The futures contracts are not traded like stocks as is the case with shares, but rather as standardized contracts. Each futures contract has a standardized size defined by the futures exchange on which it is traded. For example, the contract size for gold futures is 100 troy ounces. This means when you buy one gold futures contract, you own 100 troy ounces of gold. If the price of gold rises by 1 dollar, this will result in a profit of 100 dollars (1 × 100 ounces). A new trader needs to familiarize themselves with each commodity and futures contract as the quantities of different futures contracts vary.
Delivery Months
Futures exchanges often refer to delivery months as “contract months.” If you are familiar with stock options, it is known that option contracts expire in the months specified by the exchange. The same system exists for futures options. Futures options need to relate to a futures contract due to the delivery mechanism set by the exchange.
For instance, in a November soybean futures contract, the seller has the right to deliver 5,000 bushels of soybeans in November, and the buyer has the right to take delivery of the soybeans. Some futures contracts have limited delivery periods while others have a delivery mechanism throughout all 12 months. A futures contract expires after a specified date in the delivery month.
Stock Symbols
The symbols for futures contracts differ slightly from stocks. Each futures market has a designated symbol followed by symbols for the contract month and year. For example, crude oil futures have a specific symbol: CL. The full symbol for crude oil futures in December 2017 would be CLZ7. Gold has a symbol (GC) and the full symbol for gold contracts in June 2017 would be GCM7.
In the case of oil, “CL” refers to the underlying futures contract. “Z” refers to the delivery month in December. (F=January, G=February, H=March, J=April, K=May, M=June, N=July, Q=August, U=September, V=October, X=November, Z=December). The number “7” refers to the year – 2017.
This is the standard format for futures contract symbols. Some quoting services may differ slightly, so always make sure to check with your service provider who will provide you with a list of futures contract symbols for all futures markets.
Minimum Fluctuation or Tick Size
The minimum fluctuation or tick size describes the smallest change that can occur in the futures market, also referred to as the “tick.” For instance, the tick in the crude oil market is 0.01 or 1 cent. The contract size for crude oil is 1,000 barrels.
To calculate the tick value, you should multiply 1,000 by 0.01 = 10 dollars. Therefore, each time you see the price of crude oil move by 0.01, you know that it means a movement of 10 dollars. If the price of crude oil rises by five cents, it means it is worth 50 dollars if you are trading one contract.
In the case of gold, the minimum tick size is 10 cents, since the total contract value is 100 troy ounces, and thus the tick also equals 10 dollars per contract. While both gold and oil have the same tick value, other futures contracts vary, so make sure to familiarize yourself with the tick sizes for all contracts you intend to trade.
Contract specifications are something that must be memorized before you start trading commodities and futures. Costly mistakes can occur due to a lack of understanding of these numbers.
It is not uncommon for a novice trader to make a costly mistake when buying or selling large and very volatile contracts relative to their accounts. It is always better to be prepared with knowledge before you start trading, as learning the hard way can be very costly.
Source:
https://www.thebalancemoney.com/understanding-a-futures-contract-809394
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