Futures Lesson 2: Day Trading Day 2

What Are Contract Specifications

Every futures contract is based on a specific asset and outlines important details like how much of the asset will be exchanged, where it will be delivered, and when it will happen.

For example:

• The asset might be crude oil.

• The quantity could be 1,000 barrels.

• The delivery location might be the Henry Hub in Louisiana.

• The delivery date could be December 2017.

When you enter a futures contract, you’re agreeing to exchange something (the “underlying asset”) at a specific time in the future. This asset can either be a physical commodity (like crude oil or corn) or a financial product (like a foreign currency).

Ensuring Quality for Physical Commodities
If the asset is a physical product, the exchange defines the quality or grade. For example, crude oil contracts specify the type of oil, such as “light sweet” crude, which refers to the low levels of certain chemicals like hydrogen sulfide.

Financial Product Futures
Futures contracts for financial products are simpler. For example, a contract might be for the U.S. dollar value of 100,000 Australian dollars.

Contract Size
Each futures contract defines the amount of the product being traded (called the “contract size”). Examples include:

• 5,000 bushels of corn

• 1,000 barrels of oil

• Treasury bonds worth $100,000

These sizes are set to meet the needs of traders. For example, someone who wants to trade on the S&P 500 might use a smaller, more manageable contract called the E-mini S&P 500.

Delivery Location
The contract also states where the product will be delivered. For physical goods like lumber, this is important because transportation can be expensive. For example, a contract might specify delivery in a certain state using a specific type of shipping method.

Delivery Date
Each contract is tied to a future delivery month. Traders refer to this, like the March Corn or December Oil contract, because the timing affects the contract’s value. Delivery dates can range from one month to several years in the future. Exchanges also set specific rules for when trading stops before the delivery date—usually a few days before the actual date of delivery.

What Are Trading Codes?

Trading codes are used to identify futures contracts and show important details like the product, expiration month, and year.

Each contract has a unique code made up of a few letters for the product and additional characters for the expiration date. The code format can vary depending on the asset type and trading platform, but they’re designed to be as short as possible to make trading quick and easy.

Example: E-mini S&P 500 Futures Contract
For the E-mini S&P 500 contract, the code on the CME Globex platform is ES. This code can be different on other platforms, but for now, we'll stick with CME Globex.

Expiration Month and Year
After the product code, a letter is added to show the month the contract expires. Each month is represented by a specific letter:

• January: F

• February: G

• March: H

• April: J

• May: K

• June: M

• July: N

• August: Q

• September: U

• October: V

• November: X

• December: Z

For the year, a single number follows the letter. For example, 9 represents 2019.

Putting It Together
Let’s say you have an E-mini S&P 500 futures contract expiring in January 2019.

• The product code is ES.

• The month (January) is represented by F.

• The year (2019) is represented by 9.

So, the trading code for this contract would be ESF9.

These general rules apply to most futures contracts, but remember that codes can vary slightly between different trading platforms!