example trade = 10 Contracts X 88 Ticks X $7.8125 = $6875

Example 2: The monthly U.S. non-farm payroll number on the first Friday of a month comes out significantly weaker than expected. This indicates a surprisingly weakening economy. As a result,

Treasury yields decline, and U.S. Treasury futures prices rise. A trader notices that the March 2020 10-year T-Note futures have responded to the report by posting modest rally from 121 05/32 to only 121 15/32. He believes that the weakness in the number was a significant surprise and more participants will soon need to buy notes.

This trader buys 10 contracts of March 2020 10-year T-Note futures at 121 15.5/32.

The trader’s view proves correct. Intermediate Treasury yields continue to fall, and the

10-year T-Note future price rises further. An hour later the trader sells back the 10

March 2020 10-Yr T-Note futures contracts at 121 23/32.

Profit on this example trade = 10 * (121 23/32 – 121 15.5/32) * $1000 = $2344 (rounded to nearest dollar)

Similar to the previous example, let us recalculate the profit in this example using ticks. The tick size for 10-year contract is 1/2 of 1/32nd of 1 point. The $ value for minimum tic of the 10-year contract is $15.625.

Number of ticks made on the trade = (23/32 – 15.5/32) * 2 = 15 Ticks

Profit on this example trade = 10 Contracts X 15 Ticks X $15.625 = $2344 (rounded to nearest dollar)

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