Cocoa Futures Trading Basics

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Contents

Cocoa Futures Trading Basics

Cocoa futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of cocoa (eg. 10 tonnes) at a predetermined price on a future delivery date.

Cocoa Futures Exchanges

You can trade Cocoa futures at NYSE Euronext (Euronext) and New York Mercantile Exchange (NYMEX).

Euronext Cocoa futures prices are quoted in pounds per metric ton and are traded in lot sizes of 10 tonnes .

NYMEX Cocoa futures are traded in units of 10 tonnes and contract prices are quoted in dollars per metric ton.

Exchange & Product Name Symbol Contract Size Initial Margin
Euronext Cocoa Futures
(Price Quotes)
C 10 tonnes
(Full Contract Spec)
GBP 1,350 (approx. 7%)
(Latest Margin Info)
NYMEX Cocoa Futures
(Price Quotes)
CJ 10 tonnes
(Full Contract Spec)
USD 2,700 (approx. 11%)
(Latest Margin Info)

Cocoa Futures Trading Basics

Consumers and producers of cocoa can manage cocoa price risk by purchasing and selling cocoa futures. Cocoa producers can employ a short hedge to lock in a selling price for the cocoa they produce while businesses that require cocoa can utilize a long hedge to secure a purchase price for the commodity they need.

Cocoa futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable cocoa price movement. Speculators buy cocoa futures when they believe that cocoa prices will go up. Conversely, they will sell cocoa futures when they think that cocoa prices will fall.

Learn More About Cocoa Futures & Options Trading

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Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

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Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

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Futures Trading Basics

A futures contract is a standardized contract that calls for the delivery of a specific quantity of a specific product at some time in the future at a predetermined price. Futures contracts are derivative instruments very similar to forward contracts but they differ in some aspects.

Futures contracts are traded in futures exchanges worldwide and covers a wide range of commodities such as agriculture produce, livestock, energy, metals and financial products such as market indices, interest rates and currencies.

Why Trade Futures?

The primary purpose of the futures market is to allow those who wish to manage price risk (the hedgers) to transfer that risk to those who are willing to take that risk (the speculators) in return for an opportunity to profit.

Hedging

Producers and manufacturers can make use of the futures market to hedge the price risk of commodities that they need to purchase or sell in order to protect their profit margins. Businesses employ a long hedge to lock in the price of a raw material that they wish to purchase some time in the future. To lock in a selling price for a product to be sold in the future, a short hedge is used.

Speculation

Speculators assume the price risk that hedgers try to avoid in return for a possibility of profits. They have no commercial interest in the underlying commodities and are motivated purely by the potential for profits. Although this makes them appear to be mere gamblers, speculators do play an important role in the futures market. Without speculators bridging the gap between buyers and sellers with a commercial interest, the market will be less fluid, less efficient and more volatile.

Futures speculators take up a long futures position when they believe that the price of the underlying will rise. They take up a short futures position when they believe that the price of the underlying will fall.

Example of a Futures Trade

In March, a speculator bullish on soybeans purchased one May Soybeans futures at $9.60 per bushel. Each Soybeans futures contract represents 5000 bushels and requires an initial margin of $3500. To open the futures position, $3500 is debited from his trading account and held by the exchange clearinghouse.

Come May, the price of soybeans has gone up to $10 per bushel. Since the price has gone up by $0.40 per bushel, the speculator can exit his futures position with a profit of $0.40 x 5000 bushels = $2000.

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Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

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What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

How to trade cocoa

Once used as a currency and now one of the most popular ingredients in the world – cocoa is a soft commodity with an interesting history. Here, we discuss cocoa trading strategies and give you more insight into its production.

Cocoa trading basics

Cocoa, famously known for producing chocolate, is a highly traded industry. Used by ancient tribes as early as 600AD and exported to Europe from the year 1585, cocoa has a rich and interesting history. It now attracts traders almost as much as chocolate lovers, with the cocoa market reportedly worth more than $2.1 billion. 1 Here are few useful things to know before you start trading cocoa.

Top cocoa-producing countries

The top cocoa producers are West African countries like Cote d’Ivoire (Ivory Coast) and Ghana, as well as Latin American countries like Brazil and Ecuador. West Africa is responsible for the majority of cocoa production, worldwide. The top five cocoa-producing countries are: 2

Rank Top producers Cocoa production (in tonnes)
1 Ivory coast 1.45 million
2 Ghana 0.84 million
3 Indonesia 0.78 million
4 Nigeria 0.37 million
5 Cameroon 0.28 million

What are the different cocoa varieties?

There are three different cocoa varieties – Criollo, Forastero and Trinitario. Criollo is the rarest variety, accounting for only 5% of global production, while Forastero is the most common type of cocoa, accounting for roughly 80% of production. 3 Trinitario is a hybrid cocoa bean, which ranges between average and superior quality. The higher the quality of the bean, the better the taste of the cocoa and the higher the market price.

What moves the price of cocoa?

The price of cocoa is moved by factors that relate to supply and demand. Essentially, if more people want to buy cocoa than sell it, the price will rise because it is more sought-after (the ‘demand’ outstrips the ‘supply’). On the other hand, if supply is greater than demand, the price will fall.

The factors that impact cocoa prices include:

The climate

Like most crops, cocoa plantations are very sensitive to changing weather conditions. They require a warm climate and regular rainfall. Harsh weather conditions can have far-reaching consequences. If the crops can’t produce healthy beans, the cocoa supply will decrease, and prices will likely rise.

Labour issues

Top producers like Ghana and Indonesia often experience political issues related to labour, including wage wars and an underaged workforce. Cocoa production relies heavily on low labour costs; therefore, any new labour regulations can affect the price.

Geopolitics

Political uncertainty, corruption and unrest in cocoa-producing countries can disrupt production and supply chains, causing market volatility. This could again lead to higher cocoa prices across the globe.

Global health issues

For years, chocolate was considered bad for our health. However, more recent studies have proven that the antioxidants in dark chocolate can have a positive impact on our health. Depending on the public view of chocolate, as well as chocolate trends, the demand for cocoa may increase or decrease over the long term.

Crop diseases

Cocoa crops are plagued by various damaging plant diseases. This has a severe impact on the harvest, which leads to reduced output. For example, in 2020, the ‘Black Pod’ disease resulted in the loss of half a million tonnes of cocoa.

Currency movements

Cocoa is typically priced in British pounds and any ups and downs in the strength of GBP will impact the price of cocoa. A weak pound generally means that commodity prices drop, and the demand increases. If the pound strengthens against other currencies, cocoa becomes more expensive and demand decreases.

Additionally, if you’re planning on trading shares of cocoa-producing companies, it’s important to learn about the factors that affect share prices.

Cocoa trading strategies

Cocoa trading strategies depend on the trader’s knowledge of technical indicators, and their personal preference. Generally, traders could employ a range trading strategy, a breakout trading strategy or a fundamental trading strategy.

Range trading strategy

In a range trading strategy, a trader will identify levels of support and resistance in an asset’s price movements and seek to buy at levels of support and sell at levels of resistance. Range strategies work best in markets with lots of price movements, where there is not any particular long-term trend.

Breakout trading strategy

Breakout trading involves trying to spot the early stages of a trend and opening a position during this period. This enables traders to capitalise on profits once the trend moves above a level of resistance or, alternatively, once it breaks below a support level. In the context of cocoa trading, breakout traders will try to make a prediction about global supply for the upcoming year and open a position accordingly.

Fundamental trading strategy

Fundamental trading is a strategy in which traders depend heavily on the factors that affect levels of supply and demand. Fundamental traders will look at company-specific or region-specific events that could affect supply or demand for cocoa at the particular point in time. They will then base a trade on their findings.

Four steps to start trading cocoa

Choose a cocoa asset to trade

When you trade cocoa, it is likely that you will be trading futures. Futures are contracts in which you agree to exchange a set amount of the underlying commodity at a set price on a set date. These contracts are traded on futures exchanges. There are other ways that you can gain exposure to the cocoa market. Your choice will depend on whether you want to own the physical assets or not.

For example, shares of cocoa-producing companies are heavily influenced by the price of the commodity. Therefore, you could decide to trade or invest in companies such as Mondelez or known retailers such as Lindt.

Alternatively, you could use cocoa exchange-traded funds (ETFs), which can be used to trade cocoa benchmarks, or track a basket of cocoa stocks.

Decide how you want to trade

There are a range of different financial instruments you could use to trade cocoa, including futures, CFDs and spread bets.

Futures are the most popular way of trading cocoa, offering high liquidity and volatility. For traders, the disadvantage of trading futures includes an expectation that the physical commodity will be delivered – which they don’t want. Therefore, it’s necessary to ensure rollover arrangements are in place.

With CFD trading and spread betting, you can deal on changing prices of cocoa futures and options, without buying or selling the contract. CFD trading and spread betting use leverage, which means you only have to put up a small margin to gain exposure to the full value of the trade. This can magnify your potential profit – but also your potential loss. And, as you won’t ever take ownership of the underlying asset, you can go long or short – which means you can speculate on rising as well as falling cocoa prices.

Alternatively, you could choose to invest in the shares of cocoa companies or ETFs through our share dealing service.

Create your risk management strategy

Once you’ve familiarised yourself with the different ways to trade cocoa, you can choose which method best suits your trading strategy and risk appetite.

All trading involves risk, especially if you’re trading using leverage, which is why you need a risk management strategy to protect against unnecessary losses. There are ways in which you can minimise your risk, which includes attaching stops to your positions. Stops will close your trade at a certain point if the market moves against you, to prevent you losing more than you’re prepared to.

Open and monitor your first trade

Once you’ve completed these steps, it’s time to enter the market. When you trade cocoa with CFDs or spread bets, you can speculate on both rising and falling markets. If you think the price will rise, you would open a position to ‘buy’ cocoa, and if you think the price will decline, you open a position to ‘sell’. Your trading decision should be based on your analysis of the market and your trading strategy.

After you have opened your position – attaching the appropriate stops and limits – it is important to monitor your position’s progress and to keep up to date with anything that could impact the price of cocoa.

Cocoa trading hours

Location Cocoa exchange Trading hours*
New York London Cocoa 04:30 – 11:55 (New York time)
New York Cocoa 04:45 – 13:30 (New York time)
London London Cocoa 09:30 – 16:55 (UK time)
New York Cocoa 09:45 – 18:30 (UK time)
Singapore London Cocoa 17:30 – 02:30 (Singapore time)
New York Cocoa 17:45 – 02:30 (Singapore time)

*Hours are set by Intercontinental Exchange (ICE) and may vary. Hours will shift between March and November as the UK and US change to and from daylight savings on different days, while Singapore remains on Singapore Standard Time (UTC+8) all year round.

Cocoa trading in summary

  • The cocoa market is reportedly worth more than $2.1 billion
  • The top cocoa producers are West African and Latin American countries
  • The price of cocoa is moved by factors such as the climate, labour issues and geopolitics
  • The cocoa market offers the opportunity to make a profit on both rising and falling prices
  • Cocoa trading strategies include range trading, breakout trading and fundamental trading strategies
  • Cocoa trading hours are set by ICE and vary per region

Sources

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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