All futures and commodities contracts adhere to standardization, which means they have predefined sizes and quantities. Let’s break down the anatomy of a futures contract:
Contract Size #
Each contract is associated with a specific size, determined by the exchange it is traded on. For instance, crude oil contracts are based on 1,000 barrels, gold contracts on 100 ounces, and silver contracts on 50 ounces, among others.
Contract Month #
Every commodity futures contract has a designated contract month. For example, the E-mini S&P trades during March, June, September, and December. The trading months may vary for different commodity futures contracts.
Contract Value and Tick Size #
Each commodity has a point value and tick value. The tick represents the minimum price increment by which a commodity futures contract moves. The dollar value of each tick differs for each commodity. As an illustration, the E-mini S&P contract has a minimum tick value of $12.5, and a full point consists of four ticks, making each point worth $50.
Futures contracts are either settled in cash or through physical delivery. However, deliveries are infrequent, and most futures brokers will inform you if you approach a delivery period. Therefore, it is advisable to familiarize yourself with the active months of your futures commodities market to avoid any complications associated with taking or cancelling delivery.
Each futures contract is denominated in a specific currency. For example, CME contracts are denominated in US dollars, while Eurex contracts are denominated in euros.
It is also important to note that each commodity futures contract possesses a particular quality and grade, which constitutes its “standardization.” For instance, a gold contract typically represents 99% pure gold. It is common to observe the same contract being traded on different exchanges. For example, crude oil can be traded on the CME (NYBOT) and the ICE exchange, but these contracts may vary in terms of their grade. The CME trades “sweet crude,” whereas the ICE exchange trades Brent crude oil.