Commodity CFDs

Trading Commodities
Written by Andy

Whenever you hear the term commodity, you probably think of the futures market. Trading commodities using CFDs has some advantages for a speculator. Many commodity CFDs have the futures market as the underlying, rather than the commodity itself. This means that there is an expiration date associated with the underlying which your broker will deal with in one of two ways — either he will automatically roll it into the next month contract, or he will cash settle the existing contract and offer to open one on the next month for you.

Unlike futures, with a CFD you have no possibility that you will receive physical delivery, because it will always be cash settled. You do not need so much money, as the margin percentage is usually lower with CFDs, and also because you do not have to take the standard lot size of the futures contract. You’re not usually charged commission, and the broker will profit from the spread between the bid and ask prices.

Gold CFDs

Given the recent interest in gold following the financial turmoil, the gold CFD gives a trader a direct play on the metal, rather than investing in mining and exploration. Depending on your broker, you may find you can choose a CFD on the spot price of gold, or can trade on the gold futures price. The standard size of contract may be 10 ounces or 100 ounces, and margin could be as little as 3% of the value.

The only way in which this is not as good as holding physical gold is that you are charged interest daily, so you need to time your move into gold CFDs to coincide with an uptrend. However, you don’t get stuck with any storage or security issues.

Oil CFDs

A trader’s favorite, the volatility of the oil markets gives plenty of opportunity for the active trader to profit. Prices vary not only with obvious supply and demand caused by perceived shortages or oversupply, but are also seasonal.

You will find crude oil CFDs available on the New York market (NYMEX) and on Brent crude which is traded on the Intercontinental Exchange (ICE). Usually the CFDs are based on 100 barrels, and the margin rate for commodities is commonly 3%.

As an example, suppose you wanted to take a bullish position on US crude, and you were quoted $78.25-$78.50. If you bought five crude oil CFDs with a margin rate of 3%, this would work out to $1177.50 (taking the higher price of $78.50), and with this margin you would control $39,250 of oil. Later that same day, oil was quoted at $80.75-$81.00, and you decided to close your position. You would close at $80.75, for a total value of $40,375. Your profit on the trade is $1125.

Gas CFDs

It’s true that most people think of oil when they consider trading in the energy sector, but natural gas CFDs are less volatile and more predictable. Your CFD broker should be able to write gas CFDs on both the UK and US markets. Gas CFDs are usually traded with the futures market as the underlying, unlike oil.

As noted above, using CFDs to trade on the futures market needs that you are not restricted to the large lot sizes demanded on futures, and you will usually get a better margin rate. These two facts make CFD trading on natural gas much more accessible than taking out a futures contract.

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