Contract Unit
Categories: Derivatives, Stocks
You buy a futures contract for a certain amount of gold. But what is the quantity of gold (the underlying asset) that this futures contract represents? Gold derivatives contracts have a contract unit of 100 ounces of the yellow metal.
One stock options contract provides the right to buy or sell 100 shares at a time. Contract units are very standardized, so you can’t show up and start waving around money, demanding a contract for 123 ounces of gold, or 345 bushels of soybeans. You can, but...you'll get stares.
It’s important to remember this, because if you end up exercising a buy option contract, you’ll need a lot of capital to purchase all 100 of the shares or ounces of metal described above, the 5,000 bushels of soybeans, or the 40,000 pounds of livestock. You’ll also need a lot of space if you ever were to take physical delivery of these assets.