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 Cotton Futures and Options Market

 

The No Nonsense Guide to Buying and Selling Options

 

*The information contained within this webpage comes from sources believed to be reliable. No guarantees are being made to the content's accuracy or completeness.

 

The History of Cotton and Cotton Futures Trading

Cotton has been used in India for at least 5,000 years and was also used by the ancient Chinese, Egyptians and North and South Americans. Cotton was one of the earliest crops grown by European settlers in the United States. Cotton is a naturally occurring vegetable fiber coming from small trees and shrubs of a genus belonging to the mallow family which includes the common Upland cotton plant. Cotton requires a long growing season, plenty of sun and water while growing and then dry weather for harvesting.

These 126 plus-year-old contracts leverage for 50,000 lbs. of cotton. Cotton future contracts' antiquity are only rivaled by corn contracts that began trading about the same time in Chicago that cotton was trading in New York. Although cotton's economic role has diminished over the last century, it is still an extremely important commodity in today's economic picture.

 

ICE Cotton Futures and Options Quick Facts

  • 50,000 pound contract size

  • one cent move equals $50

  • trades Mar., May, July, Oct., Dec.

  • Cotton futures symbol (CT)

 

Here is the brochure from the ICE for cotton futures and options.

ICE cotton brochure

 

China has been one of the leaders in cotton production for years. During the cold war between the USA and The Soviet Union, the Soviets invested huge amounts of capital to create one of the largest producers of cotton in the world. Uzbekistan is now one of the world's leading exporters of cotton. Government reporting for third world producers is often lacking for cotton as well as other softs, but some countries, such as India and Pakistan provide quality statistics.

Cotton has the ability to grow anywhere that has ample soil moisture and at least 200 frost free days per year. Droughts and competition with other crops for land can cause extreme volatility in cotton futures prices.

While China exports extremely little compared to other exporters, its demand role is huge and influences cotton futures prices. China's stocks also underline the country's significance. These again are approaching half of world stocks of cotton and increases in demand from China can cause cotton futures prices to move dramatically.

The United States is a large consumer of cotton. Use has trended higher due to consumers' favor for cotton clothing. Textiles have a thin profit margin. It's made worse by competition from man-made fibers, such as polyester and rayon which are far cheaper than cotton. Increases in petroleum prices can make cotton competitive because the man made fibers are usually petroleum based. Cotton futures prices are sometimes affected by oil prices.

About two thirds of the harvested crop is composed of the seed, which is crushed to separate its three products–oil, meal and hulls. Cottonseed oil is a common component of many food items, used primarily as a cooking oil, shortening and salad dressing. The oil is used extensively in the preparation of such snack foods as crackers, cookies and chips. The meal and hulls are used as livestock, poultry and fish feed and as fertilizer.

 

Are you a cotton hedger? If so, click here to learn more.

 

When is U.S. cotton planted?
Planting begins as early as Feb. 1 in South Texas and as late as June 1 in northern areas of the Cotton Belt.

When is U.S. cotton harvested?
Harvesting of the crop typically begins in July in South Texas and extends to late November in more northern climates.

Where is cotton grown in the U.S.?

Cotton is grown in: Alabama, Arkansas, Arizona, California, Georgia, Louisiana, Mississippi, Missouri, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee Texas, Kansas, Florida and Virginia.

What are the top 3 cotton producing states in the U.S.?

They are Texas, Georgia and California.

Who are the largest global producers of cotton?

China, USA and India produce most of the global supply of cotton. The United States is the world's largest exporter of cotton.

Cotton and U.S. Currency

According to the Bureau of Engraving and Printing, US paper currency is made up of 75% cotton and 25% linen. Most people erroneously believe that the currency is made up of paper from tree fibers.

Cotton futures and cotton options contracts trading has gained quite a lot of volume over the last few years as more people learn about how cotton futures along with other futures contracts have a place in many aggressive investors' portfolios. Learn More >>>

 

Cotton Options on Futures Contracts Explained

A cotton call option gives the purchaser the right but not the obligation to purchase the underlying futures contract for a specific time period and a specific price (strike price). Let's say that you wanted to purchase an October .60 cent cotton call option and pay a premium of $900.

This means that you bought the right but not the obligation to buy 50,000 pounds of October cotton for .60 cents per pound. Of course, very few options are bought for the purpose of taking delivery but that is one potential outcome. Chances are that you either bought the cotton option to hedge your price risk in the physical cotton market (you may be a cotton farmer or and end user of cotton like a textile mill) or you are speculating that cotton prices will go higher in an attempt to make a profit.

A cotton put option gives the purchaser the right but not the obligation to sell the underlying futures contract for a specific time period and a specific price. Let's say that you wanted to buy an October cotton .50 cent put option and pay a premium of $1,600.

This means that you have the right but not the obligation to sell 50,000 pounds of October cotton at .50 cents per pound.

What is the delta factor?

The delta factor of an option represents the estimated percentage of change an option will receive based on the movements in the underlying futures contract.

Let's assume the October cotton .60 cent call option above has a 30% delta factor. This means that if the underlying futures contract were to rally by $1,000, then the call option would accrue by approximately $300 or 30% of $1,000 in the cotton futures contract.

What is theta?

Options are wasting assets which means that they lose value as time passes. The theta of an option is the measure of time decay.

Let's assume that you bought an October cotton .60 cent call option with 60 days left until expiration. Let's also assume that the cotton futures prices have moved very little over the last month and are exactly the same price 30 days later. Your option will have lost 30 days worth of time and therefore will be worth less today that it was when it had 60 days left until expiration.

What is vega?

Vega is a measure of the implied volatility of an option contract as it relates to its underlying futures contract. For instance, if the underlying futures contract is extremely volatile then the implied volatility of the options of that futures contract will be affected.

In a high implied volatility environment option premiums tend to expand. Conversely, in a low implied volatility environment the option premiums tend to decrease.

 

 

*Contract information changes from time to time. Please click here to see the most recent contract specifications and click here for the most recent trading hours.

 

ICE Cotton No. 2 Futures Contract Specifications

Cotton Futures

 

Trading Unit - 50,000 lbs. net weight (approximately 100 bales).

Trading Hours - 9 pm to 2:30pm NY time. (verify with exchange)

Price Quotation - Cents and hundredths of cent per pound

Trading Months - Current month plus one or more of the next twenty-three succeeding months. Active trading months: March, May, July, October, December.

Futures Ticker Symbol - CT

Minimum Fluctuation - 1/100 of a cent (one "point") per pound below 95 cents per pound. 5/100 of a cent (or five "points") per pound at prices of 95 cents per pound on higher. Spreads may always trade and be quoted in one point increments, regardless of price levels.

Last Trading Day - Seventeen business days from end of spot month.

First Notice Day - Five business days from end of preceding month.

Daily Price Limit - 3 cents above or below previous day's settlement price. However, if any contract months settle at or above $1.10 per pound, all contract months will trade with 4 cent price limits. Should no month settle at or above $1.10 per pound, price limits stay (or revert) to 3 cents per pound. Spot month - no limit on or after first notice day.

Point Value - $5.00

Delivery Points - Galveston, TX; Houston, TX; New Orleans, LA; Memphis, TN; Greenville/Spartanburg, S.C.

 

Cotton Options

Trading Unit - One New York Board of Trade Cotton No. 2 Futures Contract

Price Quotation - Prices quoted in cents and hundredths of a cent

Trading Months - March, May, July, October and December. The nearest ten delivery months will be available for trading.

Ticker Symbol - CT

Minimum Fluctuation - Prices quoted in cents and hundredths of a cent

Last Trading Day - The last Friday which proceeds first notice day for the underlying future by at least five business days

Expiration Date/Time - Until 5:00 p.m (New York time) on any trading day including last trading day. Automatic exercise at one tick or more in-the-money at expiration on last trading day.

Daily Price Limits - None

Strike Price Increments - 1 cent increments

Minimum Price Fluctuation - 1/100 of a cent

Point Value - $5.00

**Click Here Now! for actual cotton futures and options, quotes, prices, expirations, charts .....

 

 

Visit other softs at orange juice future, cocoa future, sugar future, coffee future

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The information presented in this commodity futures and options site is not investment advice and is for informational purposes only. No guarantees are being made to its accuracy or completeness. This information can be considered a solicitation to enter into a derivatives trade. Investing in futures and options carries substantial risk of loss and is not suitable for some people. Past or simulated performance is not indicative to future results.