E-Mini WTI Crude Oil Futures Contract

Article contributed by CME

If you have an interest in energy markets you will have heard of CME Group’s NYMEX WTI futures contract. WTI is the benchmark for crude oil prices in North America and is used by firms to hedge their commercial exposures and by traders around the world to take a view on the future price of oil.

In addition to the standard NYMEX WTI contract (which has CME Group contract code CL) there is also an E-Mini version (code QM) that for some traders have certain advantages, including:

• Half the size – 1 lot of QM is 500 barrels of oil, 1 lot of CL is 1,000 barrels.

Because it’s half the size, it’s half the risk, so a US$ 1 move in oil price will be a US$ 500 profit/loss instead of US$ 1,000.

Because it’s half the size, each lot requires half the margin call, 2,450 US$/lot instead of 4,900 US$/lot.

Because it’s half the size, you can average into/out of positions with greater flexibility.

• QM ‘financially settles’ referencing the CL contract so the prices can’t disconnect.

The financial settlement feature of QM suits people concerned about mistakenly having an open position on expiry, or trading firms who have policies forbidding trading physically delivered contracts.

Other features to be aware of before trading QM:

• It expires the day before the CL expiry (usually around the 15th of the preceding month, please check the expiration calendar).

• Because QM caters to a niche audience the daily transacted volume is lower than CL but the bid/ask spread is seldom more than 1 tick wide.

• 1 tick on QM is 2.5 cents, making the tick value US$12.50. 1 tick on CL is 1 cent, making the tick value US$10.

• If you have opposite positions on QM and CL a margin offset will be applied because they are 100% correlated. However, they are not fungible so you must close out the CL position before expiry.

Why is this of particular interest now? Because the oil market is currently experiencing high volatility. This increases the magnitude of financial risk and increases the margins that CME Group requires for holding positions. Not since the crisis of 2009 have we experienced this level of volatility; as a result the margin required on 1 lot of CL has increased from US$ 2,700 in August 2014 to US$ 4,900 today. So from a risk and capital requirement perspective 1 lot today is not the same as 1 lot was in the period 2012 – 2014 when volatility levels were lower.

As well as WTI, CME Group also offers the NYMEX Brent Crude Oil contract (code BZ). Brent is the primary European crude oil benchmark and more details of this and all CME Group’s futures contracts are available at www.cmegroup.com.

In conclusion, for traders new to oil markets the E-Mini WTI gives a chance to develop skills in directional decision making with half the monetary risk and half the margin requirement. The financially settled E-Mini WTI also addresses any concern about accidently leaving positions open or if your company has policies restricting trading of physically deliverable contracts.

Source: Bloomberg

Intrested to know more?
Please call +603 2333 8332
or email rhbib.futures.bdev@rhbgroup.com

Futures and swaps trading is not suitable for all investors, and involves the risk of loss. Futures and swaps are leveraged investments, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money initially deposited for a futures and a swap position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade.

The information and any materials contained in this article should not be considered as an offer or solicitation to buy or sell financial instruments, provide financial advice, create a trading platform, facilitate or take deposits or provide any other financial products or financial services of any kind in any jurisdiction. The information contained in this article is provided for information purposes only and is not intended to provide, and should not be construed as, advice. It does not take into account your objectives, financial situation or needs. You should obtain appropriate professional advice before acting on or relying on this article.

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