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 Wheat Futures and Options Market Trading

 

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 Wheat and Wheat Futures Trading

Wheat is a cereal grass and is believed to have originated in southwestern Asia. Wheat's use by mankind dates back 10,000 years to the ancient Mesopotamians near modern day Turkey and Iraq. Wheat may be the most valued agricultural commodity besides maize throughout the history of mankind. Wheat was first grown in the United States near what is now Massachusetts circa 1602. Today wheat is cultivated all around the world and its demand has made it one to the most actively traded grain commodities in the world. Wheat is also used as a food source for livestock and based on prices competes with corn usage.

 

Here is the grain and oilseed brochure courtesy of the CME Group.

Grain/oilseed brochure

 

The Chicago Board of Trade (CBOT), The Kansas City Board of Trade (KCBOT) and The Minneapolis Grain Exchange (MGEX) are all very important exchanges used to trade wheat futures and options for the many different types of wheat that are grown in the USA. The classification terms spring and winter wheat specify when the wheat is planted not harvested.

 

The 3 Major Wheat Trading Exchanges

The Chicago Board of Trade is the largest exchange where wheat futures and options are traded. The CBOT was established in 1858 and is the oldest US commodity exchange still in operation today. The CBOT is the primary exchange for soft red winter wheat which is used to produce biscuits, muffins and cakes. Soft red winter wheat is also crushed to make cake flour. Soft red winter wheat is considered a low protein wheat. The CBOT Chicago wheat futures specifications are available further down this page.

 

The Kansas City Board of Trade (KCBT), was established in 1876 near one of the world's most fertile growing regions and is the largest wheat future market for hard red winter wheat. Hard red winter wheat is considered a high protein wheat and is used most often in making breads. (KCBT) wheat futures and options are less liquid than (CBOT) wheat futures and options.

 

The Minneapolis Grain Exchange (MGEX) was established in 1881 as a cash market for grains. The MGEX is the largest wheat future market for hard red spring wheat. Hard red spring wheat is a high protein wheat used for making breads and hard baked goods. The (MGEX) wheat futures markets are less liquid than the wheat futures of the other exchanges.

 

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

 

Wheat Options on Futures Contracts Explained

 

A wheat 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 a July wheat $4.00 call option and pay a premium of $1,750.

This means that you bought the right but not the obligation to buy 5,000 bushels of July wheat for $4.00 per bushel. 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 wheat option to hedge your price risk in the physical wheat market (you may be a producer like a wheat farmer or an end user like a flour mill) or you are speculating that wheat prices will go higher in an attempt to make a profit.

A wheat 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 a July wheat $3.90 put option and pay a premium of $1,250.

This means that you have the right but not the obligation to sell 5,000 bushels of July wheat at $3.90 per bushel.

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 July wheat $4.00 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 wheat 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 a July wheat $4.00 call option with 60 days left until expiration. Let's also assume that the wheat 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.

 

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

 

The No Nonsense Guide to Buying and Selling Options

 

*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.

 

Chicago Board of Trade

 

CBOT Wheat Futures

Contract Size:

5,000 bushels

Deliverable Grades:

No. 2 Soft Red, No. 2 Hard Red Winter, No. 2 Dark Northern Spring, and No. 2 Northern Spring at par. Substitutions at differentials established by the exchange

Tick Size:

1/4 cent/bu ($12.50/contract)

Price Quote:

Cents and quarter-cents/bu

Contract Months:

Jul, Sep, Dec, Mar, May

Last Trading Day:

The business day prior to the 15th calendar day of the contract month

Last Delivery Day:

Last business day of the delivery month. For contracts with delivery in March 2000 and subsequent months: Seventh business days following the last trading day of the delivery month

Trading Hours:

Open Outcry: 9:30 a.m. - 1:15 p.m. Chicago time, Mon-Fri.
Electronic (a/c/eSM): 8:30 p.m. - 6:00 a.m. Chicago time, Sun.-Fri.
Trading in expiring contracts closes at noon on the last trading day

Ticker Symbols:

Open Outcry: W. Electronic (a/c/e): ZW

Daily Price Limit:

30 cents/bu ($1,500/contract) above or below the previous day's settlement price (expandable to 30 cents/bu). No limit in the spot month (limits are lifted two business days before the spot month begins)

 

CBOT Wheat Options

Trading Unit:

One CBOT Wheat futures contract (of a specified contract month) of 5,000 bu

Tick Size:

1/8 cent/bu ($6.25/contract)

Strike Price Intervals:

5 cents/bu for the first two months and 10 cents/bu for all other months. At the commencement of trading, list 5 strikes above and 5 strikes below the at-the-money strike

Contract Months:

Jul, Sep, Dec, Mar, May; a monthly (serial) option contract is listed when the front month is not a standard option contract. The monthly option contract exercises into the nearby futures contract. For example, an August option exercises into a September futures position

Last Trading Day:

For standard option contracts: The last Friday preceding the first notice day of the corresponding wheat futures contract month by at least two business days.
For serial option contracts: The last Friday which precedes by at least two business days the last business day of the month preceding the option month

Exercise:

The buyer of a futures option may exercise the option on any business day prior to expiration by giving notice to the Board of Trade Clearing Corporation by 6:00 p.m. Chicago time. Option exercise results in an underlying futures market position. Options in-the-money on the last day of trading are automatically exercised

Expiration:

Unexercised options expire at 10:00 a.m. Chicago time on the first Saturday following the last day of trading

Trading Hours:

Open Outcry: 9:30 a.m. - 1:15 p.m. Chicago time, Mon-Fri.
Electronic (a/c/eSM): 8:30 p.m. - 6:00 a.m. Chicago time, Sun.-Fri.
Trading in expiring contracts closes at the same time as the underlying futures contract (1:15 p.m.) on the last trading day

Ticker Symbols:

Open Outcry: WY for calls/WZ for puts
Electronic (a/c/e): OZW

Daily Price Limit:

30 cents/bu ($1,500/contract) above or below the previous day's settlement premium. Limits are lifted on the last trading day

 

Wheat Futures Contract Specifications

Kansas City Board of Trade

 

Hard Red Winter Wheat Futures
(Trade commenced 1876)
 

Trading Hours:

9:30 a.m. to 1:15 p.m., Central Time

Contract Unit:

5,000 bushels

Ticker Symbol:

KW

Delivery Months:

July, September, December, March, May

Price Quotation:

Dollars, cents and 1/4-cents per bushel

Min. Price Fluctuation:

1/4 cent ($12.50 per contract)

Max. Price Fluctuation:

30 cents ($1,500 per contract) above or below previous day's settlement price

Speculative Position Limits:

Combined with wheat options for a net long or net short futures - equivalent maximum of:
  Spot Month *: 600 contracts
  Single Month: 3,000 contracts
  All Months: 4,000 contracts
* Spot month limits go into effect on a contract at the close of trade the day before it's first delivery notice day.

Delivery Mechanism:

Physical; registered warehouse receipt issued by regular elevators

Deliverable Grades:

No. 2 at contract price; No. 1 at a 1 1/2-cent premium; No. 3 at a 3 cent discount, changing to a 5-cent discount with the July 2003 contract

Delivery Points:

Kansas City, Mo. - Kans. and Hutchinson, Kans.

Delivery Notices:

Must be issued and delivered to the KCBT Clearing Corp. before 4:00 p.m. on the second business day preceding the day of delivery, except on the last notice day of the delivery month, when delivery notices may be delivered to the Clearing Corp. until 2:00 p.m. on the last notice day (business day preceding the last delivery day)

Last Trading Day:

There is no trading during the last seven (7) business days of the liquidating month

First Notice Day:

The business day preceding the first business day of the liquidating month

First Delivery Day:

The first business day of the liquidating month

Last Notice Day:

The business day preceding the last business day of the liquidating month

 

Hard Red Winter Wheat Options
(Trading Began Oct. 30, 1984)
 

Trading Hours:

9:30 a.m. to 1:25 p.m., Central time

Underlying Asset:

One KCBT hard red winter wheat futures contract

Ticker Symbol:

Calls: HC. Puts: HP

Delivery Months:

Serial

Strike Price Intervals:

Integral multiples of 10 cents per bushel

Listing of Strikes:

New strikes are listed to maintain 30 above and 30 below the at-the-money strike in increments of 10 cents

Price Quotation:

Dollars, cents and 1/8-cents per bushel

Min. Price Fluctuation:

1/8 cent ($6.25 per contract)

Max. Daily Price Fluctuation:

30 cents ($1,500 per contract) above or below previous day's settlement price

Speculative Position Limits:

Spot Month *: 600 contracts
Single Month: 3,000 contracts
All Months: 4,000 contract

Last Trading Day:

1:00 p.m., Central time, on the Friday at least two (2) business days before first notice day for wheat futures

Exercise:

Any time prior to expiration by giving notice to the KCBT Clearing Corp. by 4:00 p.m., Central time, on any trading day up to and including the last trading day

 

 

 

Wheat Futures Facts

 

1 bushel of wheat weighs 60 pounds

 

1 bushel of wheat makes 73 one pound loaves of bread

 

North Dakota State University says that the yield of spring wheat that is planted after April begins to decline by a third of a bushel for each day of delay.

 

To see other grain futures visit corn futures and soybean futures.

 

 

 

 

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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.