S&P Futures Explained (Part III)

The monthly identifiers for the E-mini S&P futures contracts are H for March, M for June, U for September and Z for December. The E-mini S&P futures contract trade almost 24 hours per day with a 30 minute maintenance break in trading from 4:30 to 5:00 PM daily.

In case you lose at the end of the day you are likely to pay in a big way. If you are a new E-mini trader you be careful as traders are expected to pay for the difference between the margins for the entry and exit points. The day trading margin is less than the margin to hold an overnight position in S&P 500 E-mini Futures contract. The margin requirements for E-minis are much less than the normal contract.

All futures contracts are settled daily (assigned a final value price). Based on this settlement price, the values of all positions are marked to the market each day after the official close. Your account is then either debited or credited based on how well your positions fared in that days trading session. In other words, as long as your positions remain open, cash will either come into your account or leave your account based on the change in the settlement price from day to day.

This system gives futures trading a rock-solid reputation for creditworthiness because losses are not allowed to accumulate without some response being required. It is this mechanism that brings integrity to the marketplace.

Leverage: The effect of price changes is magnified because futures markets are highly leveraged. You typically pay the price in full with stocks (i.e., without leverage) or on margin (50 percent leverage). Leverage can produce large profits in relation to the amount of your initial margin if you speculate in futures and the market moves in your favor. However, you also could lose your initial margin if the market moves against your position.

Suppose you have decided to put $10,000 into a futures account and you buy one E-mini S&P 500 index futures contract when the index is trading at 1000. Your initial margin requirement for that one contract is $3,500.

Because the value of the futures contract is $50 times the index, each one-point change in the index represents a $50 gain or loss. If the index increases 5 percent, to 1050 from 1000, you could realize a profit of $2,500= (50 points) ($50). Conversely, a 50-point decline would produce a $2,500 loss. The $2,500 increase represents a 25 percent return on your initial investment of $10,000 or a 71 percent return on your initial margin deposit of $3,500.

An increase or decrease of only 5 percent in the index could result in a substantial gain or loss in your account in either case. Thats the power of leverage. Similarly a decline would eat up 25% of your original $10,000. It is 71% of your initial margin.

It makes your money work harder and produces more in a shorter period of time when everythings going your way, than if you paid for everything in full, up front. In such a situation leverage can be a beautiful thing. Indeed, leverage is the key distinctive aspect of futures trading as compared with stock trading.

Now suppose you buy an E-mini S&P 500 contract worth $50,000 by using $5,000 in your account. However, the contracts value drops to $45,000 as the prices fall by 10 percent instead of going up. This is the dark side to leverage. Your $5,000 is completely gone. Leverage is the one ingredient that can produce either horror stories or happy endings. Youll be obligated to put up even more money if the market keeps moving against you unless you get out of the position with an offsetting sale when your maintenance margin level is violated. It is extremely important that you fully understand the power of leverage and how to manage it well to get the happy ending.

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading futures and currencies. Trade Dow Futures and S&P Futures!

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