Last Updated on 3 November, 2022 by Samuelsson
In the financial trading world, certain terms are used to describe a change in the price of an asset. These include points and ticks that are used mostly in the futures market. As a futures trader, it is important to know what point value in futures is.
In futures trading, one point represents the smallest whole-number price increment in an asset. It is the smallest possible price change on the left side of the decimal point. For example, if the price of crude oil moves from 71.50 to 72.50, it has increased by one point. The value of a one-point movement (point value) varies with the futures contract and the exchange. For example, on the CME Group, the point value of crude oil futures is $1,000 while that of the S&P 500 E-mini is $50.
To make it easier, we will discuss this topic under the following subheadings:
- What is a point in futures trading?
- How do points relate to ticks?
- Tick size vs. tick value
- Point value vs. tick value: which do you use in calculating profit and loss in futures trading?
What is point value in futures trading?
While points may also be used by stock traders to represent the smallest whole-number change in a stock price, points are typically used in the futures trading market. In futures trading, a point represents the smallest change on the left side of the decimal point in the price of a contract.
For example, if the price of the S&P 500 E-Mini (ES) futures contract moves from 1328.05 to 1329.05, it has made a 1-point movement to the upside. Likewise, if the contract moves from 1329.05 to 1327.05, it records a 2-point movement to the downside. As you can see, when the smallest increase or decrease in the price occurs on the left side of the decimal point, it is referred to as a point.
For each contract, a point movement has a dollar value attached to it. The exact dollar value of a point varies by exchange and is different for different assets (gold, crude oil, and so on) and contract types (standard, mini, and micro contracts). For example, a 1-point movement in the standard contract of crude oil on the Chicago Mercantile Exchange is equivalent to $1,000, while in the S&P 500 E-mini contract, it is worth $50.
How do points relate to ticks?
Futures traders also use ticks to represent the size of price movements. In fact, they use ticks more often than they use points. Traders talk about ticks when there is a movement in prices on the right side of the decimal point in the price of a futures contract. So, while a point represents the smallest possible price change on the left side of the decimal point, a tick represents the smallest possible price change on the right side of the decimal point.
The tick is the smallest possible price change recorded by the market. A point is made up of many ticks, just as a minute is made up of seconds. So, ticks are fractions of a point. The number of ticks that make up a point depends on the tick size, which, in turn, depends on the asset type in a futures contract. For example, Gold futures (GC) have a tick size of 0.10, so it will take 10 ticks to have a 1-point movement. On the other hand, the S&P 500 E-Mini has a tick size of 0.25 so would require four ticks to have a 1-point movement.
Also, each tick has a dollar value. As with tick size, the tick value varies with the asset type. In addition, it varies with the contract type (standard, mini, or micro).
Tick size vs. tick value
Tick size and tick value are related but mean different things. The size of a tick determines the increment in a point, and it varies with the asset type. For example, the size of a tick is 0.25 in the S&P 500 E-Mini futures contract, 0.01 in crude oil futures, and 0.10 in gold futures (GC). This means that a 1-point price move would require 4 ticks if it’s an S&P 500 contract, 100 ticks if it’s a crude oil contract, and 10 ticks if it’s a gold contract.
While the tick size determines the number of ticks it would take to move the price by one point, the tick value refers to the dollar worth of a 1-tick price change. The tick value is actually a product of the tick size and the point value. For example, the point value of crude oil standard contract on the CME is $1,000, so the tick value would be $1,000 x 0.01 = $10. For the S&P 500 E-mini, which has a point value of $50, the tick value would be $50 x 0.25 = $12.50.
Since ticks are fractions of a point, the tick value depends on the futures contract being traded. For crude oil on the CME, every tick value is $10 as each point is worth $1,000, which makes the tick value exactly 1/100th of the point. the tick value is 1/4th of the point in the S&P 500 E-mini contract.
Point value vs. tick value: which do you use in calculating profit and loss in futures trading?
Since the tick is the smallest price movement recorded in the futures market, traders use it in calculating their profit or loss in a trade. But that is not the only factor used in P&L calculation. Other factors are the contract size and the price difference from when the trader bought the contract (which is measured in the number of ticks).
For example, let’s say a trader bought 2 WTI standard contracts at $69.70 and now the price is $70.00. the trader’s profit would be calculated as follows:
Price increment = 70.25 -69.70 = 0.55 points or 55 ticks
Tick value = $10 per tick
Number of contracts = 2
Position profit = contract size x price increment x tick value
= 2 x 55 x 10 = $1,100