Market side: Futures trading basics

LESSON 12: CALCULATING CONTRACT VALUES

Marty Hibbs, Grain Merchandiser, Grain Farmers of Ontario

This monthly educational series will feature the basic workings of the futures and options markets and how they can be utilized to help farmers with risk management.

THIS MONTH WE will cover a simple calculation for a futures trade by a typical client. The purpose for this exercise is to walk through each step of the trade and figure out the outcome in terms of dollars and cents.

We will assume you have a brokerage account with a broker showing a balance of U.S. $4,000 and are ready to trade your first futures contract. We will use our wheat contract specs to understand what we are trading.

The current price of December wheat is $5.90 per bushel. Since there are 5,000 bushels of wheat in this contract, each penny move will make or lose you $50. You call your broker and tell them to buy you one December Chicago wheat at the market. You are given a fill “bought one December wheat at $5.90”.

Let’s look at the transaction in your account activity chart:

Sept. 10: You purchase one ZWZ5 at $5.90 per bushel. It closed at $5.91 giving you a one cent per bushel gain. This profit is reflected in your total equity or balance of $4,050.

Sept. 12: The December wheat closed at $5.95. This represents a four cent move higher from the previous close or $200.  This is added to your equity of $4,050 to show your equity at $4,250.

Sept. 15: The December contract closes at $5.75 per bushel. This represents a 20 cent lower close from Sept 12 or $1,000 (20x$50). Your account value if you liquidated it at this point is $3,250.00.

Sept. 18: The market closes 15 cents lower at $5.60 per bushel. With the total equity now at $2,500 we are below the maintenance margin of $2,800 and are presented with a $740 margin call to bring your account equity back to the initial margin level of $3,240.

Sept. 19: After the United States Department of Agriculture report, the market closes limit up (45 cents). This represents an equity gain of $2,250.00 and our account equity on the close of business is $5,490.

Sept. 20: We sell our December wheat contract on the open at $6.05 and we are out of our position. Our account value is $5,490 cash with no open positions. •

Marty Hibbs is a 25 year veteran futures trader, analyst, and portfolio manager. Hibbs was a regular guest analyst on BNN for four years. He is currently a grain merchandiser with Grain Farmers of Ontario.

Lesson Definitions:

Types of margin for futures accounts:
Initial margin: In the futures market, initial margin refers to the initial deposit required in an account in order to enter into a futures contract. This margin is referred to as good faith because it is this money that is used to debit any day-to-day losses. This generally represents about five to 15 per cent of the contract value. This is calculated daily.

Maintenance margin: Maintenance margin is the minimum amount of equity that must be maintained for all open positions in a margin account. This is usually represented as cash excess which can be used to secure losses on a day to day basis for all open positions in a futures account. Maintenance margins vary from broker to broker and are generally lower than initial margins once the position is open.

About Marty Hibbs 29 Articles
Grain Merchandiser, Grain Farmers of Ontario