Like stocks, futures have an associated unit price. Unlike stocks, futures prices don’t necessarily equate to a simple monetary value. It’s important to understand the concepts of of tick, tick size, and tick value when making futures investment decisions.
As this author has previously written, a future or futures contract is essentially an agreement made between two parties to buy or sell certain assets at a specific price and date. For example, oil inventories are often used as the underlying asset or instrument for oil futures. If Buyer A commits to Seller B to buy 10,000 barrels of oil at $50/barrel on December 31, 2009, the agreement to make this purchase is a futures contract. However, the pricing of the future is expressed in different terms.
Now, let’s examine soybean futures for a moment to provide a more detailed example. The futures price for soybeans is a price per bushel and futures contracts are in quantities of 5000 bushels. The prices are expressed as xxxy, where:
xxx = the option price of soybeans in cents/bushel (e.g. 750 cents or $7.50)
y = the number of ticks (one fourth of a cent, or 1/4 cent per bushel), expressed in eights (two eighths will equal one quarter of a cent/bushel)
A futures price for soybeans of 7492 is 749 and 1/4 cents per bushel, or $7.4925 per bushel.
In this example, the minimum possible change in a commodity price is expressed as 1/4 of a commodity tick. This is the tick size, or the minimum amount that market price can increase or decrease. The tick size is also referred to as the minimum price change.
The tick value is the cash value of one tick. Soybean futures contract prices on the Chicago Board of Trade exchange are set at a tick value of $50.00/tick, where there are 5000 bushels per contract and each tick is set to 1/100th of the contact amount. Now, using the example tick size being set to 1/4 cent/bushel, the minimum price increase or decrease for a futures contact is $50/4 or $12.50.
The use of ticks in futures contracts is quite different from stock prices. It is important to understand both the value of a tick as well as its size. The new investor is advised to research this concept thoroughly before investing in futures.
Sources:
About.com – Day Trading
Chicago Board of Trade, Soybean Quotes (July 9, 2007)