'Gas At The Pump' futures offer new trading opportunites

The CBOE Futures Exchange (CFE) recently launched "Gas At The Pump^SM" futures. This innovative new product is designed to track the retail price of regular gas that consumers pay at the pump. The CFE launched six Gas At The Pump Futures contracts, one based on the national average from a survey of 800 stations across the country and five regional contracts based on the average price specific to their geographical location.

Supply chain disruptions and speculative trading helped push energy prices to record highs earlier this year. The effect has been felt both by businesses and consumers who are worried by the extreme volatility, higher costs and the resulting impact on their balance sheets.

Until now, anyone wishing to hedge their exposure to gasoline price volatility has been forced to trade a product that may have only a slight correlation to their actual cost. However, Gas At The Pump Futures offer traders a wide choice of products and because they are broken down by geographical region, traders can trade the contract that directly impacts them. This feature is highly advantageous to small businesses and consumers.

The contract size and margin requirements are more favorable, too. The contract multiplier is 10,000. So, for example, US Regular Reformulated January 2006 (UP/F6) is currently trading at 239.1, making one contract worth $23,910.00. Margin rates vary depending on the specific contract but are around $4000 for speculative positions (less for hedgers) and less than half that for spreads (you can find the exact rates here).

Chart 1 (below) shows the price history for the January 2006 US Regular Reformulated (GUF6) futures contract.

Data Source: CBOE Futures Exchange (CFE)

Chart 2 (below) shows the price history for the January 2006 West Coast PADD futures contract. You'll see that prices are higher on the West coast. This is important for a company that only has transportation costs on the West Coast because they can hedge their risk against the actual price they are paying at the pump.

Data Source: CBOE Futures Exchange (CFE)

As you look through the various contracts you'll notice the price differences across the country. As expected, prices are cheapest in the Midwest and most expensive on the West Coast. The five regional contracts now allow companies to make business decisions based on costs that are relevant to them. This tremendous flexibility is one of the best features of the new products.

Another benefit is that all the contracts are cash settled. That means that no one has to worry about taking delivery and incurring storage costs. This makes "Gas At The Pump" futures more attractive to speculators too, allowing them to employ a wide range of trading strategies from outright to calendar spreads.

Ashton Dorkins

Initial contract months for GAPP futures will be December, January, March and June. In general, there will be two near-term contract months plus two additional contract months on the March quarterly cycle. Price quotations will be in cents per gallon of gas (e.g., two-hundred and ninety-eight cents per gallon will represent $2.98). The last trading day will be the third Friday of the expiring month. Trading hours are 8:30 a.m. to 3:15 p.m., Central Time. For more details, ticker symbols and contract specifications, go to: http://cfe.cboe.com/Gas.

The CBOE Futures Exchange is a wholly-owned subsidiary of Chicago Board Options Exchange, Incorporated, offering an all-electronic exchange, open access market model, with traders providing liquidity and making markets. CFE is regulated by the Commodity Futures Trading Commission (CFTC). More information on CFE and its products, including contract specifications, can be found at: http://cfe.cboe.com.

CBOE, the world's largest options marketplace and the creator of listed options, is regulated by the SEC. For additional information about the CBOE and its products, access the CBOE website at www.cboe.com.

CBOE, Chicago Board Options Exchange is a registered trademark of Chicago Board Options Exchange, Incorporated. CFE(SM) , Gas At The Pump(SM) and GAPP(SM) are servicemarks of CBOE Futures Exchange, LLC.