QQ 101, 2 min read

Commodities and futures

After this lesson you can

Tell a spot price from a futures price
Work out profit and loss on a futures contract
Explain what rolling a contract costs

A commodity is a raw material that is the same whoever produces it: gold, silver, crude oil, wheat. Gold is priced in US dollars per troy ounce. Crude oil is priced in dollars per barrel.

Spot and futures

The spot price is the price for delivery now. A futures contract is an agreement to buy or sell a fixed amount on a fixed date in the future, at a price agreed today.

Futures are standardised. One gold futures contract on COMEX is 100 troy ounces. One crude oil contract is 1,000 barrels. A one dollar move in gold is 100 dollars per contract.

Why the two prices differ

Holding physical gold costs money: storage, insurance, and the interest you could have earned on the cash. A futures price usually includes those costs, so it sits above spot. That shape is called contango. When the futures price is below spot, usually because people want the commodity now, it is called backwardation.

Rolling

A futures contract expires. To keep a position you close the expiring contract and open the next one. That is the roll. If the next contract is more expensive, a long position pays the difference each time. Over years, roll cost can be the difference between a profitable idea and a losing one.

A long price history for a future is stitched together from many contracts. How the joins were made changes the numbers, so know which method your data uses before you test on it.

Key points

A futures contract fixes amount, date and price
Contango means the futures price is above spot
A long history of a future is stitched from many contracts

Check your understanding

A gold futures contract is 100 troy ounces. Gold rises by 15 dollars. What is the gain on one long contract?
The futures price is above the spot price. What is that called?