When you trade a specific commodity option, you will need to know the Commodity contract option specifications what are called the “Contract Specs” or contract specifications. This means the units that each, the contract and the option trade in.
For example: When trading one of these grains: CORN, WHEAT, SOYBEANS, and OATS, the underlying contract always represents 5,000 bushels of the grain. So if CORN is trading at 358.75, this means $3.5875 per bushel. The value of the 5,000 bushel contract = $3.5875 X 5,000 bushels = $17,937.50
Corn CONTRACTS trade in increments of .25 cents per bushel (1/4 penny) = $12.50
Corn OPTIONS trade in increments of .125 cents (1/8 penny) = $6.25
One TICK = one increment.
So how do we know this? The CONTRACT SPECS are set by the exchanges of each respective commodity.
Commodity Contract Option Specifications
How can you find this information quickly?
Just Google: “Corn Contract specs” (Or any other commodity the same way) and you get this result:
Before you paper-trade or real trade any contract or options on any contract, you should be absolutely certain you totally understand the units. Not all of the contracts specs are as easy to understand as the grains. After you have read the “help” tips from your broker, if you still do not understand any contract or options specifications and units, you should call your broker help line for assistance.
If you’ve been trading only stock options, you know each option represents 100 shares. Commodity options are based on each contract according to its specifications of the underlying contracts. (there is no standard used for ALL contracts but EACH contract.)
This is the format in the PDF of the exchange’s listed specifications:
For Corn Contract, see: http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contract_specifications.html