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Understanding Oil Futures Leverage

October 11, 2018 by Daniels Trading| Futures 101

A common saying in financial markets asserts that leverage is the quintessential double-edged sword. That axiom may never be more relevant than it is in futures trading, specifically the crude oil markets. Led by the industry benchmark West Texas Intermediate (WTI) and North Sea Brent (Brent) contracts, crude oil futures are some of the most frequently traded derivatives in the world.

Driven by a variety of fundamentals, as well as technicals, WTI and Brent are dynamic markets that provide participants many opportunities. Featuring consistent volatility, robust liquidity and wide daily ranges, WTI and Brent crude are commonly referred to as the Wild West of the futures markets.

A word to the wise: If you are going to engage the WTI/Brent products, then be sure to have a fluent understanding of how oil futures leverage works.

Leverage 101: Contract Size Is King

A great place to begin any discussion of oil futures leverage is by talking about contract size. In futures, a contract’s size is the quantity of the underlying asset upon which valuations are based. It directly determines the value of each tick, effectively defining the degree of risk exposure being assumed by the buyer or seller.

Fortunately for oil traders, the contract size between the two leading products is identical:

WTI Crude Oil Brent Crude Oil
Exchange CME ICE
Symbol CL B
Price Quote U.S. Dollars & Cents U.S. Dollars & Cents
Contract Size 1000 Barrels 1000 Barrels
Minimum Fluctuation $0.01 $0.01
Tick Value $10.00 $10.00

Leverage 101: Know Your Tick Value

No matter which product or market you’re trading, a good first step in applying leverage is identifying the minimum tick value. For instance, the minimum tick value of the E-mini S&P 500 (ES) is $12.50 while the E-mini DOW (YM) is $5.00. Larger contracts, such as CME Bitcoin futures (BTC) or silver (SI), cost the trader $25.00 per tick. As shown above, both WTI and Brent crude futures are valued at $10.00 per tick.

It’s vital to remember that as position size is increased, tick value grows accordingly. This is a key aspect of oil futures leverage — larger positions equal greater tick values. Take the following example as a basic illustration of how growing position size impacts the tick value of a crude oil futures trade:

Number of Contracts Tick Value
1 $10.00
10 $100.00
100 $1000.00

This concept is elementary, yet many traders are blinded by the allure of extraordinary returns and ignore the negative implications of greater tick values. Without a firm grasp of how tick value can stress a trading account, catastrophic loss, margin calls, and premature position liquidations come into play.

For instance, take the following example of a WTI crude oil intraday play utilizing a $5000 trading account. Observe how increasing position size boosts tick value and enhances risk exposure:

Contracts Intraday Margin Requirements Available Capital Tick Value
1 $1000 $4000 $10.00
2 $2000 $3000 $20.00
3 $3000 $2000 $30.00
4 $4000 $1000 $40.00
5 $5000 $0 $50.00

Assuming a $5000 account balance, taking a 1 lot position is doable. At $10.00 per tick, a given trade has 400 ticks of wiggle room before the position is liquidated or a margin call is placed. However, as the position size is increased, the margin for error shrinks exponentially. On only a 3 lot position, the cushion is reduced to an ultra-tight 66 ticks. At 4 lots, a negative 25 tick move in price will have your broker giving you or perhaps even automatically liquidating your position.

In practice, traders have many ways to put oil futures leverage into perspective. However, without a solid understanding of the concept of tick value, placing efficient trades becomes difficult at best.

Making the Most of Oil Futures Leverage

Financial leverage is a complex topic, but its general properties are similar throughout the world of finance. In all markets, the basic rule for leverage is: Use it recklessly and perish; respect its power and prosper.

For more information on the global oil markets, as well as on how leverage plays a big role in the futures game, contact a broker at Daniels Trading. Featuring the experience and knowledge gained from years in the industry, a member of the DT team can bring clarity to the sometimes intimidating topic of leverage.

Exploring CME Group Crude Oil and Energy Webinar

Filed Under: Futures 101

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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