Invest in Coal Futures - dummies

By Nick Hodge, Jeff Siegel, Christian DeHaemer, Keith Kohl

You can trade coal futures on the New York Mercantile Exchange (NYMEX). NYMEX coal futures are quoted in dollars and cents per ton, and are traded in contracts of 1550 tons.

The coal futures contract tracks the price of the high-quality Central Appalachian coal (CAPP), or Big Sandy as it’s known in the pits because of the terminals where it’s delivered at the confluence of the Big Sandy and Ohio rivers.

Consumers and producers of coal use futures to manage coal price risk. Coal producers need to know that at the end of the year they’ll make money, even if the price of coal takes a dive. By using futures, they can lock in their sell price by using what’s known as a short hedge.

If you’re a utility that uses coal, you can lock in the price by using a long hedge. This way, utilities know their fuel costs for the year and can budget accordingly despite the fluctuations in coal prices.

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. Traders buy coal futures when they believe that coal prices will go up. On the other side, traders sell coal futures when they think that coal prices will drop.

The coal futures contract trades under the ticker symbol QL, and you can buy and sell for every month going out three years. That said, it’s not for the little guy. Coal futures are traded by the companies that have a significant interest in the price of coal.

The futures are used as a means of trade between these companies and are moved in large blocks requiring a great deal of capital. The initial margin for trading coal futures is 16 percent of the contract, which at early 2013 prices of $57 per ton equates to more than $14,000.

No major indexes are designed to track coal’s price as a commodity because there are so many different types of coal to track. To quickly check coal prices, go to one of these websites: