Trading commodity futures provides direct exposure to their underlying markets. Direct exposure combined with futures leverage empowers traders to control valuable commodity contracts with just a fraction of the total trade amount.
What is a Commodity Futures Contract?
Commodity futures contracts allow traders to buy or sell a commodity at a specific date in the future. Each contract is tied directly to its underlying market. In other words, when the price of a commodity – or spot price – moves up or down, the futures contract changes simultaneously.
There are three main categories of commodity futures, agriculture, energy and metals. All contracts are derived from raw material commodities including oil, natural gas, gold, silver, corn, soybeans and cattle.
Direct Exposure to the Spot Price
The spot price is the current price of a commodity for immediate purchase, payment or delivery. Hence, the term spot indicates a price that can be executed “on the spot.”
All commodity futures prices are derived directly from the spot price, and spot prices are internationally accepted by commodity traders worldwide.
According to Dan Gramza, seasoned Chicago floor trader international consultant, “The construction of the futures contract, by its nature, is based on the spot price.”
For example, Crude Oil futures (CL) are based on spot price of West Texas Intermediate (WTI) crude oil. As a result, CL traders get direct exposure to the spot price of crude oil. Additionally, the spot price is what you would pay if you were to take physical delivery of a commodity.
Learn more about direct exposure to commodities in this 2-minute video:
Challenges of Commodity Exposure in the Stock Market
In contrast to the futures market, commodity exposure in the stock market can be challenging. Although there are opportunities in the stock market to gain exposure to commodities, it is much more indirect process with added difficulties.
For example, there are many stocks and ETFs related to gold and gold mining, but none provide the direct exposure to the spot price of gold like gold futures. Gold-based stock securities are commonly diversified among other metals and industries, reducing the direct correlation to the gold spot price.
Additionally, stocks and ETFs derived from commodities are sometimes discounted because of the dividends and share structures involved. This can also lessen the association with a stock’s price and the spot price.
Get Started with NinjaTrader
NinjaTrader supports more than 100,000 traders worldwide with a powerful and user-friendly trading platform, deep discount commissions and world-class support. NinjaTrader is always free to use for advanced charting, strategy backtesting and an immersive sim trading experience.
Download NinjaTrader’s award-winning trading platform and get started with a free trading demo with real-time market data today!
This article is intended for educational and informational purposes only and should not be viewed as a solicitation or recommendation of any product, service or trading strategy. It includes content from independent persons or companies that are in no manner affiliated with NinjaTrader Group (NTG) or any of its affiliates. The content and opinions expressed in this article do not necessarily reflect the official policy or position of NinjaTrader or any of its affiliates.