5 Differences Between Trading the S&P 500 E-Mini & the Micro E-Mini Futures
Trading guides, webinars and stories
Trading guides, webinars and stories
Although many futures traders seem to gravitate toward the e-mini equities or energy markets, there are a lot of opportunities available in the grain markets as well. The corn futures market is a perfect example of this. This article will discuss the benefits of trading corn and provide some valuable tips for getting started.
Before we discuss our tips on trading corn futures, it’s important to understand some of the benefits that trading corn futures offer.
Before you can get in the business of trading corn futures, it’s imperative that you know the key facts surrounding corn as a commodity. This knowledge will help shape your understanding of the market and allow you to spot potential shifts in the fundamental outlook for the commodity.
So here are some important facts regarding corn:
With over 14 billion bushels of corn produced in the United States every year, the U.S. is the largest producer and exporter of corn in the world. The US exports approximately 20% of the world’s corn supply and contributes to over 40% of the world’s corn production.
Some of the major uses of corn include food products, livestock feed, and ethanol production. The food consumption category is expected to rise in line with population expansion around the globe.
Primary geographic area for corn production in the United States
The primary geographic area within the United States for harvesting corn includes the Midwestern states. Illinois and Iowa are the two top producing states for corn. Some other states, including Nebraska, Ohio, Kentucky, and Missouri are also large producers of corn.
In the United States, corn futures are traded at the Chicago Board of Trade (CBOT). The symbol for corn is ZC and one contract of corn is worth 5,000 bushels. The minimum tick size is 1/4 cent per bushel which is worth $12.50/contract.
Let’s assume that the front month corn contract is trading at $4.50/bushel and makes a five cent move up. Based on this, what is the value of the price move in terms of a single standard corn futures contract?
Well, let’s do the math:
$0.05 x 5000 bushels = $ 250 – As such, a five cent move in corn would equate to a $250 move in terms of a single standard futures contract.
What about a $.12 move in Corn? Let’s see what that would look like:
$0.12 x 5000 bushels = $ 600 – So a twelve cent move in corn would equate to a $600 move in terms of a single standard futures contract.
If we break this calculation down, we can see that a one cent move in corn is equivalent to $50. If you multiply $50 per contract by the price move in cents, you will know exactly how much the value of the futures contract has increased or decreased. In addition, you would be able to know the corresponding profit or loss on your position.
There are also tradeable mini contracts for corn. A single mini corn contract represents 1,000 bushels, which is 20 % of the value of the full contract.
It follows that the tick value of the mini corn contract would also be 1/5 the value of the standardized contract. More specifically, a one-cent price move in the mini-corn contract would be equivalent to $10.
Just as important as understanding the tick values when trading corn futures, it is equally important to know the actual contract values that you are controlling. Here is how we would go about doing that:
Let’s continue with our example from before, wherein corn is trading at $4.50/bushel. Based on this market price, what would the value of a standard futures contract be?
To calculate this, we would multiply the market price of corn per bushel by the number of bushels within the contract. If we have more than 1 contract, then we would multiply the number of contracts by this resulting amount.
As per our example, we would need to multiply $4.50 (price per bushel ) x 5000 (bushels per contract) x 1 (number of contracts). This calculation results in a contract value of $22,500. Essentially, a single standard corn futures contract trading at $4.50 is worth $22,500.
What about the mini corn contract? What is the value of a single mini corn contract trading at the same price of $4.50/bushel?
Since we know that the mini corn contract is worth 1/5 the value of a standard contract, we would use the following formula:
Mini Corn Contract Value = Market Price per bushel x 1000 x # of contracts
And so, at a price of $4.50, a single mini corn contract is valued at $4500 by using the following inputs (4.50 x 1000 x 1).
By now you should have a clear understanding of how to quickly and easily calculate the value of price moves and total contract amounts within the corn futures market. We can now move on to discussing the importance of staying aware of your margin limits.
For those that may not have a thorough understanding of the workings of margin within the futures market, the following explanation should help.
Margin is the bare minimum amount of your available funds that you will require within your trading account in order to hold a leveraged futures position. Each market has a different margin amount based on its volatility characteristics. These amounts are set by the exchanges.
There are two main types of margin that you should be aware of. The first is what is referred to as initial margin and the second is referred to as maintenance margin.
Initial margin is the minimum amount of available capital that you will need in order to initiate a new position. Maintenance margin is the minimum amount of available capital that you will need in order to maintain an open position. If you fall below the maintenance margin requirements, your broker will either close your position or require you to post additional funds to cover the shortfall. As such, it is imperative that you are aware of how much margin you are using on your trade and in your account as a whole.
As of mid-July 2019, the minimum initial margin for a standard corn futures contract is $2,025. The minimum maintenance margin for a standard corn futures contract is $1,500. These are adjusted up or down periodically by the exchange based on market volatility.
Many traders confuse the concept of margin and leverage. Although they are closely related, they are not the same. We have discussed the importance of staying within your margin requirements. Let’s now dive into the idea of leverage and how to use leverage responsibly.
Simply put, leverage allows you to control a larger position in an asset using a smaller amount of capital.
Let’s say that you have $5,000 in your trading account, and you go long a corn futures contract at $4.00. Let’s assume that the price of corn rises from $4.00 to $4.40 per bushel. So, the actual rise in the price of corn is 10%. This would be your percentage profit on a non-leveraged position. And so, on a standard contract of corn that would equate to a profit of $2,000 ($0.40 x 5000 bushels = $2,000).
But what does this mean for your $5,000 account from the leverage perspective? Well, your current account is $5,000 and with the $2,000 profit from this trade, you would now have $7,000 in your trading account. This would equate to a 40% rise in your trading account. The use of leverage allowed you to amplify your gain by fourfold in this scenario.
But keep in mind that leverage is a double-edged sword. If the price were to have dropped from your $4.00 entry point by the same $0.40 to $3.60, then you would have realized a 40% loss in your trading account.
As such it’s very important to use leverage responsibly. But what is the ideal leverage amount to use? Well, that is a personal matter based on your risk parameters. As a general rule, you should try to maintain a leverage limit within 3:1 or 4:1. You can still make substantial gains in terms of percentage points by staying within these limits. By minimizing the amount of leverage used, you will also protect your trading capital against a major single trade catastrophe.
The price of corn is heavily impacted by weather conditions. Supply and demand imbalances can shift quickly in this market. It’s vital that you stay abreast potential changes in weather in the largest corn-producing states.
It is not uncommon for a fear of crop damage to have a major impact on the price of corn, often skyrocketing it to very high levels. At times, you will see limit up moves in the corn futures market when this does happen.
Although we can never be sure about catastrophic events, it is always better to be prepared for the worst. It makes sense to stay out of the market when weather-related events can cause increased volatility and risk exposure.
It’s also a good idea to be aware of seasonal tendencies in the corn market. Specifically, it is a fairly normal occurrence to see the price of corn make a swing low around November. This period corresponds to the harvest time. This is the time when the largest amount of supply is usually available in the market.
Whether you consider yourself a technical or fundamental trader, you will need to monitor three reports as it relates to corn. They can have a significant impact on the market, and so you should be cognizant of when they are released to avoid getting blindsided.
USDA Report – Every Thursday, the USDA releases a report on exports. In the report, you will find a detailed analysis of demand for corn exports. It should go without saying that a strong export outlook is often favorable for the corn market and for the price of corn futures. It is also a good idea to compare US corn exports to other corn exporting countries to gauge any major discrepancies that may exist.
Planting Intentions Report – This report is also produced by the USDA and is released at the end of March. The Planting Intentions report details the amount of acreage that is being allocated by farmers for the planting of various crop commodities. Using this report, you can extrapolate the total expected size of the crop production for the season.
Grain Stocks Report – This report comes out quarterly and is issued by the National Agricultural Statistic Services (NASS). The report offers a state by state update on the stockpiles of corn and other grains.
We have discussed some of the major drivers of corn prices, including weather conditions, export data, and planting intentions by farmers. Let’s take a look at a few other factors that can contribute to major fluctuations in the price of corn.
As you might suspect, the price of corn is highly correlated to other grain products including wheat, barley, and soybeans. Therefore supply and demand imbalances in these markets can often spill over to the corn market. You should keep an eye on these correlated markets for signs that could affect the corn market.
As corn is becoming more important in the production of Ethanol, the demand for this biofuel can have a substantial impact on the price of corn. The government is currently subsidizing corn farmers in an effort to increase the production of Ethanol. Any major shifts in this policy would likely affect the price of corn. As such traders need to be cognizant of the latest government policy surrounding this.
And last but not least, corn traders should monitor the US dollar exchange rate. As the world’s reserve currency, the US Dollar exchange rate can have an impact on the corn market. Often the US Dollar can contribute to long-term commodity price trends.
By now you should be quite familiar with the benefits of trading corn in the futures market. In addition, you should be able to take away some key insights and tips that you can use to get started.
It’s important to remember that you need to take the necessary time to learn as much as you can about a new market. Knowing and learning the basics is key to building a strong foundation. From that point forward, you can apply various technical or fundamental models and test your ideas.
With its high liquidity, strong trending characteristics, and seasonal tendencies, corn is a phenomenal product to trade. I would encourage you to use this reference guide as a starting point from which you can begin developing your own methods for trading corn futures. Once you’ve developed your trading strategy and are comfortable with your level of practice, take the next step and get funded with The Gauntlet Mini™ here.