Futures Education

Ticks, Multipliers, and Contract Value

Since futures cover a vast array of underlying products, each contract is structured differently. The structure of a futures contract is commonly referred to as the contract specifications and you will want to become familiar with these details before you trade. Besides defining the quantity and quality of what you are trading, the contract specifications will help you understand the value of the contract by providing the minimum price fluctuation and the contract multiplier.
Information on contract specification is not too difficult to find. On the website of the exchange where a futures contract trades, you will find a link to a list of the exchange-listed products. From the list, select the futures contract you wish to learn about and select "contract specifications." Here, you will find all the details you need to understand the contract value and tick size.
Here is a copy of the contract specifications for the S&P 500 futures traded on the Chicago Mercantile Exchange:
The first thing you notice is the trade unit. This refers to the quantity of the underlying product that is being traded. In the example of the S&P 500 traded on the CME, you are actually trading $250 times the underlying S&P 500 index. As of this writing, the S&P 500 index is 970, which means every contract of the S&P 500 index controls $242,500 of the underlying stock in the S&P 500 index (970 * $250.)
The trade unit for gold is more straightforward. Here is a snapshot of the contract specifications for gold from the New York Mercantile Exchange. You will notice that gold trades for 100 troy ounces - no need to do any math here!
The next thing you need to understand is how futures are quoted. Referring back to the gold specification, you will notice that gold is quoted in "U.S. dollars and cents per troy ounce." In other words, when you look at a quote for gold, it would look like this: $780.20. The total contract value is calculated by taking the contract quantity (100 troy ounces) times the quote, ($780.20) which for gold would be $78,020. When you buy a gold futures contract, you actually control $78,020 worth of gold. Obviously, with futures and leverage, you don't have to actually have $78,000 in your account. You will learn about margin here in a bit.
Now that you have a grasp on how the contract is quoted, you need to understand the minimum price fluctuations, otherwise known as a tick size. The term tick size, or simply tick, dates back to the days of the old ticker tape machines, which were the original means of conveying price information from the trading floor. Traders use the word tick to express the contract's smallest price movement or quote from the ticker tape machine.
You should remember that the tick is different for every commodity. For example, a tick in gold is $0.1, or ten cents. The contract size of gold is 100 troy ounces. To calculate the value of a tick, you would multiply 100 x $0.10 = $10. So, every time you see the price of gold move up or down $0.10, you know that means it's a $10 gain or loss. A $1 move in the price of gold would represent $100 per contract.
Another term you will likely hear in the futures language is the word multiplier, which is just another word for tick value. You can quickly determine the value of a day's price movement by multiplying the movement in ticks by the multiplier. For example, suppose the multiplier on the mini-sized Dow future is $5. If the Dow future moved up 10 ticks in one day, one long contract would have gained $50 in value (10 index ticks x $5 multiplier = $50).
Margin requirements typically are a percentage of the contract value, so that is why initial and maintenance margin requirements can change frequently.

Margin

The word "margin" means something different in futures than it does in stocks. In stocks it means that you're borrowing money and paying interest to hold a position. In futures, margin is the amount of money you have to put up to control a futures contract.
Futures margin rates are set by the futures exchanges, though some brokerages will add an extra premium to the exchange minimum rate in order to lower their risk exposure. Margin is set based on risk. The more a contract moves in price, the more you will expect to "put up" to meet the margin requirements.
The margin required for a futures contract is better described as a performance bond or good faith deposit. The levels are set by the exchanges based on volatility (market conditions) and can change at any time.
Once your position is established, you are required to keep a "maintenance margin" amount in your account for each contract you hold or risk having your position liquidated.
There are three basic types of margin requirements in futures: Initial Margin, Maintenance Margin and Overnight Margin.