Burning Questions on Futures: Notional Value, Tick Size, and Other Contract Specs

Interested in learning about futures contracts? Here's a primer on multipliers, tick size, and other futures contracts specifications.

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https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Contract specifications for futures
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Key Takeaways

  • Futures contracts specifications detail the stake in an underlying commodity
  • Other contracts specs include tick size, multipliers, and more
  • How many bushels or barrels? We look at a few specific commodity examples

Are you an experienced stock trader looking to expand your trading prowess? If so, you may be interested in the futures markets as a capital-efficient way to gain exposure to six different asset classes, virtually around the clock. Futures contracts allow market participants to express their opinions and capture trading opportunities based on the price movements of commodities, interest rates, currencies and equity indices.

The futures market is a robust one, made up of several participants such as banks, corporations, governments, farmers, institutional investors, and retail traders. These participants may either be looking to hedge their risk or trying to capitalize on price fluctuations which is known as speculating. Learn more about the basics of futures and futures trading

Asset Class Exposure

When you buy a stock, you’re getting exposure to the price movement of a specific company, be it a drug maker, auto company, or something else. In a similar vein, with futures contracts, you get exposure to the price movement of, for example, Euros, crude oil, or soybeans.

A futures contract is an agreement to buy or sell a financial instrument or a physical commodity for a future delivery on a regulated commodity futures exchange. The key components to futures contracts are known as contract specifications, or contract “specs.”

Futures contract specifications include:

  • Contract size. This is the quantity of the asset in each contract which is standardized and does not change but can be different for each instrument. For example, one contract of Crude Oil (/CL) represents 1,000 barrels. The E-Mini S&P 500 futures (/ES) represent $50 times the price of the S&P 500 Index.
  • Contract value, or “notional value.” This is the contract size multiplied by the current price. For example, if crude oil is trading for $65 a barrel, the notional value of one contract is ($65 x 1000) = $65,000.
  • Tick size. Tick size is the minimum price increment a particular contract can fluctuate. Tick value is often quoted in dollars and cents, or even fractions of a penny.
  • Delivery. Futures contracts are either cash-settled—contracts expire directly into cash at expiration, or physically-settled—contracts expire directly into the physical commodity. Physical delivery specifications (where and when the physical commodity is to change ownership) are spelled out in the contract specs. Since most futures participants trade futures in order to gain exposure to price movement, and not the physical delivery, most contracts are liquidated prior to expiration. Besides, TD Ameritrade clients aren’t allowed to take physical delivery.    

A Note on Margin

When you buy or sell a futures contract, you don't put up the entire notional value, but rather you post the initial margin. The futures margin requirement is essentially a "good faith" deposit. Futures contracts use leverage which means a small investment controls a large amount of notional value. Leverage can be a double-edged sword; a small market movement can have a large impact—positive or negative—on the account's P/L.

Also, since each futures product comes with its own set of risk dynamics, and those dynamics can change with market conditions, each has its own margin requirement. Margin requirements are set by the exchange but can change at any time. Initial margin and other contracts specs can be viewed in the thinkorswim® platform under the Trade tab, click the dropdown box > Futures. See figure 1 below. 

FIGURE 1: FUTURES MARGIN, CONTRACT SPECS. Qualified account holders can log into the thinkorswim platform and see initial margin requirements and other contract specs. Under the Trade tab, click the dropdown box and click Futures. Image source: The thinkorswim platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Some Futures Contract Specs

While each futures contract of a specific product comes in a standardized contract size, each product is different. Sometimes, the reason for a specific size was based on a fundamental factor. For example, the contract size of RBOB Gasoline futures (/RB) is 42,000 gallons, which makes sense, because a barrel of crude oil is typically refined into 42 gallons of gas. Since the contract size of crude oil is 1000 barrels, the two contracts match up nicely.

Corn, Soybeans and Wheat

Each futures contract for corn, soybeans and wheat specifies 5,000 bushels (somewhat of an antiquated term, but still used in the U.S. grain business; one bushel of corn weighs about 56 pounds, and the amount of corn in one futures contract would fill five or six semi-trucks).

The minimum tick size for these three grain futures is one-quarter of a cent. There are several delivery locations for corn futures, mostly grain storage facilities in Illinois (actual delivery rarely happens in grain futures and most other commodities, but rather, most contracts are liquidated prior to the delivery period).

Crude Oil

One West Texas Intermediate (WTI) crude futures contract specifies 1,000 barrels of oil, and the minimum price fluctuation is one cent. WTI is a light, “sweet” grade of oil (lower density and sulfur content than many other grades) similar to much of the crude pumped in major U.S. oil regions. Deliveries are made at oil storage facilities in Cushing, Oklahoma.

30-year Treasury Bonds, 10-year Treasury Notes and Eurodollars

Part of CME Group’s interest rate complex, Eurodollars, T-bond and T-note futures are among the most actively-traded financial futures in the world, used by banks and others to manage interest rate risks, such as Federal Reserve policy, economic conditions and more.

Contract sizes for Eurodollars and T-notes are $1 million and $100,000, respectively. Eurodollars are quoted in dollars and cents and have a minimum price fluctuation of one quarter of one interest rate basis point ($6.25 per contract). T-bond futures are quoted in 32nds of a point, and the minimum price move is one-half of one thirty-second of one point ($15.625, rounded to the nearest cent per contract).

Gold

One gold futures contract specifies 100 troy ounces of the metal, quotes in U.S. dollars and cents per ounce, with a minimum fluctuation of 10 cents per ounce. Deliveries can be made or taken at several exchange-approved depositories.

Live Cattle and Lean Hogs

Both specify 40,000 pounds per contract and a minimum price fluctuation of $0.00025 per pound. For cattle, physically delivery of the live animals can be made at several slaughter plants in Texas and other top cattle states. By contrast, lean hogs are based on carcass weight and are financially settled.

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