Contract Size

What Is Contract Size?

The term contract size refers to the deliverable quantity of a stock, commodity, or financial instrument that underlies a futures or options contract. A standardized amount tells traders the exact quantities that are being bought or sold based on the conditions of the contract. Contract sizes are often standardized by exchanges and fluctuate depending on the commodity or instrument. They likewise determine the dollar value of a unit move or a tick size in the underlying commodity or instrument.

Understanding Contract Size

Derivatives are financial contracts that are based on the price of some underlying asset. These assets can include yet are not limited to stocks, bonds, commodities, and currencies. They are traded in different ways. For instance, a derivative transaction can happen directly between banks in a practice called over-the-counter (OTC) trading rather than through a regulated exchange.

Financial instruments can likewise be traded on a regulated exchange. To help facilitate trades, futures or options exchanges standardize contracts, which often reduces costs and improves trading efficiencies. Standardizing comes through expiration dates, delivery methods, and contract sizes. Specifying contract size is an important part of this process.

The contract size is the amount of the underlying asset that is represented in a derivative contract. It is one of the main features of a futures contract. That is because it helps determine which players can access the market. In that capacity, larger contract sizes typically denote participation by larger, institutional investors. Contracts that are smaller in size are more accessible for an investor.

For instance, the Chicago Mercantile Exchange (CME) launched the standard-sized S&P 500 futures contracts in 1982. The contract size ($250 times the value of the index) was typically accessible to institutional investors. In 1997, the exchange launched a smaller version called the E-mini, which was one-fifth the size of the standard contract. This allowed retail investors access to these contracts. (Note that the exchange delisted the standard S&P 500 index futures and options contracts in September 2021.)

Contracts traded in the OTC market are significantly more flexible because they are not standardized, including their size.

Advantages and Disadvantages of Contract Sizes

The way that contracts are standardized to specify contract size can be a benefit as well as a drawback for traders. We've listed some of the most common upsides and downsides below.

Advantages

Standardizing contract sizes makes the trading process more streamlined and ensures that contracts are consistent with others in the market. For instance, all oil futures contracts contain 1,000 barrels of crude. In that capacity, the size of one contract doesn't differ from another.

The contract size additionally helps explain the obligations of traders. For instance, assuming a farmer sells three soybean contracts, it is understood that delivery involves 15,000 bushels (3 x 5,000 bushels), which will be paid in the exact dollar amount that is specified by the contract size.

Disadvantages

A disadvantage of the standardized contract is that it can't be amended or modified. Thus, in the event that a food producer needs 7,000 bushels of soybeans, their choice is to either buy one contract for 5,000 (leaving 2,000 short) or buy two contracts for 10,000 bushels (leaving a surplus of 3,000).

Contract sizes for commodities and other investments, like currencies and interest rate futures, can fluctuate widely. For example:

• A Canadian dollar futures contract is C$100,000
• A soybean contract traded on the Chicago Board of Trade is 5,000 bushels
• A gold futures contract on the COMEX is 100 ounces

So on account of the gold contract, each $1 move in the price of gold translates into a $100 change in the value of the gold futures contract.

Listed Options Markets

The standard contract size for a equity option is 100 shares of stock. This means in the event that an investor exercises a call option to buy the stock, they are entitled to buy 100 shares per option contract at the strike price through the expiration. An owner of a put option, then again, can sell 100 shares per one contract held on the off chance that they decide to exercise their put option. Along these lines, 10 contracts comparably represent control of 1,000 shares.

E-Minis

E-minis are a class of electronically traded futures contracts whose contract size is a negligible part of the corresponding standard futures contract. E-minis are predominantly traded on the CME and are available on:

• Indexes: Nasdaq 100, S&P 500, S&P MidCap 400, and Russell 2000
• Commodities: Gold, oil, wheat, soybeans, corn, natural gas
• Currencies: Euro

Let's glance at the E-mini S&P 500. Its contract size is one-fifth that of the standard S&P 500 futures contract, which was delisted in September 2021. This smaller contract size permits retail traders and investors to take part in the market — not just institutional investors.

Features

• Contract size refers to the amount or quantity of an underlying security represented by a derivatives contract.
• Contract sizes are often standardized and fluctuate based on the underlying asset.
• Contract sizes can't be amended or modified.
• Larger contract sizes are typically accessible simply by institutional investors while smaller ones can be traded by anyone.
• The size of a contract makes the trading process more streamlined and clearly sets out the traders' obligations.

FAQ

What Is the Contract Size of the E-mini S&P 500?

The E-mini S&P 500 contract is one-fifth of the original standard-sized contract. It is priced at $50 times the value of the S&P 500 while the standard contract was priced at $250 times the value of the index. Keep at the top of the priority list that the Chicago Mercantile Exchange delisted the standard-sized contract in September 2021.

What Is a Derivative?

A derivative is a financial contract. Its value depends on an underlying benchmark, asset, or a group of assets, They are set between two parties who use them to trade different securities and access different markets. Contract values are based on price changes of the underlying security. Derivatives can be used to hedge a particular position or speculate on price movements.

Why Is Contract Size Important in Derivatives Trading?

Contract size permits traders to understand their contractual obligations clearly. It likewise provides consistency among contracts for the same asset. For instance, the contract size for all soybean futures are no different either way so there's no confusion regarding what the trader is buying and selling.