Most day trading markets are based upon financial instruments (such as stocks and currencies), or physical commodities (such as gold and wheat), but there are also day trading markets that are based upon things that initially appear to be untradeable.
One such group of markets are the weather futures markets, which are available via the CME (CME Group). The weather futures were introduced by the CME in 2005, and have grown since then to cover many different types of weather, and many different locations throughout the world. The weather futures markets differ from other futures markets in that they are not based upon something that can be owned, and therefore do not have any physical delivery requirements (i.e. you do not have to deliver snow if you hold a short contract until expiration).
Weather Events
The weather futures markets are based upon weather information and specific weather events, such as the following :
- Heating Degree Days
- Cooling Degree Days
- Cumulative Average Temperature
- Average Temperature
- Frost
- Snowfall
- Hurricanes
Locations
The weather futures markets cover the above weather events in three different regions (North America, Europe, and Asia), and cover many locations throughout the world, including the following :
North America
- Atlanta
- Des Moines
- New York
- Baltimore
- Detroit
- Philadelphia
- Boston
- Houston
- Portland
- Chicago
- Kansas City
- Sacramento
- Cincinnati
- Las Vegas
- Salt Lake City
- Dallas
- Minneapolis
- Tucson
- Calgary
- Edmonton
- Montreal
- Toronto
- Vancouver
- Winnipeg
Europe
- Amsterdam
- Essen
- Paris
- Barcelona
- London
- Rome
- Berlin
- Madrid
- Stockholm
Asia
- Tokyo
- Osaka
Risk Management
As the weather markets are futures markets, they can be day traded like any other futures markets (such as the YM stock index futures market), but weather futures can also be used to offset risk associated with adverse weather. For example, a ski resort might want to hedge against the possibility of a warm winter and a lack of snow by trading either the temperature based or snowfall based weather futures. Another example might be a garden centre that trades the frost based weather futures as additional insurance against their stock being damaged by an early or late frost.
Contract Specifications
The contract specifications for the weather based futures markets are identical to any other futures market, and list all of the trading information that is needed to trade the markets. The only difference is that the price fluctuations are based upon the weather instead of another financial instrument. For example, the contract size for the snowfall weather futures is 1 inch of snow or $200, with the tick size and value (minimum price change and value) being 1/10th of an inch of snow or $20. The weather futures markets are priced in the currency of their region (i.e. the weather futures that are based upon European locations are priced in Euros (EUR) or British Pounds (GBP)), and they have very varied contract sizes, with tick values ranging from $20 up to more than $1000.
