Just to clarify on an earlier point, there are market makers in futures markets. They do not, however, have institutionally-sanctioned powers or knowledge above and beyond that of a retail trader, as specialists have/had in equities. They are simply there to make sure there is always a bid and an offer for a particular product.
Optioncoach - "Do you need a Delorean car fitted with a 100 Gigawatt flux capacitor to trade futures?" Its actually 1.21 Gigawatts through the flux capacitor that makes time travel possible...
OHHHHHH! thank you for all those people patient enough to help me out with this.... You don't know how much it means to me to know this information... thanks again everyone!!
can you please elaborate on this... For some reason, I find trading index futures more predictable than trading the cash... I've made 130% in the last 2 1/2 weeks. I know that's hard to believe, but that's why I'm trying to get to the bottom of this. It really pays to be curious. I'm a skeptic most of the time. That's why I tend to ask so many questions.
wait.... just to clarify... so if I bought ES today at 800....and SPX is today 805.... and it stays the same all the way upto the expiration date... if I don't sell and instead let the computer automatically close my contract, I will be getting the 805 back since that's the value of SPX at that time (multiplied by 50 since it's the ES)?
Yes, with some minor caveats. Read the link I posted earlier for more details. You bought at 800, you sold at 805, you would make 5x$50. Keep in mind, you did not actually pay 800x$50, so you will not be receiving 805x$50. Instead, you simply posted a performance bond and will make the difference. In reality, however, you will almost always pay more than cash for a futures contract because you have to pay for the cost of carry. How much more you pay in carry depends on how far away from expiration you are. Think of it this way: Instead of buying 500 stocks and holding them, you're buying a futures contract representing those 500 stocks. You and a guy holding those 500 stocks will both make the same P&L, but there's no way your positions are equivalent. The stock guy is putting $70k into stock while you are happily sitting on your $70k and earning interest on it. Arbitrageurs figure a premium based upon the risk free interest rate for futures above cash for this reason. As a result, cash is almost always lower than futures, linearly converging to zero difference as expiration approaches. Commodity markets also have carry charges resulting from insurance, storage, and risk free interest.
okay so now I see a correlation between ES and SPX... I never saw how they had anything to do with each at the beginning... so basically, the system forces the futures contract back to the price despite if there are arbitragers or not. I wasn't clear on this at first.
Well, the futures contract has to settle at something. Both nothing in the "system" is forcing the prices in line before expiration. Only arbitrage does that.
but at expiration... if ES is still worth 800 and SPX is worth 805... it's as though I bought ES and sold it at the SPX price level at expiration.... so despite if there are arbitragers or not after expiration, futures is forced to settle at cash. I would think those additional cost you mentioned wouldn't really add up to much in the scheme of things...at least I would think.
5.25% interest on $70k for one quarter is $918. This represents 18 ES points. So, on the first day of the quarter, cash of 1400 would have a fair value ES of 1418. For other commodities, storage, financing, insurance can add up to quite a bit.