Commodities Examples

Buying London Wheat

It is Monday, 11 January 2010 and you believe wheat prices in the UK are set to rise, so you decide to take a position on May London Wheat but want to limit your losses.

Guaranteed risk protection is available on most of our commodity markets. This gives you a way to guard against sudden losses.

At midday our price for May London Wheat stands at 111.5/112.0. You buy two contracts at 112.0, the offer price, and pay a Limited Risk premium on your opening price. Your position is opened at 112.0 (offer price) minus 0.3 (Limited Risk premium) = 111.7.

Placing the Guaranteed Stop

You place your Guaranteed Stop 3 places away at 108.7, so the most you can lose on your position is:

Stop level: 108.7
Opening level: 111.7
Difference: 3

Maximum possible loss: 3 points x 2 contracts x £100 = £600

In order to open your position you need to put down a deposit of £650 per contract, in this case a total of £1300.

A bearish report from the US Department of Agriculture on Tuesday and an increase in sterling strength against the euro (making exports to the eurozone less competitive) combine to drive down the price of May London Wheat throughout the week, and towards the end of the day on Friday our price stands at 106.0/106.5 – a 3-month low.

However, your Guaranteed Stop was triggered as soon as 108.2 was hit. Without it, you could have lost £1200. Instead your loss is calculated as follows:

Opening: 111.7
Closing: 108.7
Difference: 3

Profit = 3 x 2 contracts x £100 = £600