Commodity Futures and Contract Specifications

Futures contracts are the backbone of commodity trading. Understanding contract specifications, margin requirements, and rollover mechanics is essential for professional trading.

What is a Futures Contract?

Definition

• A standardized agreement to buy or sell a specific quantity of a commodity at a predetermined price on a future date
• Traded on regulated exchanges (CME, ICE, LME)
• Marked to market daily (daily settlement)
• Can be settled by physical delivery or cash

Key Terms

• Contract size: The quantity per contract (1,000 barrels of oil)
• Tick size: Minimum price movement ($0.01 per barrel = $10)
• Tick value: Dollar value of one tick ($10 for CL)
• Expiration: Month and day when the contract settles
• Settlement: Physical delivery or cash settlement

Major Contract Specifications

Crude Oil (CL)

• Exchange: NYMEX/CME
• Contract size: 1,000 barrels
• Tick size: $0.01/barrel = $10
• Trading hours: Nearly 24 hours (Sunday-Friday)
• Delivery: Cushing, Oklahoma
• Monthly expiration

Gold (GC)

• Exchange: COMEX/CME
• Contract size: 100 troy ounces
• Tick size: $0.10/oz = $10
• Active months: February, April, June, August, October, December
• Delivery: COMEX approved vault in New York

Natural Gas (NG)

• Exchange: NYMEX/CME
• Contract size: 10,000 MMBtu
• Tick size: $0.001/MMBtu = $10
• Monthly expiration
• Delivery: Henry Hub, Louisiana

Corn (ZC)

• Exchange: CBOT/CME
• Contract size: 5,000 bushels
• Tick size: $0.25/bushel = $12.50
• Active months: March, May, July, September, December
• Delivery: Chicago area

E-micro Contracts (Smaller)

• Micro Gold (MGC): 10 oz ($1 per tick)
• Micro Crude (MCL): 100 barrels ($1 per tick)
• Perfect for smaller accounts
• Same market exposure, lower capital requirement

Margin and Leverage

Initial Margin

• The deposit required to open a position
• Set by the exchange (minimum) and broker (may be higher)
• Typically 5-15% of contract value
• Example: Crude oil at $80 = $80,000 value, margin ~$6,000

Maintenance Margin

• Minimum balance required to keep position open
• Usually 70-80% of initial margin
• If account falls below this, you receive a margin call
• Must deposit more funds or position is liquidated

Leverage Implications

• Futures provide substantial leverage
• A 1% move in oil = $800 on one contract (13% return on margin)
• Leverage works both ways - losses are equally amplified
• Professional traders rarely use more than 25% of available leverage

Contract Rollover

What is Rollover?

• Closing the expiring near-month contract
• Opening the same position in the next active month
• Must be done before the first notice day (physical delivery risk)
• Most traders roll 1-2 weeks before expiration

Rollover Costs

• Contango market: Rolling costs money (next month is more expensive)
• Backwardation market: Rolling earns money (next month is cheaper)
• Track the "roll yield" as part of your total return
• ETFs like USO suffer from persistent contango roll costs

Rollover Calendar

• Know the last trading day and first notice day for your contract
• Set reminders 2 weeks before expiration
• Never hold to expiration unless you want physical delivery
• Liquidity migrates to next month 1-2 weeks early

CME Micro Futures for Beginners

Advantages

• 1/10th the size of standard contracts
• Lower margin requirements
• Perfect for learning and practice
• Same market, lower risk

Available Micro Contracts

• Micro E-mini S&P 500 (MES)
• Micro E-mini Nasdaq (MNQ)
• Micro Gold (MGC)
• Micro Crude Oil (MCL)
• Micro Bitcoin (MBT)

Key Takeaways

1. Always know your contract's tick value before trading
2. Margin is not cost - it is a performance bond
3. Roll contracts well before expiration to avoid delivery issues
4. Micro contracts are ideal for newer traders with smaller accounts
5. Leverage in futures is powerful - use it responsibly