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Economic Purposes of Futures Trading - Page 3

How to Read Commodity Futures Price Tables

Price is the key statistic generated by futures markets, although the volume of trade and the number of outstanding contracts (open interest) also are important. Prices are available from a variety of sources, including many daily newspapers. Most papers also report volume and open interest.

Since the policies of wire services and newspapers vary to some extent in their format and terminology, this publication will describe price reporting formats in general terms, using as an example Table 1.

Table 1. CBT Corn Futures Prices

-GRAINS AND OILSEEDS-

Corn (CBT) 5,000 bu.; cents per bu.

  Open High Low Settle Change Lifetime
High
Lifetime
Low
Open
Interest
May 252.00 252.75 250.75 278.00 ..... 285.00 228.00 4233
July 258.00 258.75 256.50 258.00 -.25 285.50 232.50 141648
Sept 262.75 263.50 261.50 262.00 ..... 270.50 238.00 33922
Dec 266.25 267.50 264.75 266.75 ..... 268.00 235.50 141307
Mr 96 272.50 273.50 271.00 272.75 ..... 274.00 249.50 14723
May 276.25 277.00 275.00 276.75 ..... 277.75 259.50 1352
July 278.25 279.25 277.25 278.75 ..... 280.00 254.00 7351
Dec 253.75 253.75 252.75 253.50 ..... 258.50 239.00 4373

Est. vol 38,000; vol Wed 38,592; open int 348,967 + 987

The open or opening price is the price or range of prices for the day's first trades, registered during the period designated as the opening of the market or the opening call. In the table shown, May 1995 corn on the Chicago Board of Trade (CBT) opened at $2.52 per bushel. Many publications print only a single price for the market open or close regardless of whether there was a range with trades at several prices.

The word high refers to the highest price at which a commodity futures contract traded during the day. The high price for March 1996 corn was $2.73 per bushel.

Low refers to the lowest price at which a commodity futures contract traded during the day. The low price for March 1996 corn was $2.71 bushel.

Some publications show a close or closing price in their tables. The closing price is the price or range of prices at which the commodity futures contract traded during the brief period designated as the market close or on the closing call --(i.e., last minute of the trading day).

Because the last few minutes of trading are often the busiest part of the day, with many trades occurring simultaneously, the exchange clearing house computes a settlement price from the range of closing prices. The settlement price, which is abbreviated as settle in most pricing tables, is used by the clearing house to calculate the market value of outstanding positions held by its members. It is also frequently used synonymously with closing price, although they may, in fact, differ.

The change refers to the change in settlement prices from the previous day's close to the current day's close. The - change for July 1995 corn indicates that the previous day's settlement price must have been 258 (i.e., 258 +).

The lifetime high and low refer to the highest and lowest prices recorded for each contract maturity from the first day it traded to the present.

Open interest refers to the number of outstanding contracts for each maturity month. Some newspapers do not include this information.

At the bottom of the table is another line of information. Est. vol. indicates the estimated volume of trading for that day was 38,000 contracts. Vol. Wed. means that the trading volume for the previous day was 38,592 contracts. Open Int. refers to the total open interest for all contract months combined at the end of the day's trading session. The 348,967 open contracts represent an increase of 987 contracts from the open interest of the previous day at the close.

The third line of the table reads as follows: "Corn (CBT) 5,000 bu; cents per bu." This line means that the table applies to the Chicago Board of Trade (CBT) corn contract; the contract size is 5,000 bushels; and the prices shown in the table are in units of cents per bushel. Thus, 252 cents means $2.52 and of a cent per bushel.

Some publications may differ slightly in their report formal. The Washington Post, for example, report grain prices in dollars per bushel rather than cents per bushel. Also, newspapers may often group futures contracts by exchange, whereas the Wall Street Journal, and others group them according to the type of commodity (for example, metals, grains, food-stuffs, financial, etc.).

Option price tables are set up differently than futures price tables. To understand an option price table, it is first necessary to understand basic option terminology. There are two types of options, "call" and "put" options.

A call option gives the buyer the right, but not the obligation, to buy a commodity (or a futures contract, in the case of an option on a futures contract) at a pre-established "strike price" or "exercise price" prior to the expiration date of the option contract.

A put option gives the buyer the right, but not the obligation, to sell a commodity (or a futures contract, in the case of an option on a futures contract) at the strike price in the contract prior to expiration of the contract.

The purchaser of an option (call or put) pays a premium to the seller (also called "writer" or "grantor") of the option. Depending upon the buyer's objective in purchasing the option, the premium represents either the cost of price protection (for a hedger) or the cost for an opportunity to profit from a favorable price movement in the case of a speculator. The premium is the cost of the option.

The size of an option on a futures contract is equal to the size of the underlying futures contract. In the following gold option table, the size of the contract is stated in the table heading. Also, the heading is the pricing unit for the contract. In the case of gold, the pricing unit is dollars per troy ounce.

An option customer has to make several decisions before buying or selling an option. Among the important ones are:

1) Whether to buy or sell a call or a put option;

2) Which expiration month to use; and

3) Which strike price to choose.

4) Is the present option premium appropriate for me to realize my profit goals.

An option's premium consists of its time value and its intrinsic value. The intrinsic value of an option is the difference between the strike price and the price of the underlying futures contract or zero, whichever is greater. For instance, if an April gold call option has a strike price of $300 an ounce, and the April futures price is currently $320, the call option has an intrinsic value of $20 an ounce and is in-the-money. If the futures price were $260 an ounce, the call option would be out-of-the-money by $40 an ounce and would have an intrinsic value of zero. If the option has several months to go before expiring it is then considered to have time value, although in dollar terms this may be relatively low.

When an option is out-of-the-money, the premium or market price of the option totally reflects its time value--the amount an option purchaser is willing to pay for the possibility that the option will become profitable prior to the date when the option expires.

The likelihood of an option moving into the money depends upon the time remaining until the option's expiration and the price volatility of the underlying commodity. Professional traders use sophisticated models to measure price volatility and to compute what an option's premium should be. Some of the factors they consider are:

1) The strike price;

2) The price of the underlying futures contract;

3) The time remaining before the option expires;

4) The volatility of the underlying futures contract; and

5) Short term interest rates.

Table 2. Gold Option Price Table

GOLD (CMX) 100 troy ounces; dollars per troy ounce.

Calls-Last Puts-Last
Strike
Price
Aug-C Oct-C Dec-C   Aug-P Oct-P Dec-P
290 21.00 26.50     0.40 3.00 4.80
300 11.90 19.30     1.20 5.30 7.1
320 1.00 8.50 13.70   10.00 13.50 15.00
340 0.20 2.80 6.80   29.40 28.50 28.00
360 0.10 1.00 3.50   49.40 46.20 44.00
380 0.10 0.60 1.70   69.40 ... 62.00

Est. vol. 5,800, Fri vol. 3,729 calls, 2,267 puts.

Open interest Fri. 42,755 calls, 31,931 puts.

However, the actual premiums paid for options are arrived at through competitive bidding and offering and can differ from theoretical values. In the gold option price table (Table 2), there are three expiration months listed for both calls and puts--August, October, and December. In the far left-hand corner of the table is a series of strike prices that may be chosen, ranging from $290 to $380 per troy ounce. The price of an October call option with a $320 strike price is $8.50 per ounce (or $850 for 100 oz. contract). The price of an August put option with a $290 strike price is $0.40 per ounce ($40.00 for the contract).

The bottom two lines of the option price table indicate today's estimated volume for calls and puts combined, but show the previous day's actual volume and separately indicate open interest for calls and puts.

As you can see, understanding the futures markets requires some effort to learn the details. Therefore, consult other texts on this subject before considering speculating in the futures markets.

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