How To Trade On Commodities Contracts

Posted by on Oct 17, 2017 in Blog |

The most common way to trade on commodities is through a futures contract, which is an agreement to buy or sell a specific amount of a commodity at a fixed sum at a pre-determined point in the future. With some commodities, like gold and silver, it’s possible to trade a daily cash market (Rolling Daily) or but for the bulk of tradeable commodities we are operating in the futures market.

On the ETX Capital TraderPro platform you will find a list of all the commodities you can trade on. Usually there are futures contracts for the next one or two months, with an expiry day (when the contract is settled).

Trading on commodities with is similar to trading on equities or indices in that you are choosing whether you think the price will rise or fall. The only difference for the majority of traders is the time element. Most traders of equities and indices trade the rolling daily price and simply rollover their position until they exit the trade.  commodities trading the futures contracts expire and so you need to beware being closed out of a contract before you intended.

Buyers and sellers can use commodity futures contracts to lock in the purchase of sale prices weeks, months or years in advance. For example, assume that a farmer is expecting to produce 1,000,000 bushels of soybeans in the next 12 months. Typically, soybean futures contracts include the quantity of 5,000 bushels. If the farmer’s break-even point on a bushel of soybeans is $10 per bushel and he sees that one-year futures contracts for soybeans are currently priced at $15 per bushel, it might be wise for him to lock in the $15 sales price per bushel by selling enough one-year soybean contracts to cover his harvest. In this example, that is (1,000,000 / 5,000 = 200 contracts).

One year later, regardless of price, the farmer delivers the 1,000,000 bushels and receives $15 x 200 x 5000, or $15,000,000. This price is locked in. But unless soybeans are priced at $15 per bushel in the spot market that day, the farmer has either received less than he could have or more. If soybean were priced at $13 per bushel, the farmer receives a $2 per bushel benefit from hedging, or $2,000,000. Likewise, if the beans were priced at $17 per bushels, the farmer misses out on an additional $2 per bushel profit.