If you are a new E-mini trader you be careful as traders are expected to pay for the difference between the margins for the entry and exit points. In case you lose at the end of the day you are likely to pay in a big way. The margin requirements for E-minis are much less than the normal contract. The day trading margin is less than the margin to hold an overnight position in S&P 500 E-mini Futures contract.
Like all futures contracts, S&P futures contracts including E-minis are settled daily. The values of all positions are marked to the market each day after the official close based on the settlement price. At the end of the trading day they are assigned a final value price. Cash will either come into your account or leave your account based on the change in the settlement price from day to day as long as your positions remain open. In other words, based on how well your positions fared in that days trading session, your account is then either debited or credited.
It is this mechanism that brings integrity to the marketplace. As losses are not allowed to accumulate without some response being required, this system gives futures trading a rock-solid reputation for creditworthiness.
Leverage: The effect of price changes is magnified because futures markets are highly leveraged. You typically pay the price in full with stocks (i.e., without leverage) or on margin (50 percent leverage). Leverage can produce large profits in relation to the amount of your initial margin if you speculate in futures and the market moves in your favor. However, you also could lose your initial margin if the market moves against your position.
Suppose you have decided to put $10,000 into a futures account and you buy one E-mini S&P 500 index futures contract when the index is trading at 1000. Your initial margin requirement for that one contract is $3,500.
Each one-point change in the index represents a $50 gain or loss because the value of the futures contract is $50 times the index. You could realize a profit of $2,500= (50 points) ($50) if the index increases 5 percent, to 1050 from 1000. Conversely, a 50-point decline would produce a $2,500 loss. The $2,500 increase represents a 25 percent return on your initial investment of $10,000 or a 71 percent return on your initial margin deposit of $3,500.
Conversely, a decline would eat up 25 percent of your original $10,000 or 71 percent of your initial margin. In either case, an increase or decrease of only 5 percent in the index could result in a substantial gain or loss in your account. Thats the power of leverage.
Indeed, leverage is the key distinctive aspect of futures trading as compared with stock trading. It makes your money work harder and produces more in a shorter period of time when everythings going your way, than if you paid for everything in full, up front. In such a situation leverage can be a beautiful thing.
But there is a dark side to leverage, too. For example, assume you use $5,000 in your account to buy an E-mini S&P 500 contract worth $50,000. Instead of going up, however, prices fall by 10 percent and the contracts value drops to $45,000. Your $5,000 is completely gone. Unless you get out of the position with an offsetting sale when your maintenance margin level is violated, youll be obligated to put up even more money if the market keeps moving against you. Leverage is the one ingredient that can produce either horror stories or happy endings. To get the happy ending, it is extremely important that you fully understand the power of leverage and how to manage it well.
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading futures and currencies. Trade Dow Futures and S&P Futures!
You must log in to post a comment.