The new way to Futures Trading; the Eminis Contract

When someone says they trade Futures, is your immediate thought that Futures are risky? That's what most people think. But most people don't even know what Futures are, so how the hell can they say they're risky.

Number one lesson I learnt in investing is to make your own decisions. And to do that you need to know what Futures are, and how they work.

So what would you say if I said to you that Futures trading:

• Was highly liquid so that your trades were guaranteed
• Had $5 brokerage
• Had no other fees or changes and no spread
• Was highly leveraged and had no interest charges
• Had no market makers
• Provided great returns
 

Maybe you'd say that it sounds to good to be true. Well that's exactly what Futures can do. Do yourself a favour and check this out... Learn about the Eminis revolution

So what exactly is a “Futures contract”? Well as the name suggests it’s an agreement that happens in the future. People might use them to lock in a certain price some time in the future.

A food processing company for example might buy Grain futures so that they know exactly how much they’ll pay for something in the future. That's traditionally what people thought Futures were. But you can also trade Futures on other instruments like major stock indices, like the S&P 500. That's the index of the top 500 companies in the US.

Futures trading in the past has been the sole domain of the big players. But now there's a new version of the Futures contract that's open to the average investor. It's called the Eminis contract and let me tell you it has some powerful features to it. Take a look here to learn more... Learn about trading the S&P500

If we look inside a futures contract we see some similarities to Options. A futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price.

Now whilst there are some similarities to Options here, there are also some striking differences. Firstly the position can’t be exercised early, so in that respect they’re akin to European style options rather than American style options.

Sidebar: European style options can only be exercised on expiry day whereas American style options can be exercised any day up to the expiry day.

Secondly, the value of the futures contract varies virtually one for one with the underlying asset.

Also the value of the futures contract is based on the underlying asset plus a “cost of carry”. The cost of carry is the cash rate of the underlying asset (its price) plus an interest cost for the duration of the contract, less a dividend amount. So it’s effectively the cost of the underlying asset plus or minus an amount that takes into account the cost of holding the asset.

Indices don’t generally pay dividends so a futures contract on an index like the S&P 500 will be the current price of the S&P500 plus interest.

Now to get into a future contract you need to put up an Initial Margin. It’s similar to the way CFDs work. Usually the Initial margin is 5% or 10% of the price.

But CFDs work slightly differently because with CFDs you are charged daily interest based on the value of the asset. With Futures the interest is already included in the price of the contract.

What this means for day traders is that there’s no interest cost to trade Futures just as there’s no interest cost to trade CFDs (if traded on the same day).

Here’s a snapshot of S&P500 prices for the underlying index (Cash) and each of the futures contracts. See the difference in the “Last” price works out to be around 4% pa. That’s the interest cost. Also note that you can trade Options on Futures, but we’re not talking about those today.
 

CME S&P 500

Now the minimum size of an S&P500 futures contract is based on a multiplier of 250. What this means is that the current price is multiplied by 250 to determine the contract value, and the Initial Margin is around 5% of that.

So here we can see the current price of the S&P500 Mar07 contract is 1453.30, so the contract value for one futures contract is 1453.30 x 250 = $363,325. You can see why Futures were the domain of the big guys.

However recently, in the last 4 years or so, a new version of the Futures contract has emerged that makes it much more affordable. It’s called the emini Futures contract and has a multiplier of only 50. So in our example, an emini S&P500 Futures contract costs $72,665. And the initial margin for many brokers is around $3,375 as opposed to almost $20,000 for a normal contract.

The eminis market open up a whole new world for traders. Consider this…

With the S&P500 eminis futures market as an example you can:

• Trade a highly leveraged investment
• Have zero cost stop loses
• Always close your positions because of the massive liquidity in the market
• Have zero interest charges
• Very low brokerage, in some cases just $5 per contract
• Limited individual stock risk since the index is made up of 500 stocks
• No ability for market manipulation because it’s so big ($40B traded per day)
• Go short or long
 

It’s probably the fairest market around and offer enormous opportunity for those who know what they’re doing. If you like to learn more about this market check this out… Learn about Eminis