Chicago Mercantile Exchnage

  • Dollars and Sense: Calculating Profit and Loss in Currency Futures

    Thanks to the CME Group (Chicago Mercantile Exchange); financial institutions along with investment managers, corporations, futures brokers, and private entrepreneurs have a regulated and centralized forum in which they can manage their risk exposure to changes in currency valuations. Naturally, where there are hedging opportunities there is also room for mass speculation and that is exactly what occurs every Sunday afternoon through Friday at the CME.

    While many argue that the cash currency market, often referred to as Forex, is a much larger arena, I believe that the CME offers a very competitive trading environment in terms of execution. I also believe that the CME currency futures are superior in terms of transparency and credibility. This particular article isn’t intended to clarify the differences between Forex and currency futures, however, if you are interested in illumination of the arguments for and against each trading forum, be sure to read my book “Currency Trading in the FOREX and Futures Markets” published by FT Press Currency Trading in the FOREX and Futures Markets book by Carley Garner(www.CurrencyTradingtheBook.com).



    CME Currency Futures


    Currency futures are traded electronically on the CME's Globex platform and are, for the most part, traded in "American terms". This simply means that the prices listed in the futures market represent the dollar price of each foreign currency or how much in U.S. dollars it would cost to purchase one unit of the foreign currency. In order to understand the point of view of the futures price ask yourself; "How much of our currency does it take to buy one theirs?" To illustrate, if the Euro is trading at 1.1639, it takes $1.16 39/100 U.S. greenbacks to purchase one Euro.


    All currency futures contracts are categorized as financials, and therefore have a quarterly expiration cycle. Similar to Treasury bonds and stock indices, currency futures contracts expire in the months of March, June, September and December. Additionally, like the other financials, currency futures are traded nearly 24 hours per day. The CME halts trading for 45 minutes Monday through Thursday day between 4:15 and 5 PM Central time in order to maintain the electronic trading platform, and of course trade is halted on Friday afternoon in observance of the weekend.


    Please note that the CME lists several currencies and even currency pairs (cross currency pairs that involve two currencies other than the US Dollar), that are not discussed within this article. The omission of such contracts was intentional. Many currency futures and pairs contracts are listed but do not have the ample liquidity necessary to make them a viable choice for speculators.


    It is also important to realize that currency futures have no daily trading limits. Unlike raw or agricultural commodities, there is no limit to the amount in which currencies can appreciate or depreciate in a single trading day. There are arguments for and against price limits but in my opinion this is a positive characteristic because it prevents unnatural price floors and ceilings and avoids locked limit trade in which speculators are unable to exit a market. Of course there is a flip side, without price limits the currency markets can make very substantial moves on a daily basis. However, I will argue that in the long run a lack of price limits actually works to reduce market volatility. This is because a futures market that has gone “locked limit”, often accelerates panic felt by traders caught on the wrong side of the market and unable to exit their position.


     

    The Majors


    Euro Futures


    The value of one futures contract is 125,000 Euro so each tick higher or lower changes the price of the contract by $12.50 and translates into a profit or loss to the trader in that amount. This is true of a majority of the currency futures. The Swiss Franc and the Japanese Yen share the characteristic of a $12.50 tick value.


    Once you know the tick value of any particular currency futures contract, it is easy to compute the dollar amount of risk, profit and loss. For example, a trader that is long the Euro from 1.1239 and liquidates the position at 1.1432 would be profitable by 193 ticks or $2,412.50 (193 x $12.50). This is calculated by subtracting the purchase price from the sale price (exit) and multiplying that figure by $12.50.


    1.1432 – 1.1239 = 193 profit


    193 x $12.50 = + $2,412.50 minus commissions and fees


    Swiss Franc Futures


    Currency Futures are Quoted in U.S. DollarsThe contract specifications of the Swiss Franc futures are identical to that of the Euro. Accordingly, the contract size is 125,000 Swiss Franc and the tick value is $12.50. With that said, calculating risk and reward is also the same. The only significant difference between the Euro and the Franc futures contracts are the price at which they trade.


    Therefore, a trader that is short the “Swissy” from 1.0375 (nearly at par with the U.S. Dollar) likely believes that the value of the Franc will diminish relative to the greenback. However, the trader may also want to place a stop loss order to mitigate the risk of being wrong. If the stop order is placed at 1.0440 the funds at risk would be $812.50 ignoring commissions and potential slippage in the stop fill. This is figured by subtracting the entry price from the stop price and multiplying by $12.50.


    1.0440 – 1.0375 = 65 risk


    65 x $12.50 = $812.50 commissions and fees and ignoring potential slippage are not included in this assumption of risk.


    At this price, it takes about a little over $1.00 to purchase one Swiss Franc. If the Franc were trading at $1 it would be described as being in parity with the Dollar or simply “at par”.


    Yen Futures


    The Japanese Yen is the most unique of the major currency futures contracts traded on the CME. The contract size is 12,500,000 Yen, yes that is right; twelve and a half million Yen. Despite the incredible contract size, the Yen has a tick value of $12.50 along with the Euro and the Swiss Franc. Thus, all calculations are treated in an identical manner.


    On a side note, the massive contract size is necessary because the Yen is closer to being an equivalent to the penny than it is the dollar in U.S. currency.


    British Pound Futures


    The British Pound futures contract differs from the Euro in terms of contract specifications. A British Pound futures contract represents 62,500 Pounds Sterling (British Pounds). Just as the contract size is half that of the typical currency, so is the point value. Each point Pound of fluctuation represents a profit or loss of $6.25 to the futures trader.


    The numbers are different, but the process is the same. A trader long the British Pound from 1.5732 but wanting to limit her risk to $1,000 would place a sell stop 160 points beneath the entry point at 1.5572. The number of points at risk can be determined by dividing the desired risk of $1,000 by the tick value, $6.25. Likewise, if the same trader later chooses to offset her long futures contract at 1.5643 (hopefully she remembered to cancel her stop), the realized profit would have been 71 points or $443.75. This is figured by subtracting the sale price from the purchase price and multiplying by $6.25.


    1.5643 – 1.5572 = 71 profit


    71 x $6.25 = +$443.75




    The Commodity Currencies


    Currencies in which their valuations are highly dependent on the exports of commodities are often dubbed as “commodity currencies”. The Australian Dollar and the Canadian Dollar are perhaps the most commonly traded commodity currencies. For instance, a relentless rally in crude oil and other commodities are generally supportive of the value of the Canadian Dollar, but sharp commodity declines will drag these two currency futures contracts lower. This is because Canadian and Australian exporters will likely sell products in terms of their domestic currency. The increased demand for their commodity products will have a direct impact on the demand for the Canadian currency and thus favor higher valuations of the “looney”. In fact, for the first time in decades, the Canadian Dollar traded at par with the U.S. Dollar in 2007 at the height of the commodity craze, and again in 2011 on a similar run in the commodity asset class.American terms currency futures


    Australian Dollar Futures


    The Australian Dollar futures contract, often referred to as the Aussie, has a contract size of 100,000 Aussie Dollars. Consequently, the tick value of the contract is $10. Like the others, The Aussie futures expiration months are quarterly and there are no set price limits on daily trading.


    Due to its convenient point value, risk and reward calculations can be figured by simply adding a zero or moving the decimal point one place to the right. To illustrate, a profit of 1 tick is equivalent to a profit of $10; likewise, if the market rallies 200 points a futures trader would be making or losing $2,000. For instance a move from .7298 to .7398 equates to 100 points, or $1,000 in profit and loss to a commodity trader.


    Canadian Dollar Futures


    The contract specifications for the Canadian Dollar are nearly identical to those of the Aussie Dollar futures. The contract size is 100,000 Canadian Dollars and the tick value is $10. Once again, working the math in this contract is as simple as adding a zero.


    A trader that is short a Canadian Dollar futures contract from .7940 and subsequently gets stopped out of the position at .8400, the realized loss would have been 460 points or $4,600. Hopefully, you wouldn’t let your losses run to this extent but anything is possible.


    .8400 - .7940 = 460 loss


    460 x $10 = -$4,600 commissions and fees add to the loss

     


     

    An Up and Coming Currency Futures Contract


    Mexican Peso Futures


    In the past the Mexican Peso futures contract offered questionable liquidity and few opportunities for speculators. However, the Peso has become much more popular among speculators and is worth taking a look at. Like the British Pound futures and the “commodity currencies”, the contract specifications for the Peso differ greatly from the norm.


    If you have ever traveled to Mexico, you are aware that the valuation of the Peso is much lower than that of the dollar, typically about a 10th of a U.S. Dollar. Thus, it takes a small percentage of a dollar to buy one Peso. For this reason, the CME opted for a contract size of
    500,000 which is a great deal bigger than those assigned to the Euro or the Swiss Franc futures. Each point in the Peso is equivalent to a $5 gain or loss for any trader with an open futures position.


    Also unique to the Peso is the expiration months. The Peso has a contract listed (that expires in) each month as far as 13 months in advance. This is the only currency that allows traders to trade contracts expiring in each and every month of the year, they typically have quarterly expiration months. However, it takes more than an exchange simply listing a contract for speculators and hedgers to get involved. In fact, there is often very little, if any, open interest in any of the non-quarterly contracts (January, February, April, etc.). In other words, you should only trade the March, June, September, and December Mexican Peso futures contracts!


    Despite all of the differences in the Peso relative to the other currencies, the calculations involved in trading it are very similar. Like the others you would simply take the difference between the purchase price and the sale price and multiply it by the tick value to reach the total profit or loss on a trade.
    A trader that sells the Mexican Peso at .076425 and is forced to buy it back at a loss at .077385 would have realized a loss of 96 points or $480.


    .077385 - .076425 = 96 loss


    96 x $5 = - $480 commissions and fees add to the loss

     

  • Getting Started in Interest Rate Futures

    Interest Rate FuturesCalculating Profit and Loss in Interest Rate Futures

    As you have likely discovered, the term commodity can be used to describe a wide array of assets. The formal definition of a commodity is a physical substance or asset that is “interchangeable” in trade. From a more general standpoint, a commodity is any product that trades on a futures exchange. Along with grains such as corn and wheat, commodities also come in the form of financial assets such as interest rate products and currencies. Just as you wouldn’t prefer one bar of gold over another, you likely wouldn’t have a preference between one T-bill over another. The Chicago Board of Trade (CBOT) division of the CME Group futures exchange has recognized this; therefore the CBOT exchange offers standardized contracts to represent each of the government issued fixed income securities known as Treasuries. Similarly, the Chicago Mercantile Exchange division of the CME Group, offers futures trading in a short term interest rate product known as a Eurodollar.

    There are several widely traded contracts in the realm of interest rate futures trading. Each of these futures contracts carry slightly differing market characteristics, and in some cases contract sizes, point values, etc. For those unfamiliar with the futures markets, these discrepancies can be overwhelming. However, I hope to deliver the pertinent information clearly in order to make your journey into financial futures trading as pleasant as possible.

    Before we cover the basic specifications of each contract, it is important to be aware of a few facts regarding Treasury bond valuation. First, longer maturities will react quicker and more violently to changes in interest rates than shorter maturities. Additionally, the value of a bond (the price in which it is trading) is inversely correlated with interest rates or yields. Accordingly, if interest rates go up bond price will drop and vice versa. Keep these points in mind as you review the details of each contract; it will help you to determine which avenue best suits your risk tolerance and personality.



    Interest Rate Futures

    Treasury Futures

    Several years ago the 30-year Treasury bond was the primary interest rate product traded on the Chicago Board of Trade (CBOT). During its prime, it was considered the only Treasury futures contract for experienced commodity traders to involve themselves with. However, the Federal Reserve’s failure to issue new 30-Year bond contracts on a regular basis has worked against the popularity of the contract. In the meantime, shorter maturities such as the 10-Year note benefited in terms of volume and open interest.

    Similar to the other financial futures contracts, all interest rate products are on a quarterly cycle. This means that there are four differing expiration months based on a calendar year. Thos months are; March, June, September and December.

    30-Year T-Bond Futures

    Symbol: ZB

    The 30-year bond is often referred to as the long bond due to its lengthy maturity and its spot on the infamous yield curve. You might also know it simply as “the bond” as other Treasury issues are known as Notes or Bills (to be discussed later).

    The face value of a T-Bond at maturity is $100,000; therefore the contract size of one futures contract with the 30-year Treasury bond as an underlier is also $100,000. Knowing this, it is easy to see that a contract can be looked at as 1,000 points, or trading handles, worth $1,000 a piece. What is unlikely to be obvious is that each full point or handle can then be looked at as a fraction. In trading, the term handle is used to describe the stem of a quote. This usage began in reference to currency futures to describe a penny move. For example, if the Euro rallies from 131.00 to 132.00, some may say that it has moved a handle. In the case of the 30-year Treasury futures, a rally from 156’0 to 157’0 is equivalent to a price increase of one handle.

    The discussion of the relationship between Treasury futures prices and interest rates is to extensive to be included here, but to clarify pricing here is a general explanation of the relationship between the current Treasury price relative to it’s par value. If a futures contract is trading in excess of its par value of 100’0, interest rates have gone down since the issuance of the underlying Treasury securities. If the futures contract is trading below par, interest rates have gone up.P&L Calculations in Interest Rate Futures

    The long bond trades in fractions of a full point; specifically, ticks equivalent to 1/32 of a full point or $31.25 figured by dividing $1,000 by 32. Treasury bond futures are quoted in handles, and fractions of a handle. Further, by the number of full points (worth $1,000) and an incremental fraction of such. Thus a typical bond quote may be 152-24. This is read as 152 handles and 24/32nds. At this quote, the futures contract has a value of $152,750. This is calculated by multiplying 152 by $1000 and 24 by the tick value of $31.25.

    If you are comfortable with the idea of adding and subtracting fractions you will be able to easily calculate profit, loss and risk in Treasury futures. For those that are “fractionally” challenged, you may want to trade Eurodollars which are valued in decimals and will be discussed subsequently. However, I am confident that everyone will quickly become proficient bond futures calculations after looking at the examples below.


    Reading the contract size and point value likely isn’t going to help you to remember or even understand bond futures pricing but looking at a few examples should add some clarity to the details. If a commodity trader goes long a September bond futures contract at 155’22 and is later able to sell the at 156’24 would be profitable by 1’02 or 1 2/32. In dollar terms this is equivalent to $1,062.50 ((1 x $1,000) + (2 x $31.25)).

    The multiplication is relatively standard but people tend to be unjustifiably intimidated by fractions. If you recall the concept of borrowing, you will be fine. In the example above, it wasn’t necessary to borrow. You could have simply subtracted the numerator (top number in fraction) of the buy price from the numerator of the sell price and multiplied the result by $31.25. Likewise, you would have subtracted the handle of the buy price from the handle of the sell price and multiplied the result by $1,000.

    24/32 – 22/32 = 2/32, 2 x $31.25 = $62.50

    156 – 155 = 1 x $1,000 = $1,000

    Total Gain = $1,000 + $62.50 = $1,062.50 minus commissions and fees

    The math isn’t always this convenient. There will be times in which you will need to borrow from the handle to bring the fraction to a level in which you can properly figure the profit or loss. For example, a trader that sells a September bond futures contract at 158’12 and buys the contract back at 156’27 may have a difficult time calculating her trading profit. In this case it is easy to see that the trade was profitable. We know this because the handle at the time of the sell was 118 and the buy was 116 but unless you have been doing this for a while it will take a little work to derive the exact figure.

    The denominator of the sell price, 12, is much smaller than the denominator of the buy price, 27. Therefore we know that we must borrow from the handle to properly net the fractions. In this example, we could reduce the selling price handle to 157 and increase the fraction by 32/32nds. Thus, the new selling price is 157’44. This is a number that can be easily worked with.

    44/32 – 27/32 = 17/32, 17 x $31.25 = $531.25

    157 – 156 = 1 x $1,000 = $1,000

    Total Profit = $1,531.25 minus commissions and fees

    The purpose of these examples is to give you an idea of how T-Bond futures traders can calculate their trading results. Obviously, not all bond futures trades or traders will make money.


     

    10-Year Note Futures

    Symbol: ZN

    The 10-year note futures, or simply “the note”, has many similarities to the 30-year bond futures contract. The contract size and the point value are all common characteristics. Similarly, if you were able to come to peace with the 30-year bond futures calculations the 10-year note won’t be an issue.

    To reiterate, the contract size of the note is $100,000 which is split into 1,000 handles equivalent to $1,000 and a tick value of 1/32nds or $31.25. Unlike the 30-year bond futures contract, the T-note trades in half ticks (.5/32) valued at $15.625.

    Calculating profit, loss and risk in the 10-year note is identical to that of the 30-year bond. To demonstrate, if a trader goes short the 10-year note futures from 123’29.5 and places a buy stop to protect him from an adverse move at 125’15.0 the risk on the trade would be 1’17.5 or 1,546.87. This is calculated by subtracting the entrance price of the short from the potential fill price of the buy stop at 125’15.0. Once again, the math requires borrowing from the handle in order to properly subtract the fractions. This is done by adjusting the stop price from 125’15.0 to 124’47 ((125 – 1) + (15/32 + 32/32)).

    47/32 – 29.5/32 = 17.5/32, 17.5 x $31.25 = $546.87

    124 – 123 = 1, 1 x $1,000 = $1,000

    Total Risk = $1,531.25 plus commissions and fees

    5-Year Note Futures

    The 5-year note futures contract is identical to the T-bond and the 10-year in terms of contract size. Each 5-year note futures contract represents a face value of $100,000 of the underlying security. Once again, the contract is comprised of handles valued at $1,000 and each handle is divided into 32nds. However, in the case of the 5-year note each 32nd is broken into 4 minimum increments. In other words, each 32nd moves in quarter increments or .25/32. If you recall, the 10-year note has a minimum price fluctuation of .5/32, and the 30-year bond has a minimum tick value of 1/32nds. If 1/32 is equal to $31.25, and .5.32 is worth $15.625, then we know that .25/32 must be $7.8125. Nobody said this would be easy. The futures markets can be potentially lucrative but there is no such thing as “easy money”.

    There aren’t any surprises when it comes to 5-year note futures calculations, other than the fact that they trade in quarter ticks. However, this only requires an additional digit to be typed into your calculator as the process remains the same.

    A trader that goes short a 5-year note futures from 119’10.25 and places a limit order to take profits at 117’05.50 will be profitable by 2’04.75 or $2,148.43. This is figured by subtracting the limit order price from the original sell price.

    10.25/32 – 4.75/32 = 4.75/32, 4.75 x $31.25 = $148.43

    119 – 117 = 2, 2 x $1,000 = $2,000

    Total Profit if Limit Order Filled = $2,148.43



    2-Year Note Futures

    The 2-year note futures contract is the “oddball” of the Treasury complex. Unlike the others, this contract has a face value at maturity of $200,000. Thus, the value of a point (handle) is $2,000 and 1/32 is equivalent to $62.50. Like the 5-year note, the minimum tick is a quarter of a 32nd, or simply .25/32. In dollar terms this is $15.625.

    The difference in the face value of the 2-year note relative to the other Treasury futures contracts is due to fact that the U.S. government issues significantly more debt in the 2-year maturity than any of the others. Accordingly, there are more 2-year Treasury notes traded in the underlying cash market. In other words, the CBOT opted to list the contract with a $200,000 maturity face value to provide “economies of scale” for market participants. This translates into saving the hassle of paying an additional commission which is interesting and noble logic for an organization that survives on trading volume.

    Due to diversity in contract size and point value relative to the other Treasury futures, calculating profit and loss in the 2-year note must be slightly adjusted. A trader that is long a September 2 year note futures at 109’11.75 and is later stopped out of the trade at 108’02.25 would have realized a loss of 1’9.5/32 or $2,593.75 (remember, 1/32 = $62.50).

    11.75/32 – 2.25/32 = 9.5/32, 9.5 x $62.50 = 593.75

    109 – 108 = 2, 1 x $2,000 = $2,000

    Total Loss = $2,593.75


    Eurodollar Futures

    Many traders confuse Eurodollars with the Forex currency pair Euro/Dollar. They may sound the same, but that is where the similarities end. A Eurodollar futures contract is written on a 3-month interest vehicle denominated in U.S. dollars but deposited in off-shore banks. In its simplest form it is a Certificate of Deposit located in a foreign bank. Accordingly, the interest rates offered to Eurodollar holders (in the cash market) are relatively low due to the perceived risk of default being minimal.

    Eurodollars are Savings Deposits in Foreign BanksTogether, the CME Eurodollar futures and options and lead the worldwide industry in open interest and based on daily trading volume, Eurodollars are considered the most liquid futures market in the world.

    The contract size of a Eurodollar futures contract is $1,000,000, and similar to the other interest rate futures products, contract expirations are quarterly; March, June, September, December.

    Eurodollar futures are quoted in handles and decimals and are simply an inverse of the corresponding yield. For example, a Eurodollar price of 97.50 implies a yield of 2.5%. This is figured by subtracting the contract price from 100 (100 – 97.50). Clearly, yields can’t go to zero, so we can infer that the Eurodollar will never trade at 100.00. Thus, as the futures price approaches 100.00, you should consider market fundamentals and technical analysis to construct a bearish strategy.


    The point (handle) value of a Eurodollar is $2,500 and the tick value is $25; so a drop from 99.50 to 98.50 equates to a profit or loss of $2,500 per contract. The Eurodollar futures contract has a minimum price movement of a half of a tick, or $12.50 for most months but is a quarter of a tick, $6.25 for the nearest expiring month. This is likely because the near month Eurodollar futures contract doesn’t typically see much in the way of price change. The daily price change in the front month is typically less than 5 ticks, making it a great place for beginning speculators to get their feet wet. However, considered yourself warned, the deferred Eurodollar futures contracts will react more violently to changes in interest rates or climate. If your risk tolerance is low to moderate, stay with the near month.


    Calculating the profit, loss and risk of any given Eurodollar position is different that that of the Treasury complex but is also less cumbersome. Before you begin your calculation, you can simply move the decimal point and multiply each (full) tick by $25. For instance, if a trader buys a December Eurodollar futures contract at 99.085 (99.08 ½) and later sells it at 99.290, the realized profit on the trade would have been 20.5 ticks or $512.50. The mechanics are the same as the other contracts; it is just the point value that differs (but don’t forget to move the decimal two places to the right).

    9929 – 9908.5 = 20.5

    20.5 x $25 = $512.50


    The information included in this article certainly won’t make or break you as a trader, but without familiarity of the basic specifications of the contract that you are trading you aren’t giving yourself a fair shake. After all, awareness and experience may prevent you from becoming emotional or panicky while your hard earned dollars are on the line.

  • Getting Started in Stock Index Futures Trading

    Calculating Profit and Loss in Stock Index FuturesCalculating profit, loss and risk in the stock index futures complex.

    Before Putting Your Money on the Line…You Should Know the Basics. If you are like most people, you work hard for your money and the last thing you want to do is see it evaporate in your trading account. Throughout my journey in the markets, I have yet to find a fool proof way to guarantee profitable trading, but what I am certain of is that you owe it to yourself to fully understand the products and markets that you intend to trade before risking a single dollar. What you will learn from this article is merely a stepping stone to getting started in trading stock index futures, but without fully understanding the basic calculations of profit, loss and risk in the futures markets, you may never lay the foundation necessary to become a successful commodity trader.

    When most people think of the commodity markets, they imagine fields of grain or bars of gold. However, a futures contract may be written on any commodity in which the underlying asset can be considered fungible. The term fungible purely means “interchangeable”, or having the ability to “comingle”, in trade. For example, you wouldn’t prefer to have one bushel of corn over another. According to the Chicago Mercantile Exchange Group, corn is corn as long as it meets the CME Group definition of a deliverable grade.

    Financial products can be thought of in much of the same way. One unit of the S&P 500 index is just as valuable (or not) as the next. Therefore, financial products can also be considered commodities and trade similarly on futures exchanges around the world.

    Don’t make the mistake of assuming because you are familiar with the equity markets, you can automatically apply that knowledge to trading in the future markets. Despite the underlying asset of stock index futures being based on indices which are household names, the manner in which they trade and the risk they pose to traders is dramatically different than their stock market counterparts.

    Stock Index Futures Markets

    In the U.S. there are four primarily traded futures contracts based on domestic stock indices; the Dow Jones Industrial Average (or simply the Dow), NASDAQ 100, Russell 2000, and the S&P 500. There are several other stock index futures available, but as a speculator you want to be where the liquidity is and many of them simply don’t offer that.

    While stock index futures are all highly correlated in price, they have very distinct personalities. As a trader it is vital to be comfortable with the specifics of the futures contracts that you are trading and eventually the price characteristics of the underlying asset itself.


     

    S&P 500 Futures

    The S&P 500 futures contract traded on the CME, sometimes referred to as the “big board”, represents the widely followed Standard & Poor’s 500 index. This index is seen as a benchmark of large capitalization stocks in the U.S and is the most commonly traded stock Wall Street Bull index futures contract.

    There are currently two versions of the S&P 500 futures contracts traded on the CME division of the Chicago Mercantile Exchange. Although the CME has ceased trading in most open-outcry futures pits on July 1st 2015, to make way for fully electronic execution in the futures markets, the futures exchange opted to keep the full-sized S&P 500 futures contract trading in a pit. Accordingly, traders can opt to execute their S&P 500 futures orders in the open outcry pit using the “big” S&P, or electronically using the e-mini S&P 500 futures contract.

    The full-sized S&P futures contract has a point value of $250 with a minimum tick of .10. Floor brokers often refer to an S&P point as a “dollar”. For every point, or dollar, that the price moves higher or lower a trader will be making or losing $250. Thus, the contract size of the index is calculated by multiplying the index value by $250. For example, if the futures contract is currently trading at 2050.00 then one full sized S&P 500 futures contract is valued at $512,500. Similarly, a trader that goes long an S&P futures contract at 2089.40 and is forced to sell it due to margin trouble at 2053.20 he would have sustained a loss in the amount of 36.2 points or $9,050 plus the commissions paid to get into the trade. Once again, many traders aren’t willing to accept this type of volatility in their trading account and opt for the benefits of the e-mini version of the contract.

    The e-mini S&P 500 is one fifth the size of its full-sized counterpart and unlike the larger version, the minimum tick is a quarter of a point or .25. With that said, the point value is $50 and the contract size is also one fifth the size of the original contract. If the e-mini S&P is trading at 2050.00 the value of the contract would be $102,500. Now that is more like it. An e-mini S&P futures trader is exposed to risk but relative to the “Big Board” contract it is much more controllable. When it comes to leverage, less is sometimes “more”.

    A trader that goes long the e-mini S&P from 2035.00 and is able to sell the position at 2052.25 would have realized a profit of 17.25 points or $862.50. Again, this is figured by subtracting the sale price from the purchase price and multiplying the difference by $50.

    2052.25 – 2035.00 = 17.25

    17.25 x $50 = $862.5


     


    Dow Jones Industrial Average Futures

    Dow futures are listed and traded on the Chicago Board of Trade (CBOT) division of the Chicago Mercantile Exchange Group. The CBOT’s futures version of the Dow index closely follows the infamous Dow Jones Industrial Average comprised of 30 blue chip stocks.Chicago Mercantile Exchange Group Stock Index Futures

    In the past, the futures exchange provided futures traders with the ability to speculate on the DJIA in three different increments of risk and reward. However, in recent years the product listing has been streamlined a single Dow futures contract to increase efficiency; the mini-sized Dow (futures symbol YM). The DJIA mini-sized futures contract is often referred to in the industry as the “nickel Dow” because each point of movement in the futures market is worth $5 to a trader.

    Unlike some of the true commodity futures contracts, the contract size of a stock index is not fixed. In fact, there is no contract size; instead, the contract value fluctuates with the market and is calculated by multiplying the index value by the point value (which is $5 in the case of the mini Dow futures contract). Accordingly, if the mini-sized Dow futures contract settled the trading day at 17,520 the value of the contract at that particular moment would be $86,250 ($5 x 17,520). Keep in mind that the margin for the mini-sized Dow is far less than $57,600 making it a highly leveraged trading vehicle. Margins are subject to change at any time, but the average seems to be between $4,000 and $5,000. As you can imagine, being responsible for the gains and losses of a contract valued at nearly $90,000 with as little as $4,000 could create large amounts of volatility in your commodity trading account. However, it is this leverage that keeps traders coming back to the futures markets for more. Unfortunately, it is the same leverage that has resulted in many bitter ex-futures traders.

    Calculating profit and loss in the mini-sized Dow is relatively easy. Unlike many other commodities, or even financial futures, the Dow doesn’t trade in fractions or decimals; one tick is simply one point. Consequently, if a trader is long a mini-Dow futures contract from 17,257 and is able to liquidate the trade the next day at 17,348, the realized profit would have been 91 points or $455 (91 x $5). This is figured by subtracting the purchase price from the sale price and multiplying the point difference by $5.

    17,348 – 17,257 = 91

    91 x $5 = $455 (minus commissions and fees)

    Not bad for a day’s work; regrettably, it isn’t always that easy. Had the commodity trader taken the exact opposite position by selling the contract at 17,257 and buying it back at 17,348 the loss would have been $455 plus commissions and fees.


     

    NASDAQ Futures

    NASDAQ futures are listed on the CME division of the Chicago Mercantile Exchange Group; it closely tracks the NASDAQ 100 index which includes the 100 largest non-financial stocks listed on the NASDAQ stock exchange. Prior to the closure of the futures trading pits at the CME, the exchange provided traders with two alternatives in speculation on the NASDAQ, a full sized contract and an e-mini version. However, the NASDAQ 100 futures contract now only trades in an e-mini version. This is probably a positive development to the retail trading community, because the original NASDAQ futures contract (full-sized), at $100 per point, was too large and volatile for most speculators.

    The e-mini NASDAQ 100 futures contract comes with a point value of $20 (one fifth of the original $100 full-sized contract) reducing the contract size considerably. With the futures market at 4520.00, an e-mini NASDAQ contract is equivalent to $90,400 of the underlying index.

    An e-mini NASDAQ trader long from 4505.50 and subsequently able to sell the position at 4532.75 would have been profitable by 27.25 points or $545. This is figured by subtracting the exit price by the entry price and multiplying the difference by $20.

    4532.75 – 4505.50 = 27.25

    27.25 x $20 = $545 (minus commissions and fees)

    Generally speaking, the e-mini NASDAQ is the tamest speculative vehicle in the stock index futures complex in regard to daily profit and loss per contract held. Further, it also comes with the lowest margin requirement. For this reason, some beginning traders opt to trade the e-mini NASDAQ futures when dipping their toe into the futures arena. With that said, the NASDAQ 100 is far more susceptible to price moves dependent on a single stock (such as Apple) than a broader index such as the S&P 500 futures might be.


     

    Russell 2000 Mini Futures

    ICE Futures ExchangeThe mini Russell 2000 futures contract trades on the Intercontinental Exchange (ICE Exchange). It is the one and only stock index listed on ICE; consequently, it is also the most treacherous in regard to volatility. The Russell is believed to be a market leader, and it typically is, but sometimes leading the pack of stock index futures means excessive volatility.

    A commodity trader long or short the Russell futures will make or lose $100 per full point of price movement. On an average day, the Russell will see a move from 3 to 8 points but on a volatile day it isn’t out of the question to see 15 to 25 points in price movement. If you’ve done the math in your head, you’ve realized that this equates to $1,500 to $2,500 in profit and loss per contract.

    For instance, a trader that goes short a mini Russell Futures at 1221.00 and places a stop loss order at 1235.00 would be risking 14 points, or $1,400 before commission and fees.
    1235.00 – 1221.00 = 14.00
    14.00 x $100 = $1,400

    If you are looking for a lot of bang for your buck, the Russell might be for you. Nevertheless, the massive and sudden market movements make it a risky venture.

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