Commodity Trading – Trade Sizes and Margin Requirements

When trading commodities it is imperative to understand what it is we are buying or selling.

Each commodity will be measured in its own unit. Below we see the unit for each of the most popularly traded commodities:

Commodity Units
Crude Oil Barrell
Gold Troy Oz
Silver Troy Oz
Platinum Troy Oz
Corn Bushels (100)
Soybeans Bushels (100)
Wheat Bushels (100)
Natural Gas mmBtu
Heating Oil Gallons
Gasoline Gallons
Coffee C lbs (100)
Sugar no.11 lbs (100)
Coffee No.2 lbs (100)
Brent Oil Barrell
Palladium Troy Oz
Copper lbs (100)

For example, crude oil is traded in barrels. So in our order box below the number, we enter under ‘amount’ is the number of barrels we want to buy or short sell.

In this example, we will be buying 50 barrels of crude oil at $103.83 per barrel (in our previous article we mentioned how all commodities are quoted in US dollars

If we were to purchase 50 barrels of oil without any leverage it would cost us $5,191.50 at its current price (50 X $103.83).

However, with the use of leverage, we do not need that amount of cash in our balance to open a position of this size. Our broker will lend us the money for our position and we just put down a margin requirement. So say the leverage for crude oil is 100:1. This is the same as saying the margin requirement is 1% i.e. we only have to put down 1% of the position size and our broker will lend us the cash to open this position.

Therefore, for a position of 50 barrels of crude oil that costs $5,191.50, the margin requirement is $51.91 (1% of $5,191.50). This is all we would need in our account to open this position.

Trade Type Long Buy
Instrument Crude Oil
Trade Size 50 Barrels
Current Market Price $103.83
Cost of Trade without Leverage $5,191.50
Margin Requirement (Leverage) 1% (100:1)
Used Margin for Trade $51.91

If we had a trading account in a different currency denomination then this $51.91 would be converted to our currency at the current exchange rate.

Let’s look at another example using gold as our instrument. Gold is measured in ounces so in our ‘amount’ box we would enter how many ounces we would like to buy or sell. Let’s say we would like to short sell 10 ounces of gold. In our above order box, we see the current market price for gold is $1,326.60 per ounce. Therefore if we were to short sell 10 ounces of gold without leverage the position would cost us $13,266.00 (10 X $1,326.60).
Again, with the use of leverage, we do not need that amount of cash in our balance to open a position of this size. So say the leverage for gold is 200:1. This is the same as saying the margin requirement is 0.5% i.e. we only have to put down 0.5% of the position size and our broker will lend us the cash to open this position.

Therefore for a short sell on gold of 10 ounces at the current market rate of $1,326.60 our margin requirement would be $66.33 (0.5% of $13,266). This is all we would need in our account to open this position.

Trade Type Short Sell
Instrument Gold
Trade Size 10 Troy Ounces
Current Market Price $1,326.60
Cost of Trade without Leverage $13,266.00
Margin Requirement (Leverage) 0.5% (200:1)
Used Margin for Trade $66.33

If we had a trading account in a different currency denomination then this $66.33 would be converted to our currency at the current exchange rate.

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