Cotton futures options expiration

Futures contracts, descended from forward contracts, have remained basically unchanged in form and function since the founding of the first futures exchanges. Forward contracts are cash market transactions that establish the terms for the actual ownership transfer of the physical cotton at a specific delivery date. The terms of the contract are unique to the parties involved. Forward contracts became possible as information transfer accelerated in speed. A futures contract, however, differs from a forward contract primarily in that it is standardized and, while it has a delivery component, it does not exist primarily to facilitate physical delivery.

Futures and options contracts

Futures contracts, descended from forward contracts, have remained basically unchanged in form and function since the founding of the first futures exchanges. Forward contracts are cash market transactions that establish the terms for the actual ownership transfer of the physical cotton at a specific delivery date. The terms of the contract are unique to the parties involved. Forward contracts became possible as information transfer accelerated in speed.

A futures contract, however, differs from a forward contract primarily in that it is standardized and, while it has a delivery component, it does not exist primarily to facilitate physical delivery. A futures contract is a standardized agreement to purchase or sell a fixed quantity of a commodity at a predetermined price, with settlement to take place at a future date. The only negotiable element of the contract is the price.

The trading of cotton futures, therefore, involves pricing cotton. Unlike forward contracts, delivery of futures contracts seldom takes place; the difference between the agreed and spot price at the time of contract expiration is typically settled through a cash transaction. In effect, an option contract provides a kind of price insurance. Although the institutions and the governing rules and regulations behind the contracts have evolved considerably over time, the concepts behind futures and options contracts and the purposes they serve remain largely unchanged.

Futures markets are created to serve cash market needs and therefore seek to reflect cash market conditions. The world prices its cotton at a premium or discount to the Cotton No.

The unique characteristics of cotton as a plant are revealed in the complex grading standards of the cotton futures contract. In , NYCE implemented the certificate system. Under the system, a certificate stipulating the grades of cotton became good for delivery, passing from hand to hand like a stock certificate.

This became the standard for recording and guaranteeing the quality of each specific bale of cotton, a measure necessary to ensure the validity of the futures contract as a benchmark for pricing.

The Cotton No. Contracts are listed for March, May, July, October and December plus one of more of the 23 succeeding months. No origin is specified. The price is quoted in cents and hundredths of a cent per pound. In the spot month contract nearest expiration there is no limit on or after the first notice day. Floor trading hours are a. Eastern Time. Electronic trading hours are a. The primary cotton classing components are colour, length, micronaire and strength. Micronaire is a reading of the coarseness of the fibre measured by its resistance to air passage.

Any longer staple does not carry a higher premium. Industry standards and practices have periodically led to specification changes. The minimum grade of cotton deliverable against the contract was raised to low middling from good ordinary in A contract permitting southern delivery was introduced in Trading in the Cotton No. In recent years the exchange has adjusted the contract specifications to reflect industry practices. Beginning with the May Cotton No.

The stability and continuity of the futures market function is based on the standardization of the contracts to reflect cash market conditions and practices. ICE continuously monitors the performance of its markets and the changing cash market conditions.

Adjustments have been and will continue to be made to the contract as cash market conditions, crop characteristics and industry practices demand. Proposals for new contracts are also considered and evaluated for potential introduction to the market. The evolution of the cotton certificate system illustrates how the exchange can change its procedures and practices while maintaining the essential concepts of its primary functions. Today the certificate system still serves its original purpose, but the development of the Electronic Warehouse Receipt EWR system has allowed the assignment of ownership of a bale of cotton to move from a cumbersome manual exchange of paper to a completely electronic transfer and record of the transaction.

With ever-increasing globalization, the ability to transfer ownership instantaneously via electronic means ranks with the development of the steam ship and the transatlantic cable as a change in the movement of critical market information. The cotton industry uses the Cotton No. Hedging is possible because the cotton futures and the cash market have a strong relationship and generally move in tandem over time.

In cotton, the basis has particular importance because of the many pricing variables that affect the global marketplace. To establish a successful hedge, the industry user in cotton as in other agricultural commodities must calculate and examine the historical basis for the product trading in the local cash market. This basis risk cannot be transferred to the futures market.

Since the abolition of the gold standard in , all cotton futures contracts, with the exception of India, have been traded in United States dollars. Hedging or speculation in cotton futures in any other currency, therefore, involves unpredictable exchange rates and adds one more element of pricing uncertainty. Currency risk therefore becomes a factor in calculating basis risk. When the dollar falls, cotton has often risen in price. For cotton in the United States, knowledge of basis must be coupled with an understanding of the changeable logistics of government support programmes.

A look at the history of cotton futures trading in New York reveals the impact of government programmes. Between and the early s, NYCE exhibited an extraordinarily low trading volume. In , NYCE traded only contracts — a daily average of 3 contracts. The Farm Security and Rural Investment Act of and its subsequent changes presented cotton hedgers with new challenges and opportunities.

Cotton hedgers today rely heavily on the flexibility of options on Cotton No. The increased volume of cotton options in recent years has demonstrated their growing importance to risk managers. The nearest 10 delivery months are listed for trading. For example, in August , options on the October , December , March , May , July , October , December , March , May and July contracts were available for trading.

The successful cotton hedger can utilize a variable mix of futures, options on futures and forward contracts. The cotton futures and options markets provide a number of possible hedging and investment strategies and opportunities. Once the hedging position has been put in place, it should be monitored and adjusted as market conditions warrant.

DEC Cotton - #2 represents the cotton futures market contract expiring in December. Symbol. As on any stock exchange, cotton futures market contracts are. Learn how to trade Cotton futures and options with our free practice account. bought an October cotton cent call option with 60 days left until expiration.

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