The unleaded
gas futures price is different than the unleaded gas price in the cash (physical) market. Generally, the price of a commodity
for future delivery is higher than the cash price due to carrying costs (insurance, interest, and warehousing fees).
This is called contango. The opposite of contango is backwardation. Backwardation is when the price of a commodity for future
delivery is lower than the cash price Backwardation is normal in a “seller’s market.”
When you trade unleaded gas futures, your futures price depends
on where you get into the market. After you post your initial margin, your profit or loss depends on where you enter and exit
the market (minus transaction costs).
For example:
The contract size for unleaded gas is 42,000 gallons. So each $.01
move equals $420. As the market moves your account value adjusts. If your account value drops below the maintenance margin,
a margin call is due. A margin call can be met by offsetting positions or adding money to your account.
Trading
futures is like driving a car without insurance. You save the insurance premium, but if you crash you will wish that you were
insured. If you have very deep pockets or deal with the physical unleaded gas product then futures may be for you. If you
are a speculator with a limited amount of risk capital then unleaded gas options is a better way for you to invest in the
unleaded gas market.
