More and more retail traders are either interested in or already trading equity futures. With the recent volatility, futures seem like the perfect instrument to trade for quick profits: take a position, get the direction right, watch them take off (don’t blink) and make money! But the “regular” equity futures (/ES, /NQ or /RTY) can require a significant amount of margin (especially if you’re trading multiple contracts) and can have considerable swings in value. What if you have a smaller account, are just starting to trade equity futures or aren’t interested in taking a significant amount risk? Let’s discuss an alternative focused on the S & P 500 futures.
What are S & P 500 Futures?
S & P 500 futures are contracts that provide a trader or investor with an investment that’s based on the price of the S & P 500 index. Futures are called derivatives because their value is “derived” from the price of another instrument or benchmark; in this case the S & P 500 Index. These futures are an easy, capital efficient way to trade the direction of this basket of stocks or the general direction of equity markets.
How do S & P 500 Futures Work?
Let’s say you’re bullish the overall equity markets and you want exposure to the overall market but don’t want the risk associated with trading an individual stock. One possibility is to buy one S & P 500 futures contract; commonly referred to (and its symbol on many trading platforms) as the /ES (often called the E-Minis). Buying this contract is the equivalent of buying 500 shares of the $SPY. For every $1 move in the S & P 500 Index, the $SPY moves about $.10 (the $SPY is 1/10th the size of the Index). So if the /ES is the equivalent of buying 500 $SPY shares, and the Index increases by 1 point, the $SPY increases by $.10 and the /ES will increase by $50 (500 $SPY shares X $.10 increase in price). A 50 point move in the Index results in a $2,500 move in one /ES contract.
Why use the /ES Rather Than Buying $SPY
The short answer is that it is a much more efficient use of capital. The investment in 500 $SPY shares (with the $SPY at $455.00) is $227,500. A typical broker will require margin of 50% or $113,750 (if you have a margin account). If the Index moves 100 points, the $SPY will move $10 and you’ll make $5,000! The return on capital is about 4.4% ($5,000/$113,750) – not too bad especially if it happens in a short period of time!
As an alternative, assume the margin requirement for 1 /ES contract, controlling 500 $SPY shares, is $12,000. The margin requirement will be broker dependent; the margin calculation is more complicated than the single number presented here and will change (quickly – especially in a move against you) as the Index moves. The same 100 point move in the Index, will generate the same profit of $5,000 but will generate a return on capital of 42% ($5,000/$12,000)! That’s a lot of leverage resulting in a much more efficient use of capital! Of course, if you’re wrong, the losses and additional margin requirements can move against you very quickly.
How can You Trade the S & P 500 Futures With a Smaller Account?
Many retail traders have smaller accounts that can’t justify the risk or the margin requirements. How can they trade futures? There is an S & P 500 micro futures contract with the symbol /MES for those traders that want to trade smaller with less risk. The /MES is 1/10th the size of the /ES or the equivalent of 50 $SPY shares. Each 1 point movement in the Index is worth $5 and the margin for each contract is around $1,200 (depending on your broker). The same 100 point move in the Index results in a $500 change in the value of the /MES. This has the same capital efficiency as the /ES just in a smaller package! Not only is the /MES great for smaller accounts but also if you like to trade multiple contracts for more effective money management.
Masters In Trading Futures Charting Platform – Tracking Futures Relative Value
Trading relative value is one of Masters in Trading key concepts. Any futures instrument is not cheap or expensive on its own; it’s cheap or expensive relative to another futures instrument. Masters In Trading has developed its own charting system for charting individual futures and the relative value of a series of futures. Here’s a comparison of the S & P vs. NASDAQ vs. Russell vs. Dow futures for the last 90 days on the new charting platform:
Which futures is the cheapest? Which is the most expensive?
The list of symbols available include (at the time of this writing):
- Equities (/ES, /NQ, /RTY, /YM)
- Bonds (/ZT, /ZF, /ZN, /TN, /ZB, /UB)
- Energies (/CL, /NG, /HO, /RB)
- Metals (/GC, /SI, /PL, /PA, /HG)
- Currencies (/DX, /6E, /6B, /6C, /6S, /6A, /6J)
- Cryptos (/BTC, /ETH, /MBT, /MET)
- Agriculturals (/ZM, /ZL, /ZS)
Are There Smaller Contracts for Other Futures?
Yes! Here are some smaller contracts (micros) for other futures:
- NASDAQ: /MNQ
- Russell /M2K
- Oil /MCL
- Gold /MGC
- Silver /SIL
- Dow /MYM
There are micros for agricultures, energies, foreign exchange, cryptos, etc. Check out the futures exchange websites and your broker for additional information and margin requirements. Volume, liquidity, and trading hours will vary by contract. Please make sure you do your own research and remember: paper trade, paper trade, paper trade until you’re 100% prepared to manage your risk.
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