Figuring P&L in Commodities: It All Makes Cents

 

Energy Futures

crude oil futuresCrude Oil Futures


Crude oil is one of the most talked about commodities but is also one of the most challenging of the futures markets to speculate. WTI (West Texas Intermediate) Light sweet crude (not to be confused with Brent crude oil) is quoted in dollars per barrel. From a commodity trading standpoint, it is relatively simple to calculate profit, loss, and risk in crude oil futures because it is quoted in dollars and cents, as we are accustomed to in everyday life. The contract size is 1,000 barrels, so each penny of price movement in crude represents $10 of risk to a commodity trader.


A price quote of 65.00 is just as it appears, $65.00 per barrel of crude. A drop in price from 65.00 to 63.00 is equivalent to a $2,000 profit or loss for a futures trader. Remember, each penny is worth $10 to a trader and a $2 move in price is 200 cents.

Heating Oil Futures

Heating oil futures and unleaded gasoline are much more complicated to figure. Both are quoted in cents per gallon, similar to how it is displayed to you at a gas station pump. Consequently, in both cases the decimal point separates the dollars from the cents and each of them trade in fractions of a cent. The contract size for each is 42,000 gallons, so each point in price movement is worth $4.20 cents to a futures trader and each penny (100 points) is worth $420. For example, if heating oil futures are trading at 2.1060 ($2.10 6/10) and rallies to a price of 2.2140 ($4.21 4/10) the futures contract has gained 10.8 cents or $4,536 (10.8 x $420). By this example you can see how easily money can be made or lost in the futures market. A price move of less than 11 cents could result in a profit or loss of several thousand dollars.

Natural Gas Futures


Natural gas futures are quoted in BTU's or British Thermal Units which is a measurement of heat and has a contract size of 10,000 mmBTU or million BTU's. Each tick of price movement in this contract is valued at $10 and there are 1000 ticks in a dollar of price movement. Thus, for every dollar move in the natural gas futures market, the value of the contract appreciates or depreciates by $10,000. To illustrate, if the market rallies from 3.305 or $3.30 1/2 to 4.305 a trader would have made or lost $10,000 on one futures contract. This might be enough to deter you from this market, unless of course you have deep pockets and substantial risk tolerance.

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