Futures Trading: A few examples

Futures Trading: A few examples

To see how trading in the futures markets work, consider these examples.

1. Trading the S&P 500 futures

The E-mini S&P 500 is a popular equity futures contract to trade. Let’s say you thought the S&P 500 was going to increase in value.
Instead of buying a number of shares to sell later at a profit, which can be capital intensive, you decide to buy a futures contract. Assume a $4,000 margin.

Buy S&P 500 at 1400 Value of the contract = $50 x price of the S&P 500 = $50 x 1400 = $70,000

Value of your position = $4,000

The next day, the S&P 500 price falls. Your margin reduces by the change in the value of the contract

Current price S&P 500 is 1380 Value of the contract = $50 x price of the S&P 500 = $50 x 1380 = $69,000

Value of your position = $3,000

After a few days, the S&P 500 rises. You close your position.

Sell S&P 500 at 1420 Value of the contract = $50 x price of the S&P 500 = $50 x 1420 = $71,000

Value of your position = $5,000

Your profit, less commissions and fees, is $1,000. Consider that this profit was earned using $4,000 rather than $70,000.

2. Trading the DJIA futures

The mini-Dow is the futures contract on perhaps the most influential index, the Dow Jones Industrial Average (DJIA). Let’s say you thought the Dow was going to decrease in value. Instead of borrowing shares to “short-sell”, or profit from a downturn and paying interest on the borrowed money, the futures markets are convenient to short sell, as you do not need to “own” a contract to sell it. Assume a $4,000 margin.

Sell DJIA at 12,000 Value of the contract = $5 x price of the DJIA = $5 x 12,000 = $60,000

Value of your position = $4000

The next day the DJIA falls on news of rising oil prices.

Current price DJIA is 11,900 Value of the contract = $5 x price of the DJIA = $5 x 11,900 = $59,500

Value of your position = $3500

However, good news on the economy boosts the DJIA. When you sell, you profit from the price falling and lose when the market rises, so your margin reduces by the change in the value of the contract

Buy DJIA at 12,100 Value of the contract = $5 x price of the DJIA = $5 x 12,100 = $61,000

Value of your position = $3000

In this case, you experience a loss of $1000. While futures trading offers powerful leverage, you should carefully consider the use of leverage in trading.

3. Trading the Euro currency futures

Currency futures are an attractive way to trade currencies. In 1971, when Milton Friedman wanted to short the British Pound, he was denied by the banks because he did not have a “sufficient commercial interest”. With his influence, the Chicago Mercantile Exchange pioneered currency trading to create a powerful tool for hedging risk and speculating. The Euro futures contract is traded in high volume. Assume a $4,000 margin.

Sell Euro at 1.3000 Value of the contract = 125,000 x price Euro = 125,000 x 1.3000 = $162,500

Value of your position – $4,000

The Euro falls on weak GDP growth.

Current price Euro is 1.2900 Value of the contract = 125,000 x price Euro = 125,000 x 1.2900 = $161,250

Value of your position = $5,250

A few days later the European Central Bank announces a rate hike.

Buy Euro at 1.3100 Value of the contract = 125,000 x price Euro =125,000 x 1.3100 = $163,750

Value of your position = $2,750

4. Trading gold futures

Gold is widely viewed as a hedge against inflation, and it’s economic importance makes this a popular choice to get exposure to the commodities markets. One popular venue to trade gold is through the COMEX division of the New York Mercantile Exchange (NYMEX). The futures contract is based on a 100 oz. of gold. Assume a $4,000 margin.

Buy gold at 650 Value of the contract = 100 x price gold = 100 x $650 = $65,000

Value of your position is $4,000

There is a liquidation by funds to free up cash

Current price is 640 Value of the contract = 100 x price gold = 100 x $640 = $64,000

Value of your position is $3,000

Concerns about dollar weakness leads to “flight-to-quality”

Sell gold at 660 Value of the contract = 100 x price gold = 100 x $660 = $66,000

Value of your position is $5,000

In considering these examples, it’s important to note your risk and reward objectives to determine the period of time and capital to use to trade.

Khurram Naik is a derivatives broker at Infinity Futures in Chicago. He is a graduate of Carnegie-Mellon and has worked in research in cognitive science and education at Princeton, Harvard and Carnegie-Mellon University. He is also a former field director for a political campaign. He maintains a blog on literature and cognitive science. He can be reached at k.naik@infinitybrokerage.com

Trading Futures, Options on Futures, and off-exchange foreign currency transactions involves substantial risk of loss and may not be suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. The information contained on this email does not constitute a solicitation to buy or sell by Infinity Futures, Inc., and/or its affiliates, and is not to be available to individuals in a jurisdiction where such availability would be contrary to local regulation or law.


Comments (1)

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  1. Dinesh says:

    Good and simple to learn the concept of Future Trading for beginners who are little bit familiar with futures.

    It will be useful for all if similar examples are provided for call & put options.