Coal Futures Trading Basics

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Contents

Coal Futures Trading Basics

Coal futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of coal (eg. 1550 tons) at a predetermined price on a future delivery date.

Coal Futures Exchanges

You can trade Coal futures at New York Mercantile Exchange (NYMEX).

NYMEX Coal futures prices are quoted in dollars and cents per ton and are traded in lot sizes of 1550 tons .

Exchange & Product Name Symbol Contract Size Initial Margin
NYMEX Coal Futures QL 1550 tons
(Full Contract Spec)
USD 18,900 (approx. 16%)
(Latest Margin Info)

Coal Futures Trading Basics

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

Coal 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 coal price movement. Speculators buy coal futures when they believe that coal prices will go up. Conversely, they will sell coal futures when they think that coal prices will fall.

Learn More About Coal Futures & Options Trading

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Buying Straddles into Earnings

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. ]

Day Trading using Options

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

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. ]

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 into Earnings

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. ]

Day Trading using Options

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

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. ]

Learn How To Trade Coal

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Last Updated on August 15, 2020

Why is Coal Valuable?

Coal is a fossil fuel formed from dead plant matter trapped between rock deposits.

Over a period of millions of years , biological and geological processes turn this material into peat and then through further metamorphosis into lignite, sub-bituminous coal and finally anthracite coal.

Coal has been used as an energy source throughout human history. Cavemen used the rock to heat their caves. During the Industrial Revolution, its use proliferated as energy needs expanded. Today coal generates 41% of the global supply of electricity and plays a key role in several other industries.

How is Coal Mined?

Coal miners extract coal by one of two methods:

  1. Surface mining in open pits
  2. Deep mining in underground shafts

The geology of a deposit of coal determines which of the methods miners use. Underground mining currently represents a larger share of world production than surface mining.

Estimates place the size of proven global coal reserves at 1.1 trillion metric tons . This supply equates to 150 years of coal at current rates of production. ( By comparison, oil and gas reserves will last 50 and 52 years, respectively, at current production levels. )

Key Facts About Coal Mining

  1. It may not be economically feasible with current technology to mine some of the proven coal reserves.
  2. It is unlikely that significant new coal reserves will be found. After centuries of mining, geologists have a very good understanding of the size and location of global coal deposits.

Global coal production had been growing steadily since 1970. In recent years production numbers have declined precipitously as more countries turn to cleaner form of energy.

The five largest coal producing countries are:

Top 5 Coal Producing Countries

Rank Flag Country
#1 United States of America
#3 Australia
#5 New Zealand

Most coal production remains in the country where it’s mined. About 15% of global production is exported to foreign markets. The top coal importing countries are China, India, Japan and South Korea.

Top Coal Exporting Countries

Rank Country
#1 Indonesia
#2 Australia
#3 Russia
#4 United States of America
#5 Colombia
#6 South Africa
#7 Canada

4 Main Uses of Coal

Uses of Coal Description
Power Generation Steam coal, also known as thermal coal, provides a source of electricity.
  • Power plants ground steam coal into a powder and fire it into a boiler to produce heat.
  • The heat is used to turn water into steam.
  • The steam powers a turbine that, along with an alternator, generates electricity.
  • Steel Industry A form of coal known as coke or metallurgical coal is used to smelt iron ore and produce steel.
  • Specialty high-temperature ovens bake coal to produce coke.
  • Coal used for this process must be low in sulfur and cleaned very well.
  • The final product is more expensive than coal used for power generation.
  • Miscellaneous Industries The following industries use coal:
  • Aluminum refineries
  • Paper manufacturers
  • Chemical companies
  • Pharmaceutical manufacturers
    Refined coal tar is used to manufacture specialty chemical products including:
  • Creosote oil
  • Naphthalene
  • Phenol
  • Benzene
    Ammonia gas from coal ovens is used to create:
  • Ammonia salts
  • Nitric acid
  • Agricultural fertilizers
    Coal Byproducts are found in:
  • Soaps
  • Aspirins
  • Solvents
  • Dyes
  • Plastics
  • Rayon
  • Nylon
  • Specialty Products Coal is used to make:
  • Air and water purification filters
  • Kidney dialysis machines
  • Construction materials
  • Tennis rackets
  • Mountain bikes
  • Lubricants
  • Water repellents
  • Resins
  • Cosmetics
  • Shampoos
  • Toothpaste
  • What Drives the Price of Coal?

    Coal prices can fluctuate for a variety of reasons, but the 5 most common ones include:

    1. Emerging Market Demand
    2. Substitution
    3. Environmental Concerns
    4. Transportation Costs
    5. Government Regulations

    Emerging Market Demand

    Electricity consumption in emerging economies has a significant effect on coal demand and coal prices.

    Emerging market countries, especially China, have been transforming their economies from agrarian to industrial and information-based. This transformation requires significant infrastructure, building construction and urban development.

    Building modern societies requires modern electric power grids and heavy electricity consumption. As more emerging market citizens move into cities, the need for power will continue to grow.

    Substitution

    Coal competes with other sources of power including natural gas, solar, wind and hydroelectric power . Natural gas, as an example, often competes strongly with coal on price and is a cleaner form of energy.

    Other energy sources such as wind and solar are far more expensive than coal, but are much cleaner. As technologies improve, cost-competitive substitutes for coal may emerge. These substitutes can have a major impact on coal demand and coal prices.

    Environmental Concerns

    Coal has a reputation as a very dirty and environmentally unfriendly form of energy. The scientific community warns that burning coal raises carbon dioxide levels and contributes to global warming. The coal industry has responded to these criticisms by developing and touting cleaner coal initiatives . Carbon emission capturing and storing represents a potential solution.

    Clean coal technologies are expensive and threaten to upend coal’s economic competitiveness with other energy sources. The ability of the industry to reduce the environmental footprint of coal could have a big effect on coal demand and prices.

    Transportation Costs

    Transporting coal from mines to consumers requires trains, barges and trucks. All of these modes of transportation use diesel fuel, so changes in its price can have a significant effect on coal prices. With cross-country shipments, the cost of transportation could exceed the price of coal at the mine.

    On average, transportation represents about 25% of the overall cost of coal .

    Transporting Coal Out of the Palermo Quarry in Kazakhstan – via Pixabay

    Government Regulations

    Clean air regulations in developed countries have resulted in declining coal production.

    Concerns about environmental pollution and its effect on global warming have led governments to enact laws limiting carbon emissions. Such regulations have the effect of making coal economically unfeasible. If these regulations intensify, then more coal plants will shutter creating reduced supply and higher prices.

    3 Reasons You Might Invest in Coal

    Investors purchase coal for a variety of reasons, but the following are most common:

    1. Bet on Emerging Market Demand
    2. Bet on Infrastructure
    3. Portfolio Diversification

    Bet on Emerging Market Demand

    The fast-growing Chinese economy has an insatiable demand for cheap fossil fuels to produce energy. Chinese electricity usage is likely to surge over the coming decades as the country builds new factories and housing.

    India will also see massive increases in its electricity consumption as it modernizes its economy. Unlike the West, China and India are less likely to be influenced by environmental concerns when making public policy. An investment in coal is a way to bet on the modernization of these emerging market economies.

    Bet on Infrastructure

    The United States has not invested in major infrastructure projects in decades.

    Infrastructure requires massive quantities of steel. Demand for coal (and the coke from coal used to produce steel) could surge if plans to replace the crippling infrastructure in the United States come to fruition.

    Other large developed countries in Europe and Asia will have massive infrastructure needs in the coming years. The price of coal used to make coke is about three times higher than the price of coal used in the electric power sector.

    Portfolio Diversification

    Investing in coal along with other commodities is a way to diversify an investment portfolio.

    Investors seeking true asset class diversification should consider putting a portion of their investable assets into a basket of commodities including coal, other energy commodities, metals and agriculture.

    Should I Invest in Coal?

    Coal prices can be volatile, and traders should take this into consideration.

    Placing a small portion of an investment portfolio into a diversified basket of commodities, including coal, could actually mitigate investment risk.

    There are two compelling reasons why traders should include coal in this basket:

    Global Growth : Coal is one way to bet on global growth. Emerging market countries will undoubtedly need a cheap source of electricity to power factories and homes in the years ahead. They will very likely turn to coal to meet much of this demand.

    Global Infrastructure : Investors should consider the crucial role that coal plays in the steel industry. The need to rebuild bridges, railways and airports should increase demand for steel and, in turn, the demand for coal.

    Global Infrastructure via Pixabay

    However, traders should also consider three serious risks associated with a coal investment:

    Environmental Concerns : Coal is receiving intense scrutiny in many countries because of the pollution it creates. These concerns are creating competition from greener energy sources. As the cost of greener energies declines, consumers might switch to these for their energy needs.

    Regulation : Coal produces harmful and toxic carbon emissions, and many countries might intensely regulate these in the years ahead. If countries phase out coal as a source of power, then demand could plummet.

    Global Recession : Weak economic conditions could cause coal and many other commodity prices to suffer.

    What Do the Experts Think About Coal?

    Industry experts emphasize the environmental and regulatory risks of coal, but most don’t expect demand to dissipate anytime soon.

    Coal likely will have a role in the energy-supply stack for decades to come, barring anything short of an outright ban on fossil-fuel production or consumption.”

    – Ethan Bellamy, senior research analyst at Robert W. Baird & Co.

    However, concerns over the environmental problems of coal could mean a steady decline in consumption.

    My view is coal is on this long-term secular decline (but) it’s not dead completely.”

    – Matt Miller, equity analyst at CFRA in Denver.

    Others see coal’s environmental and regulatory problems as a contrarian opportunity:

    “Coal-mining companies are among the most out-of-favor companies in the stock market today. As contrarian investments, these stocks have real appeal.”

    How Can I Invest in Coal?

    Investors have a very limited number of ways to invest in coal . Some previously available means for investing in coal ceased trading recently:

    Coal Trading Methods Compared

    Method of Investing Complexity Rating (1 = easy, 5 = hard) Storage Costs? Security Costs? Expiration Dates? Management Costs? Leverage? Regulated Exchange?
    Coal ETFs 2 N N N Y N Y
    Coal Shares 2 N N N N Y Y
    Coal CFDs 3 N N N N Y Y

    Coal Futures and Options

    The Intercontinental Exchange (ICE) recently suspended trading in Central Appalachian Coal Futures and Central Appalachian Coal Options due to lack of any open interest in the contracts.

    Prior to this, the Chicago Mercantile Exchange (CME) delisted trading in Central Appalachian Coal Futures.

    There are no active liquid exchanges for trading futures and options on coal in major markets.

    Coal ETFs

    These financial instruments trade as shares on exchanges in the same way that stocks do. There are no ETFs that offer exposure to physical coal extracted from mines.

    Investors seeking exposure to the coal mining industry can invest in the VanEck Vectors Coal ETF (NYSEARCA: KOL) . This ETF invests the majority of its assets in companies that generate at least 50% of their revenues from coal operations including production and mining, transporting coal, producing coal mining equipment and storing and trading coal.

    Shares of Coal Companies

    There are very few publicly traded companies engaged in mining and processing coal. The industry has shrunk in recent years due to mergers and bankruptcies. The remaining companies are not pure-play investments in coal, but the performance of their shares is generally correlated with the price of coal. The major coal mining stocks include:

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