Options/Futures Contracts Limitation

Discussion in 'Trading' started by bvam1, May 20, 2006.

  1. bvam1


    Don't know where to ask this question, so here seems best.

    Anyway, I know that investors are subjected to a limitation on the amount of options/futures contracts they can hold. My question is: are institutions, such as hedge funds, also subjected to this limitation or can they hold an unlimited amount of contracts?
  2. dcvtss


    AFAIK, anyone (hedge fund, institution, individual) can trade as many contracts as they have margin for. Margins are set by the exchanges and vary from product to product. As an example, the CBOT mini-dow requires $500 per contract for day trading and $2632 per contarct to hold overnight.
  3. it's interesting you bring that up, good question, i'm not sure about institutional limits vs retail

    from the CME site however:
    Effective 4/21/06 – Position limit increases to 10,000 contracts on CME Russell 2000® contracts.


    is it just me, or wasn't this limit something like 1500 a year or two ago? 10k contracts is 725M notional. So here's my question, who's trying to trade almost a BILLION dollars of er2?

    it wouldn't surprise me if 98% of the volume in this contract is 2% of the players. exchange is happy, megoliths are happy, ppt is happy... retail is f-ed. fake liquidity
  4. bvam1


    Well, the purpose of contract limit is to prevent people from cornering the market. But if it's not applicable to institutions, then, what's the point of contract limit? That's why I want to know.

    Also, is it a well known practice for major brokerage firms to create exotic options and futures to sell to large hedge funds or private investors? For instance, if i want to buy, say, QQQQ options but I want the multiplier to be 1,000,000 instead of 100 and that settlement is cash instead of delivery of QQQQ stocks upon excercise of options. Can brokerage firms put together a product like this to sell to me?

    I know there are swaps and other types of exotic instruments, but what if I want certain types of contract currently not available, can they create them and sell to me OTC?
  5. i'm sure they can if you can do large business and make it worth their while.

    as far as i'm concerned, anyone trading 10,000 er's probably has me cornered lol
  6. bvam1


    I am talking about a position worth up to several billions. Surely, it can be worth their while.

    But how can they hedge if they sold me this exotic options? They would have to long around 60 million shares of QQQQ just to sell me a position of $3 billion, or they can buy 600k of regular calls, or buy millions of shares of each of the 100 stocks in nasdaq 100 and equivalent position of options in each. And able to do it within minutes after selling the options to me means major slippage.

    I am trying to see how they would hedge themselves. Because if it's hedgable, then, it is possible to buy this sort of exotic options from them.
  7. Mutual funds hold futures to hedge their small cap stock portfolio. As a day trader you should be happy that position limits are being increased!! This means that hedgers are interested in increasing their positions. Hedgers generally are not trying to f u c k the little guy for a tick or two.

    Futures contracts need institutional(hedging) interest to survive. Remember the best futures contracts to day trade are the contracts that are utilized by institutions for hedging purposes. The volume in the ER2 is increasing because the institutions NEED to use it to hedge their portfolio. Thus larger day traders are able to trade the contract because they are confident that they can get in and out of their larger day trading positions.

    Before you start getting all paranoid you should educate yourself about why futures contracts were invented. No need trying to start conspiracy theories!!!!!
  8. fair enough. the paranoia is a little severe at times. i just remember in early 03, when the er traded about 10-15k contracts a day and it was like taking candy from some poorly informed retiree somewhere.

    my friends at the time said it was like 'watching turtles make love' and wouldn't trade it with me. i'm no longer particularly competetive in this market, and find that no matter how or where i enter, or on what systematic basis, it's profoundly less likely to move in my favor regardless of tactic.. almost as if someone has gained an incredible advantage and really leapfrogged the heck out of old successful tactics. it squeezes like i am indeed against a very nimble mm with the expense structure and informational power to squeeze for ticks, in the 1000s of contracts

    things change, it's probably just natural forces. i've moved on
  9. i would bet that if the cftc did a study, and randomly entered er2 a few hundred or thousand times, in random directions, times and timeframes, they would find that it consistently runs against the position in a statistically significant fashion, regardless of conditions

    does that imply unfair advantages, affiliations or manipulation? no idea, probably not. many would say that's just trading
    #10     May 20, 2006