Cotton No. 2 Futures Price
The
cotton price in the cash (physical) market is different than the cotton futures price. Generally, the price of a commodity
for future delivery is higher than the cash price due to carrying costs (insurance, interest, and warehousing fees). This
is called contango. The opposite of contango is backwardation. Backwardation is when the price of a commodity for future delivery
is lower than the cash price. Backwardation occurs in a “seller’s market.”
When
you trade cotton futures, your futures price depends on where you get into the market. After you post your initial margin,
your profit or loss depends on where you enter and exit the market (minus transaction costs).
For example:
The contract size for cotton is 50,000lbs.
So each $.01 move equals $500. As the market moves your account value adjusts. If your account value drops below the maintenance
margin a margin call is due. A margin call can be met by offsetting positions or adding money to your account.
If you have very deep pockets or deal with the physical cotton product then futures may be for you.
Trading cotton futures is like driving a car without insurance. You may save the insurance premium, but if you crash you will
wish that you were insured.
