Futures Leverage?

Discussion in 'Index Futures' started by jonbig04, Jun 23, 2008.

  1. Someone recently mentioned to me that futures are great to trade. One reason was b/c of the leverage involved. I know of course what leverage is, but I dont see how it pertains to futures trading.
     
  2. :D
     
  3. this is satire, right?
     
  4. timbo

    timbo

    Paying variation in lieu of greater variance. Your answer?
     
  5. The basics:

    Equities:
    1 point = $1.00 .. you need money upfront to leverage


    Futures (example ES):
    1 Point = $50 .. leverage is built in on each point.
    Contrct equals IndexValue x $50. So for evey contract you are exposed 1314 x $50 = $67,700.
     

  6. Maybe i should have warned that im a complete futures noob.

    Anyways I understand your math, however Im confused as to why that makes a difference in profitability. I guess a better way to state my question would have been "why does my friend, and probably some of you, think that higher leverage is 'better'?

    Is it better if you dont have much to trade with?

    If for some reason your making perfect trades do you make more money that you would if you were making perfect trades on stocks?


    This is all a part of me trying to figure out what to trade.

    If my questions don't make any sense, then maybe tell me why exactly YOU trade futures?
     
  7. bkveen3

    bkveen3

    alright so you say you understand leverage but you cannot possibly understand leverage and not understand this.

    Say you have $200 and you invest $100 in option A and option B

    Option A - pure stock, goes up one point

    outcome- you make one dollar


    Option B - futures, goes up one point

    outcome- you make fifty dollars


    Which option was more profitable?
     

  8. I understand that much. Im going to throw out a rough example just to make sure I understand this. say 1 contract costs $1,000, but you only have to pay up $100 to trade it. The contract goes up in value 50%, making it worth $1,500. You sell and pocket the $500 making 500% on your money. Is this right? Any more clarification on how this works exactly would be great. Especially on what happens if the contract declines by 50%.

    Another thing, Im realizing that in TA the goal is not necessarily to have more profitable trades then losing trades (of course that would be nice), but to make more on your profitable trades than you lose on your losing trades, making futures kind of the perfect instrument. Is t here any truth to that or am I oversimplifying?
     
  9. If this is your motivation, then you should run away, fast.

    You have NO idea how much and how fast you can lose all your money trading leveraged investments. That is what happens to almost everyone who tries it.

    Your friend is a fool, and you are about to become road kill

    Get away from this idea. Seriously.

     
  10. one corn contract is 5000 bushels. july corn is7.20 or so a bushel times 5000 is 36 k. futures move so fast and the leverage is a double edged sword. I would agree with the poster above me that you really have to know what you are doing or you will be lunchmeat!
     
    #10     Jun 24, 2008