Contract Specifications

Given the nature of my job as a trader, it was of utmost importance to know everything about the product you were trading. As such, the details for the examples provided in this blog post can be a little bit daunting. To further complicate things, there might be some words and phrases I haven't explained yet, but that's because I can't talk about one aspect of a futures contract without bringing up another. I'll try my best to explain everything clearly. Let's get started.

We'll take a look at two examples: Corn Futures and S&P 500 Futures.

Corn Futures

Corn futures are traded at the Chicago Mercantile Exchange (formally Chicago Board of Trade) under the symbol ZC. You can see a summary of the contract specs at this website (this pdf file is the actual rulebook). As you can see, everything (from the size of the contract to when/where it will be delivered) about the contract is standardized and specified.

First, note the contract size. Contract Multiplier (or contract size) is the amount of underlying asset each contract represents. In this case, for each corn future you purchase, you are purchasing a future delivery of 5,000 bushels of corn delivered to one of the locations mentioned in the rulebook (you have to arrange to pick it up yourself).

The pricing unit is "cents per bushel." For instance, if the purchase one corn future contract for a price of 400, I would be paying 400 (cents / bushel) * 5,000 (bushels) = 2,000,000 cents (or $20,000) in cash. (While the official prices are printed as such (400 or 401), traders will often prefer to look at it as dollars and not cents. So you can think 4.00 (dollars / bushel) 5,000 (bushels) = $20,000 instead).

Now that we know how it's priced, let's take a look at the tick size. The contract specs say it ticks in "1/4 of one cent per bushel." So, if you have a price of 3.45 the next increment of price would be 3.4525, then 3.4550, then 3.4575. On the exchange, the prices are represented in eighths (because the corresponding option contracts tick in eighths), even though it ticks in quarters. For instance, you might see the last price traded as 375'4 (which would equal 3.7525, equivalent to 3.7525 * 5,000 = $18,762.50).

Finally, the contract specs indicate how these corn futures are settled. Settlement is the act of executing the contract when they expire and can be done in one of two ways. Physical delivery is when the amount specified of the underlying asset is delivered by the seller to the buy. Cash Settlement is a cash payment made based on the loss/gain related to the contract.

S&P Futures

S&P 500 Futures are also traded on Chicago Mercantile Exchange (CME) under two symbols SP (the "Big") and ES (the "Mini"). These futures are based on Standards and Poor's 500 (an American stock market index that best represents the U.S. stock market). Why the two symbols? It's because they have two different multipliers. We'll see shortly why these details matter so much in a trader's world.

The "Big" contract is traded in the Open Outcry trading pit at the CBOT pit during regular trading hours. When the floor (or trading pit) closes, it moves onto CME's electronic platform called CME Globex. The "Mini" contract trades exclusively on CME Globex.

The contract sizes for the "Big" is $250 * the S&P500 and trades in $0.10 ticks. So each tick is worth $250 * 0.10 = $25. For instance, if you purchased one of the SP contracts for 1895.20 and sold it one tick up at 1895.30, you would have just made exactly $25 (minus any transaction fees).

The "Mini" contract is 1/5th the size of the "Big" at $50 * the S&P500. The smallest increment (one tick) is $0.25 and so 1 tick equals $50 * 0.25 = $12.50. Notice how even though the ES tick size is larger than the SP (0.25 versus 0.1), because of the contract size the actual increment in dollars is smaller. The E-mini is usually the vehicle of choice for most traders given its accessibility (electronic), smaller size (contract size) and liquidity (more people trade it).

Finally, both SP and ES are cash settled. For instance, let's say I purchased one ES for the price of 1807.25. The monetary value of my investment would be 1807.25 * 50 = $90,362.50. On the day of expiry, the S&P index settles at 1809.32. Then since I purchased the future, I would have made 1809.32 - 1807.25 = 2.07 points (monetary value of 2.07 * 50 = $103.50). In another example, let's say I sold a SP contract at 1825.40. On the day of expiry, let's say the index settles at 1835.20. I would have lost (1835.20 - 1825.40) * 250 = $2,450.

S&P500 is of particular interest to options traders across the US (most of them in Chicago), given its liquidity and potential earnings. We'll definitely come back to discuss trading the S&P500 in the future.

(Note: Now that you know what contract specs are, I won't necessarily put dollar signs for prices. That is, if I say I buy an option for 3.00, it means just that. The cash value of 3.00 varies greatly depending on the contract size and multiplier.)

I did a similar exercise for Bitcoin Futures when they first released it a few months ago. Check it out here.