Question about risk

Discussion in 'Index Futures' started by FrasierK, Feb 29, 2004.

  1. FrasierK


    I've been looking at trading futures, but there's one thing I need to ask. Probably the dumbest question you've seen here on Elite, but I haven't found the answer elsewhere. So here it is.

    What is the USD risk at stake here:

    1 ES contract bought.
    Initial margin USD 2000
    Value of 1 contract, about 50 x 1150 = USD 57500
    Amount in my account USD 20000

    I know my risk should be my stop for this trade, eg 1.5 points or USD 75. What I'd like to know is what would happen to my account in case the index went down to zero. Or if my stop was not triggered, I wasn't aware of it, and I found my position still to be on when the index was down to, let's say 1000 (150 points x 50 = 7500 USD). In this case, I'd still have the necessary margin in my account (20000 - 7500 > 2000), but would I had lost 7500, or would my position be sold before that.

    Like I said, probably a stupid question, on a scenario that's not likely going to happen, but still. I appreciate any clarifying answer.

  2. Banjo


    If your stop wasn't placed or not triggered you would be down the 7500 and still own it. They wouldn't sell you out unless you were in danger of violating margin. The broker/ fcm risk management would protect themselves. Overnite margin is double intraday.

    ps: if the index ever goes to zero start looting cause that's where the world will be.
  3. well....there could be a curb called limit down.....which could prevent your broker of protecting in case of catastrophe you could owe him money....

    Michael B.
  4. Banjo


    Yes, the mad cow thing caused limit down days in cattle didn't it?
  5. Yeah...but he did say the he and his broker will be alright....unless Bin Laden nukes Washington DC.... (unless they live in Washington DC)

    Michael B.
  6. wdscott



    I just wanted to add to the other comments, that the broker or FCM could increase margin at any time to whatever amount they deem appropriate. If for example you held 2 contracts with a 150 handle loss ( some sort of Lock limit move) and the FCM increased margin for some reason, when the market reopened for trading, you could theoretically get liquidated by your broker and stuck owing the FCM money.

    Just ask Victor Neiderhoffer. Right after his liquidation his positions
    became profitable.

    The chances are remote of this happening to you or any responsible trader. I think your your initital question was, could you get caught in an uncomfortable margin situation trading commodities. The answer is always.....yes.

    Best Regards,
    Dave Scott
  7. FrasierK


    Thankyou guys, it's good to know what's at stake in all kinds of scenarios!

    A thought would be, I guess, to just have enough in the account to manage the margin for the number of contracts I want to purchase at the most.

    I now have an account with ib where I swing trade stocks. I could open a futures account with them and keep it funded just enough for my futures trading needs. If only daytrading and max 4 contracts (not from the start, but hopefully if doing good, within a year or two), 8000 usd could do it. That would then be the maximum I could lose in the equity futures market if I understand you correctly?
  8. could owe money.....

    4 contracts = $200.00/point on the ES

    You would have a 40 points buffer in a lock down situation using your performance bond if the ES lost 60 points during this time and if your broker did not change the performance bond requirements, your owing.....4k

    So if you have other money in stocks in your universal account at IB, some of them would possibly be liquidated if you did not have any cash in your account....

    Michael B.

  9. FrasierK


    Under normal circumstances, wouldn't my position be liquidated automatically when ES lost 40 points, if margin is 2000 and I only have 8000 in the account and had bought 4 contracts?
  10. ig0r


    Only if there are buyers, I believe the issue here is that a great catastrophe might cause an enormous limit down move, you will be liquidated wherever possible (wherever someone will buy the position off you). No guarantees...
    #10     Feb 29, 2004