Cotton Futures and Options
Market
Learn the most effective strategies for buying and selling options
on futures contracts. Also learn producer and consumer hedging
strategies.
*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
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