Gasoline futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specified amount of gasoline at a predetermined price on a future delivery date.
Gasoline futures are traded on the New York Mercantile Exchange (NYMEX). Each contract consists of 42,000 U.S. gallons of oil which is equal to 1,000 barrels.
The price is quoted in U.S. Dollars and Cents per gallon with a tick size of 0.01¢ per gallon.
Gasoline Futures Contract Specs:
- Ticker Symbol: RB
- Exchange: NYMEX
- Trading Hours: 9:00 AM until 2:30 PM EST.
- Contract Size: 42,000 U.S. gallons (1,000 barrels)
- Contract Months: all months (Jan. – Dec.)
- Price Quote: U.S. dollars and cents per gallon. Ex $2.25 per gallon
- Tick Size: $0.0001 (0.01¢) per gallon ($4.20 per contract).
Gasoline Futures Trading
Originally consumers and producers of gasoline managed gasoline price risk by purchasing and selling gasoline futures. Gasoline producers would employ a short hedge to lock in a selling price for the gasoline they produced while businesses that require gasoline would utilize a long hedge to secure a purchase price for the amount they required.
Today there is another kind of trader in the gasoline futures market, the speculator; who assumes the price risk that hedgers try to avoid in return for a chance to profit from favorable gasoline price movement. Speculators buy gasoline futures when they believe that gasoline prices will go up and sell gasoline futures when they think that gasoline prices will fall.
If you’re bullish on gasoline, you can profit from a rise in the gasoline price by taking up a long position in the gasoline futures market. You would implement this strategy by buying (going long) one or more gasoline futures contracts on the NYMEX exchange.
Long Gasoline Futures Trade Example
You decide that current gasoline futures are undervalued so you buy a long near-month NYMEX Gasoline Futures contract at a price of $2.25 per gallon since each NYMEX Gasoline futures contract represents 42,000 gallons, therefore the value of the futures contract is $94,500. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of $12,500 to open the position.
One week later, the price of gasoline futures has risen to $2.50 per gallon. Each futures contract is now worth $105,000. So by selling your futures contract, you can immediately exit your long position with a profit of $10,500. Not bad for a weeks work.
Selling Gasoline Futures to Profit from a fall in Gasoline Prices
If you think gasoline is overvalued (bearish), you can also profit from a fall in gasoline prices by taking up a short position in the gasoline futures market. You can do this by selling (shorting) one or more gasoline futures contracts.
Short Gasoline Futures Trade Example
This time you decide to go short on one near-month NYMEX Gasoline Futures contract at the price of $2.25 per gallon. Since each Gasoline futures contract represents 42,000 gallons of gasoline, the value of the contract is $94,500. To enter the short futures position, you have to put up an initial margin of $12,500.
One week later, the price of gasoline futures has fallen to $2.00 per gallon. Each contract is now worth only $84,000. So by closing out your futures position now, you can exit your short position with a profit of $10,500.
Note: For simplicities sake, both of the above examples fail to take into account broker commissions. These are levied on all futures trades by your broker and shouldn’t cost more than $10 per trade. Discounts are available for multiple contracts.
Trading gasoline futures is actually a lot easier than it looks; the gasoline market is a lot less liquid than the oil futures market but it’s still exposed to the same market forces, so there’s a good opportunity for profitable trades.
If you want to learn more about trading heating oil futures it’s a good idea to join a broker like optionsXpress because they offer online training seminars and webinars. That way you’ll learn from professional futures and options traders and the advice they’ll give you will stand you in good stead as you develop your trading.