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Wheat Futures and Options Education
Wheat futures and options quick facts:
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5,000 bushel contract
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One cent equals $50
The History of Wheat and Wheat Futures
Trading
Wheat's use by mankind dates back 10,000 years to the
ancient Mesopotamians near modern day Turkey and Iraq. Wheat
may be the most valued agricultural commodity besides maize
throughout the history of mankind. Today wheat is cultivated
all around the world and its demand has made it one to the
most actively traded grain commodities in the world. Wheat
is also used as a food source for livestock and based on
prices competes with
corn
usage.
The Chicago Board of Trade (CBOT), The
Kansas City Board of Trade (KCBOT) and The Minneapolis Grain
Exchange (MGEX) are all very important exchanges used to
trade wheat futures and options for the many different types
of wheat that are grown in the USA. The classification terms
spring and winter wheat specify when the wheat is planted
not harvested.
The
Chicago Board of Trade is the
largest exchange where wheat futures and options are traded.
The CBOT was established in 1858 and is the oldest US
commodity exchange still in operation today. The CBOT is the
primary exchange for soft red winter wheat which is used to
produce biscuits, muffins and cakes. Soft red winter wheat
is also crushed to make cake flour. Soft red winter wheat is
considered a low protein wheat. The CBOT
Chicago wheat futures
specifications are down the page.
The
Kansas City Board of Trade
(KCBT), was established in 1876 near one of the world's most
fertile growing regions and is the largest
wheat future
market for hard red winter wheat. Hard red winter wheat is
considered a high protein wheat and is used most often in
making breads. (KCBT) wheat futures and options are less
liquid than (CBOT) wheat futures and options.
The
Minneapolis
Grain Exchange
(MGEX) was established in 1881 as a cash market for grains.
The MGEX is the largest wheat
future market for hard red
spring wheat. Hard red spring wheat is a high protein wheat
used for making breads and hard baked goods. The (MGEX)
wheat futures markets are less liquid than the wheat futures
of the other exchanges.
What is a wheat futures contract?
A
wheat futures contract is an agreement between a buyer and a
seller to receive or deliver a product on a future date at a
price they have negotiated today.
The agreement is standardized as to
delivery period, contract size and quality of the product.
These specifications are determined by the exchange.
Wheat futures contracts typically are
used as a price protection mechanism or an investment tool,
not as a method of selling or obtaining a product.
To avoid having to meet his contractual
obligation to receive or deliver a product, a buyer or
seller must liquidate his wheat futures contract. A buyer
(long) would sell his wheat futures contract, and a seller
(short) would buy his wheat futures contract back. This
procedure is called offsetting a wheat futures position.
The ability to deliver is necessary to
maintain the economic relationship between the cash and
wheat futures markets. Many savvy wheat farmers use the
wheat futures and wheat options to hedge their crops against
adverse wheat futures price movements.
Wheat Futures Contract
Specifications
Chicago Board of Trade
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CBOT Wheat Futures
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Contract Size:
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5,000 bushels
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Deliverable Grades:
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No. 2 Soft Red, No. 2 Hard Red
Winter, No. 2 Dark Northern Spring, and No. 2
Northern Spring at par. Substitutions at
differentials established by the exchange
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Tick Size:
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1/4 cent/bu ($12.50/contract)
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Price Quote:
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Cents and quarter-cents/bu
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Contract Months:
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Jul, Sep, Dec, Mar, May
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Last Trading Day:
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The business day prior to the
15th calendar day of the contract month
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Last Delivery Day:
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Last business day of the delivery
month. For contracts with delivery in March 2000 and
subsequent months: Seventh business days following
the last trading day of the delivery month
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Trading Hours:
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Open Outcry: 9:30
a.m. - 1:15 p.m. Chicago time, Mon-Fri.
Electronic (a/c/eSM): 8:30 p.m. - 6:00 a.m. Chicago
time, Sun.-Fri.
Trading in expiring contracts
closes at noon on the last trading day
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Ticker Symbols:
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Open Outcry: W. Electronic
(a/c/e): ZW
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Daily Price Limit:
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30 cents/bu ($1,500/contract)
above or below the previous day's settlement price
(expandable to 30 cents/bu). No limit in the spot
month (limits are lifted two business days before
the spot month begins)
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CBOT Wheat Options
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Trading Unit:
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One CBOT® Wheat futures contract
(of a specified contract month) of 5,000 bu
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Tick Size:
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1/8 cent/bu ($6.25/contract)
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Strike Price Intervals:
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5 cents/bu for the first two
months and 10 cents/bu for all other months. At the
commencement of trading, list 5 strikes above and 5
strikes below the at-the-money strike
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Contract Months:
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Jul, Sep, Dec, Mar, May; a
monthly (serial) option contract is listed when the
front month is not a standard option contract. The
monthly option contract exercises into the nearby
futures contract. For example, an August option
exercises into a September futures position
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Last Trading Day:
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For standard option
contracts: The last Friday preceding the first
notice day of the corresponding wheat futures
contract month by at least two business days.
For
serial option contracts: The last Friday which
precedes by at least two business days the last
business day of the month preceding the option month
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Exercise:
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The buyer of a futures option may
exercise the option on any business day prior to
expiration by giving notice to the Board of Trade
Clearing Corporation by 6:00 p.m. Chicago time.
Option exercise results in an underlying futures
market position. Options in-the-money on the last
day of trading are automatically exercised
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Expiration:
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Unexercised options expire at
10:00 a.m. Chicago time on the first Saturday
following the last day of trading
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Trading Hours:
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Open Outcry: 9:30
a.m. - 1:15 p.m. Chicago time, Mon-Fri.
Electronic (a/c/eSM): 8:30 p.m. - 6:00 a.m. Chicago
time, Sun.-Fri.
Trading in expiring contracts
closes at the same time as the underlying futures
contract (1:15 p.m.) on the last trading day
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Ticker Symbols:
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Open Outcry: WY for
calls/WZ for puts
Electronic (a/c/e): OZW
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Daily Price Limit:
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30 cents/bu ($1,500/contract)
above or below the previous day's settlement
premium. Limits are lifted on the last trading day
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