How to calculate leverage when trading futures

Discussion in 'Index Futures' started by Pekelo, Jul 20, 2017.

  1. Pekelo


    I have seen quite a few times people calculating the leverage using notional value of the index, when it is rather irrelevant to the correct calculation. It is your account size and the number of contract that affects the leverage mostly. Bigly, if I might say so. Leverage tells you how much your account moves compared to 1 unit movement of the index. In plain, if the index drops 1% and your account loss is 12%, then your leverage was 1:12...

    Since I won the Nobel prize last year in Math, I feel authorized without further much ado, to reveal the formula, free of charge:

    Lev=(Ctr # x Index value x Point value)/Account size

    Ctr#: number of contracts used
    Index value: the current value of the index (ES would be 2473)
    Point value: the value of 1 point (ES is $50)
    Acc Size: Your account in dollars

    Let's see an example. A trader with a 10K account using 2 ES contracts has a leverage of:

    (2 x 2473 x $50)/ $10000= 24.7

    Extra credit: Just because you are trading futures, you still can under leverage your account, meaning that your account movement can be LESS than the movement of the traded future.
    Last edited: Jul 20, 2017
    johnnyrock and Xela like this.
  2. Is there anything wrong with using margin to calculate leverage?
  3. Xela


    Call me pedantic (which probably you already do), but there isn't one in Math - the nearest equivalent (arguably better than a Nobel, actually) is the Fields Medal. But thanks for a very good post which will doubtless be really helpful to many readers. :cool:
  4. Pekelo


    Yes. The margin only tells you what your maximum size can be compared to your account size.

    Max. number of contracts = account size / margin

    Here is a simple way to see it easily: 2 traders trade at 2 different brokerages. Everything is the same, but broker A's margin is $2000 and broker B's is $500. Yet the leverage of the 2 traders are the same, because margin has nothing to do with it...
  5. Pekelo


    Damn, somebody caught it. Well, there should be one and I should have got one just for this formula....
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  6. Pekelo


    Somebody could have pointed out that:

    Notional value = Point Value x Futures value

    Thus the notional value is in the formula, but it moves very little, almost a constant compared to the 2 other factors, account size and number of used contracts...
    dealmaker likes this.
  7. In your formula, the quantity (Index value x Point value) is the notional value of the contract. Your formula for calculating leverage is correct, but you get no Nobel prize.
  8. No, I mean the actual margin that the exchange actually computes for a given position... Is there anything wrong with using that as a measure of leverage?

    Maybe I am just confused abt what you're trying to achieve here...
  9. The margin tells you the maximum leverage you can take. The actual leverage can be less, depending on your exposure (i.e. the number of open contracts).
    Xela and Pekelo like this.
  10. No, sorry, hold on...

    If I have an open position of X contracts, the exchange will compute total margin for this position as some F(X) (as long as we're being all mathematical and stuff). This number is solely a function of the size and nature of the trade or portfolio.
    #10     Jul 20, 2017