Can You Explain Futures To Me?

[catapuss]

Hi, I know the doc has said things like "with futures, you can lose your shirt and then some", but I notice that some stoolies on ID regularly post that they use futures.

On the surface they seem to be a very cheap (commission, leverage wise) instrument. Can you guys explain some things to me please, as I am getting nowhere trying to find out stuff on Google etc.?

Lets say I am interested in indexes, most likely S&P 500 futures (I have no idea what the difference is between those and the E mini is).

So far in my trading experience I am only familar with considering price changes. How do you determine which delivery date of contract to choose and what effect does it have?

Do you normally watch the relevant futures chart or the underlying cash index or both?

I am sure this is all pretty straightforward, but I just dont know these basic things about futures, and until I do it is difficult for me to determine their suitability.

Thanks in advance.

[SkiddMarket]

I'm a newcomer to futures, so my experiences are probably similar to what you'll go through when you start trading them. The mini S&P future has the symbol ES with an expiration notation at the end. Interactive brokers (a great place to trade futures) requires the symbol ES by itself. There is a Dec, March and a June expiration (maybe Sept-). From what I gather, you want to trade the closest expiration- they are more heavily traded and you get a tighter spread. It trades in 1/4 point intervals (ticks)- each tick is worth $12.50- that gives $50/point. The spread is usually a quarter point: for example bid 888.25 Ask 888.50, but sometimes there is a bit larger spread especially after regular trading hours. Globex trades all day and night except they close on Friday evening and reopen on Sunday evening. Selling and buying are EXACTLY the same- you don't have to wait for an uptick.4

 

I usually follow the $OEX livechart at 5 minute intervals when I'm trading the S&P Emini, and I watch the DJIA - for some reason the futures seems to follow it up and down better than the $SPX. The futures seem to anticipate movement up or down- I notice the futures drop a point (4 ticks) for no apparent reason, and then suddenly the dow and $SPX will dive 5 points.

 

They are very easy to trade- I always use market orders to get in- and I use a stop at all times just in case of disaster like a lost internet connection. I like them better than SPYders- you don't need to tie up all your margin to make money if you're pretty sure where the market is going. As I gather, they also have favorable tax treatment as well- 60% capital gains /40% regular income for all profits. Just about EVERYONE here knows more than I do about futures trading, but sometimes a newbie's experience makes other newcomers more comfortable. Good luck and USE STOPS!

[catapuss]

:grin: That's an incredibly infomative reply Skidd. I've been using UK CFD/spreadbetting firms for my indexes, more often the DOW 30 because it works out better. Many brits use this method, but it is way expensive compared to futures, which is why I am looking to switch.

General use of futures seems very low compared to equities, but I can't see why when they seem perhaps more convenient.

My assumption is that the warnings about them are with regard to the leverage/ use of margin, but I am already familar with putting as little as 8% down on a position, so reckon I am ok with that aspect.

I'm not much of a daytrader, generally look for positions to hold for at least a few days, but that might change a little with lower costs. I tend to enter with quite wide stops, it just seems to suit me better, but I'm also accustomed to being able to make telephone contact so website technical problems don't tend to matter so much.

Anyway, thanks SKidd, that was the dog's you not what.

[SkiddMarket]

One more quick note, Cat: I've traded the Nasdaq Mini and the Dow futures also. I like the S&P Mini best by far because the spread between bid and ask is usually only one tick. In the others, it can go to 2,3, even 4 ticks quite often- usually when I want out quick . Oh- as to the tax treatment, it's 60% long term capital gains, 40% short term capital gains, or so I've read. Good luck.

[catapuss]

Yes, it's funny how unfavourable spreads and prices can be if you desperately need to get out!

[MaxxPain]

A disadvantage of futures is that you have to purchase big chunks or contracts. You can't buy half of a contract. You either buy $20000 or $40000 of the Nasdaq 100. You can't buy $30000 worth because that would be 1.5 contracts. The initial margin is low at $2250 for e-mini Nasdaq 100 so with $10000 you can easily buy 2 contracts if you want that much leverage. I put $20000 in my account and even with that much I'm forced to use leverage on many contracts. The mini-S&P is 50 x the index which is nearly $45000.

 

It takes discipline and planning to avoid using more leverage than you can handle. A futures account easily gives a beginner too much rope, but in the hands of an experienced trader can lead to big gains.

[catapuss]

Hi, Maxx,

I certainly don't consider myself to be experienced. Made my first dong trade in October 2001. At that time, i knew jack all about the markets, was just looking to pile into the rebound going on at the time. I didn't know then that there were opportunities to be had on the sell side, hadn't head of shorting. However, I recognised at the end of December 2001 after doing some looking around at longer term charts that the most of these which were supposed to be heading for the good times looked more like they were totally screwed.

Anyway, I put a halt on what i was doing, started doing some saerching and ended up at Capitalstool. This is the only place I have ever learned anything. Other sites are just full of people trying to boost their egos and swearing a lot.

Anyway, I have survived using leverage for about 10 months. I hav a rule that I always enter in a low risk, minimise the losses way, if the position is any good you will get the opportunity to add, no problem, which is where the leverage comes in handy. That would mean with your Nasdaq E mini you were talking about, just the one contract to start with no addition until a clear profit is shown. As far as I am concerned this rule cannot be violated if i whish to still be around in the future. Loss control takes priority over profit maximising, because if you have one big loss that can ruin everything. As my old friend Remirez used to say "never overextend your reach, you are vulnerable and off balance".

Tanks.

[MaxxPain]

Somebody at work started the simulated account at Lind-waldock two weeks ago. Today, he would have got a margin call if it was a real account. It's interesting to observe a newbie with such leverage.