Newbie questions on Profits in trading Emini NASDAQ

Discussion in 'Index Futures' started by coolweb, May 1, 2005.

  1. Hi,
    I usually trade stocks and equities, I'm looking for a bit more leverage on my market calls (Been trading for 2 years, profitable for 1 ) Looking to profit more on this inevitable downturn.

    a) Does Emini-Nasdaq100 Correlate directly with the Stock index Nasdaq 100?

    I notice it was 1 hour off in prophet, I think its pretty much in CST time.

    I've also compared the e-miniNQ with nasdaq100index and I don't see too much volatility, they correlate very closely, like almost exact,

    I am a position trader (hold for 1-3 days) so Are the volatility you guys are talking about only problematic for scalpers?

    b) NQ0506 = $1425 Right now, Lets say I buy 10 lots of NQ0506 for $14,250


    NASDAQ is 20x ( profit size? )

    So lets say if NQ0505 drops from $1425 -> $1410
    for a 15 point drop.

    I would make 20 * $15 ( $300 ) PER LOT?

    So with 10 LOTS it would be $3000 ?


    So the margin rate is around 10x it seems?

    c) Can I buy 10 lots? or do I have to buy either a 1 lot or a 100 lots contract (contract like options?)


    Thanks guys in advance :)
     
  2. a. yes the emini futures correlate almost tick for tick with the Nasdaq 100 index. If the index advances 10 points, you can expect the futures to advance about 10 points

    b. your numbers are correct. Each contract changes $20 with each point gained or lost. If you sold 10 contracts at 1425 and bought them back at 1410, you would make $3000 minus commissions. Be sure you understand the leverage involved:
    10 contracts at 1425 amounts to you controlling $285,000 worth of futures. Is that amount what you normally trade in stocks?

    c. you can buy emini contracts in whatever amount you like. You do not have to buy lots of 10 or 100. If you want to buy 6 or 14 contracts, that's fine.

    best of luck.
     
  3. FT79

    FT79

    Coolweb,

    An indexfuture value is underlying value + Riskfree rate - Dividends of the underlying stocks.

    And some free advice, start small when trading futures, it's a complete different ball game. Don't know how big your trading capital is but beginning with one contract to get familiar with characteristics of the NQ is not to be a shamed off.

    If you feel comfortable (i.e. profitable) add contracts, but not to much. USD 5000 per contract is IMHO the minimum requirement (although you can trade with some companies for USD 500 intraday margin).

    Happy trading,
    FT79
     
  4. mhashe

    mhashe

  5. Very nice link, mhashe.

    Thank you.:)
     
  6. BCE

    BCE

    Ditto, mhashe :)
     
  7. dpt

    dpt

    Some terminology might help.

    In futures trading the things you trade are called contracts, not lots,
    (people also call them cars for short). The minimum trade size is one
    contract.

    When you buy or sell a contract, you don't pay or receive money, other than
    commissions and fees.

    This is because what you've actually done is to enter into a contract with
    someone else, to trade a fixed quantity of the commodity that underlies the
    contract, at today's purchase or sale price, at a specified time in the
    future.

    So if you buy, (go LONG), one NQM5 at 1425, you've made a contract to take
    delivery of the underlying from the person who sold you the contract, and pay
    a specific price. In this case the underlying is defined to be a specific
    basket of stocks with a cash value equal to $20 x (the point value of the
    NASDAQ 100 index), and the price you agreed to pay for the basket of stocks at
    expiration is $20 x 1425 = $28500.

    Delivery takes place on the expiration date of the contract. For the NQM5
    the expiration date is 06/17/05.

    If instead you sell (go SHORT) you've made a contract to deliver the
    underlying at expiration and receive the current futures price in return.

    Stock index futures contracts are actually settled in cash, not by the actual
    delivery of stocks, but it still makes a lot of sense to think of the
    transaction in the above way.

    Recapitulating: in futures trading the LONG position agrees to take delivery
    of the underlying from the SHORT position at expiration, and the price and
    size of the trade are agreed upon beforehand.

    If the underlying price on the expiration date is higher than the
    current futures price, the LONG position will pay a lower price than it would
    have had to pay for the underlying in the market on the expiration date, and
    the SHORT position will obtain less money than it would have obtained for
    selling the underlying on the expiration date. The opposite is true if the
    underlying price is lower than the current futures price at expiration.

    Of course, you don't have to hold a SHORT or a LONG until the contract
    expires. You can offset the SHORT or LONG position any time before expiration,
    if the market allows it, by making a trade in the opposite direction, as you
    suggested below:

    So say you sold 1 contract: NQM5 @ 1425. You were then SHORT 1 NQM5, which
    meant you agreed to deliver a specific basket of stocks for a price of $20 x
    1425 = $28500 on 6/17/05. Then the price dropped to 1410, and you bought 1
    NQM5 @ 1410. The new LONG position exactly offsets your SHORT position, leaving you
    flat.

    You won't need to do anything on 6/17/05, and you immediately receive: $20 x
    (1425 - 1410) = ($28500 - $28200) = $300, less, of course, commissions and
    fees.



    Right: with 10 contracts, it would be $3000.



    Margin in futures trading is a bit different than in stock trading. It works
    like this: as long as you are either net SHORT or net LONG some number of
    contracts in the market, you are required to post a cash performance bond in
    your account for each contract either long or short. The money is supposed to
    serve as a guarantee that you will fulfill the terms of the contract.

    The amount of cash you have to put up depends on the market, the type of
    trader you are, and your broker, and it is subject to change at any time.

    For the NQ the CME lists the following margins:

    Initial Maintenance

    Spec $3,750 $3,000
    Hedge/Member $3,000 $3,000
    CBOE $3,000 $3,000

    So the exchange requires that a speculator post at least $3750 per NQ contract
    traded as an initial performance bond, and requires at least $3000 per
    contract traded be kept in the account in order to maintain a position.

    In practice, many brokers let you trade futures on an intraday basis using a
    lot less than exchange minimum margins, but they require that you get
    flat at the end of the day, or at best, that you hold no more contracts long
    or short overnight than the exchange minimums allow for. If your margin drops
    below the maintenance minimum, you generate a margin call, or, fairly likely,
    your broker will liquidate positions in your account to bring the margin into
    line with exchange minimums.

    All of your open positions in any case are marked to market at the end of the trading day.

    In the case of the exchange minimum and the trade you described, the ratio of
    the value of the contract to the initial margin was:

    $28500/$3750 = 7.6

    The ratio of the value of the contract to the maintenance margin was initially
    9.5, but that ratio will fluctuate with the price of the contract.

    More important to consider is probably the value of the contract relative to
    the overall size of your account. If you have, say $50K in your account, you
    can trade 10 NQM5, because the initial margin is $37500. But with the index at
    1425, 10 contracts is equivalent to a position in the underlying market worth
    $285,000: so the actual leverage you have is 5.7 to 1.

    If some broker let you trade NQ intraday using margins of $500 per contract,
    you could in principle trade 100 contracts in a $50K account, which would
    amount to an overall leverage of 57 to 1.

    Needless to say, this is extremely likely to be a recipe for disaster, and you
    should keep the overall leverage considerably smaller. Ideally, it could even
    be sensible to keep leverage no bigger than 1 or so if you're just learning to
    trade futures, until you're sure you have an edge.
    Meaning: trade only 1 NQ in an account of $30K.

    No shame in that at all, and you should also consider the typical volatility of a contract when
    placing your stops and deciding how to trade it. If the volatility is too large, you may have a hard time placing stops that are acceptable if you require that you risk no more than 1-2% of your
    account on any given trade. I think this would
    often be true when trading 1 NQ on a 1-3 day time scale in a $30K account.



    You can buy 10 contracts if you have the margin, and 1 contract is the
    minimum.

    Options on futures are options on 1 contract, unlike stocks, where options are
    on 1 lot or 100 shares.

    Cheers!
     
  8. BCE

    BCE

    Thanks, dpt. Very nice post. :)
     
  9. Hi,
    Very informative posts guys, thanks for filling me in,
    I will definately trade small when I start out, to just get the feel of things,

    1)
    I have been trading QQQQ for a long time, long and put options, which I think is very similar in margin terms to futures.

    If I can trade the QQQQ correctly with discpline , I should be able to work the NASDAQ emini 100 future as well correct with similar results?


    2) I've also noticed you said it was a "Recipie of diaster" if you trade with a lot of leverage like 100 contracts when account is only $30k

    Lets say you are NET LONG on 100 contracts, the NQmini goes down 20 points (huge down day)
    20 * 20 = $400 * 100 = $40k (you just lost $40k there)

    You only have $30k in your account.

    Would the future broker just stop out your account and sell all your contracts to get back the money (sort of like a margin call) or is it at the end of the day you now owe money to the broker and have to pay it back?



    :)

    Thanks!
     
  10. dpt

    dpt

    Put options, if you are trading near the money puts, will move somewhat less than 1/2 as fast as the QQQ
    until they go in the money, so they're not quite comparable to outright shorting the QQQ; the outright
    short would move faster.

    But if you keep the value of your positions in NQ near the same in comparison to the value of your
    futures account, as your positions in QQQ are to your stock account, then you should be able to handle
    the futures trading just as well as you do the stock trading. The futures price can get a bit more out of
    line with the index than the QQQ does, but all told the moves should be pretty similar, so your
    experience in QQQ should carry across to NQ if you're using the same leverage in both cases.

    This is the disaster that I spoke of. You blew up your whole account in one day, and you now have a debit
    balance of $10K. The answer whether you get a margin call before you're sold out or not depends on the
    broker, your specific relationship with him, and the contract you're trading.

    If it's one of these firms that lets you trade with $500 margin per contract, I think they're simply
    going to sell all your contracts on Globex right after the RTH close and you will end up owing $10K or
    more to the broker at the end of the day. You'll have to pay it back. The margin that your broker has to
    put up in order to maintain your 100 NQ minis LONG overnight is very large ($3000 per contract), and
    unless your broker knows in advance that you can and will be able to meet that kind of a margin call,
    they'll sell you out to protect the firms capital. But if you can meet that kind of a margin call, you'ld
    probably want to have a much larger trading account in the first place, in order to avoid the possibility of a margin call
    in the first place.

    This assumes that the trading limits are not hit on the contract you're trading. A limit move against
    you is another matter entirely, and if that kept up for days ... well you get the picture. It's never
    happened to me, but I have heard of people being stuck in futures positions while the market makes limit
    moves against them, day after day; though not in the NQ minis.

    By the way it's probably best to be sold out completely in this case. Even if things were not nearly so
    desperate, say you had only 10 contracts long, and you could put up $40,000 to give you a credit balance
    of $30K so you could hold on overnight, it's still probably a bad idea to meet the margin call. Unless
    you really, really know what you're doing, you would just be throwing good money after bad. Of course,
    there's a chance it could reverse the next day, but then again it may not, and the most recent evidence
    was that you are very much out of tune with the market. You most likely wouldn't be thinking too clearly
    after an event like that.

    That's why you should trade small at first, like you said you will :)

    Good trading!
     
    #10     May 2, 2005