Futures Contract Risk Exposure

Discussion in 'Trading' started by carltonp, May 11, 2011.

  1. Hello Fellow Traders,

    Can someone please tell me in simple layman terms what my full risk exposure is when trading Futures? In particular mini-sized DOW and E-mini S&P 500.

    I fully understand that when traders buy a futures contract, they are not physically buying anything - its simply a way of participating in the price movement of the the market of their choice.

    So, if the market moves 10 points, traders can buy a futures contract, long or short, and make money on the move if it goes in their direction. They can also lose money if the move goes against them.

    My question is what exactly do traders stand to lose?

    With stocks if a trader buys 10 IBM at $10 that will cost him $100. If the share price goes down to 0 not only will he be the proud owner of worthless shares he will also have lost is $100 investment.

    Now, lets say one E-mini contract is $1000 (just to keep things simple), and lets say my initial margin (performance bond) is $4000.

    If I were to purchase one contract and it moves one point, i.e. from 1000 to 1001 that will translate into $50 on my P&L i.e. 50 x 1 x 1 contract = $50.

    All very simple so far.

    Now, question 1) If the contract went down 80 points (from 1000 to 920) would that mean my margin would be wiped out? i.e. 50 x 80 x 1= $4000

    2) If the contract went down 40 points would I get a 'margin call' from my broker? i.e. the initial margin is now $2000.

    3) What would happen if say the contract went down 100 points? Would that mean I owe my broker $1000? i.e. 50 x 100 x 1 = $5000 - $5000 - $4000 = $1000.

    4) What would happen at the end of the settlement period if I still own the contract?

    For those of you willing to provide feedback on the questions please understand that I'm just starting out with futures and plan paper trade before dipping my toe.

    Really appreciate your comments.


  2. Big AAPL

    Big AAPL

    We cannot tell you if you would get a margin call because you neglected to tell us how much your account is funded.
  3. http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_contract_specifications.html

    Contract Size $50 x E-mini S&P 500 futures price

    0.25 index points=$12.50
    1.00 index points=$50.00

    That's per contact.

    Regardless of margin, you're responsible for the loss if it goes against you. As you lose money, if you don't have it in the account, you get a margin call.

    Cash Settlement. All open positions at close of last day of trading are settled in cash to the Special Opening Quotation (SOQ) on Friday a.m. of the S&P 500 Index.
  4. Another big issue to consider is the margin can and will change on you depending on the volitility of the contract. Until you get a handle on all aspects of trading futures most would advise trading only one contract for an extended period of time.

    Understand there is also "maintainence" margin so if you hold the contract overnite then the margin is significantly higher. As mentioned this is cash settled and trust me the broker can and will cash you out if you do not have enough cash in your account.
    The futures options will settle into the nearest month contract.
  5. OK,

    I've read many threads on this Forum and I've seen newbies get ripped to shreds for asking basic questions.

    So before any of you that are kind enough to respond, please bear in mind that I'm very new to Futures.

    With that said, BIG APPL, I'm assuming that I've opened an account with the initial margin required to trade, in this case $4000, and I have $20K in my account.

    Blobmorse, I fully appreciate that I'm responsible for the loss that goes against me. I'm also familiar with the actual point sizes. I was just using hypothetical numbers to make the calculations simple

    I'm interested to know if I could lose the full $50K in the example?

  6. Richard,

    Please explain

  7. Brokers software now will liquidate you at/near/close to your account value. They will not let it go into default.

    So if you have $20k, your max risk is basically the $20k under normal conditions. In theory, you are on the hook for whatever the loss is but since the futures trade round the clock, you should get out around your $20k level before it turns into more.

    But in all the paperwork you sign, you are saying you are on the hook for whatever the loss may be.
  8. OK...you said you had (example) 20K in your account. You decide you want to trade oil (CL). Your broker's maintainance margin is $6500. You think oil has gone down enough and should be in for a bounce. You buy at 103. Since the margin is only $6500 you have "plenty" in your account for 2 contracts. So you are tying up $13000 cash for those 2 contracts.

    Overnight peace breaks out in the middle east and the dollar gets strong and Oil is ...down $6. Your broker in the middle of the night without any notice ups the margin to $13500 so now you don't have enough cash in your account if the position has gone against you. You wake up...go to the bathroom...get some coffee and sit at the computer and look at your positions.

    You are down $12000....you have $8K supposedly in cash yet since the margin has gone up you are now in the red...not enough margin to cover. Some brokers will automatically liquidate you...sell your position so you are in compliance so you only lose the $12K. The way you lose ALL your money is to hold on to the position and if the broker gives you a chance come up with enough cash to be in compliance and oil goes down another $6K........

    While the above is an extreme example (only marginally so:p ) I have read many traders who got ripped a new one when we had the "flash" crash and several other severe and unexpected "black swan" type of events.

    I can't say it enough....UNDERSTAND...all of the components of your chosen instrument then with your $20K pick the ES, YM, or NQ to start with. Trade one contract until you have been thru some solid ups and downs. good luck!
  9. Your maximum theoretical exposure is the value of the contract. This may happen in the ES if for some reason suddenly all the S&P 500 companies are declared bankrupt. It may happend in CL if a new energy source is discovered.

    This is what happened to many exotic products during the financial crisis. Their value went to zero. Longs owned the money to their brokers. The FED had to buy them to bail them out. Nobody will bail you out so be very careful. If you are worried about risk this is not the place to get answers. You should consult a licensed professional.

    "The risk of loss in trading futures contracts can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition."
  10. I wouldn't worrry about getting info on the internet vs "licensed" professional. Lets face it most of us log on to "web MD" before we call our doctors :p If you have experience in trading stocks and or some good knowledge and are intelligent you can successfully trade futures. They are actually designed for the smaller retail player and without the market maker the electronic platforms give equal access and play to everyone.
    #10     May 11, 2011