Assumptions: you have some basic idea how options work. you are using a broker like Think or Swim where you can see ticker value and Margin requirements.
Futures are basically contracts between buyer and seller. This is similar to options definition but there is no obligation to buy or sell in options. Futures can be traded on Oil, copper, sugar, corn , metals, stock indices etc. Stock Indices future contracts are highly liquid and these are cash settled. Futures move in ticks(minimum price fluctuation).
Below 4 are heavily played.
- Emini S&P
- Emini Nasdaq
- Emini Dow
- Emini Russel 2000
Emini S&P Index and Emicro S&P Index
Emini : /ES: 1 dollar index move is 4 ticks. Each tick is 12.5 dollars. Contract size is 50*s&p index. so when you buy a futures contract, you are trading a number 50* 4000(lets assume index value is 4000 for this example) = 200000 dollars with just 13k margin. so if index moves up 10 bucks , you can sell and lock your 500 bucks profit. Index drops 10 points, you will show -500.
Emicro:/MES: Each tick is 1.25 dollars. Contract size is 5*S&P index. So when you buy a micro s&p index future contract, you are trading a number 5*4000 = 20000 with just 4k margin. if index moves up 10 bucks you make 50. If index drops 10, you will show -50 in account. sounds simple right? now let us look at pros, cons and risks.
Timings: you may check hours in below link. except one hour around 5pm, futures are open most of the time.
https://www.cmegroup.com/trading-hours.html#
Pros:
- no Pattern day trading issues
- Taxes are less than regular short term stocks
- Index options use cash settlement at expiration. These expire quarterly. if you are still long index at time of expiration, you can sell and get next expiration contracts when it is active.
- Used for hedging. you expect a downtrend in markets and do not want to sell equities then you can short futures.
Risks:
- Huge liability is involved. you are trading a 200k worth future contract for just 13k. if Index crashes 500 points and you do not have a hedge, broker may force liquidate because of margin requirement failure, then you owe 25k to broker. This could happen while you are sleeping 🙂
- Choppy movements in index can challenge a smart Chartist.
My suggestions:
- Always be good with direction prediction. if you are not right 6-7 out of 10 decisions, then do not enter futures.
- Always hedge your future positions or close all positions at the end of your trading day.
- Beware of major events. Futures move sharply. Example : Elections, Brexit.
- Always master one future contract and then slowly move to 2.
- Be careful when you try to play agricultural products as they are seasonal. you may need some experienced veteran trader guidance initially.
- you can begin with micro index futures and then move to mini once you are comfortable.
Disclaimer: This Post is not investment advice. All posts are my personal opinions only.