Ask a Broker

ISSUE 611 | NOV 2007

Q: I'm just getting started in futures trading. What are the most important things I need to know?

A: Lind Plus Senior Market Strategist Ken Hughes answers

I think there are four essentials you must know before you begin trading and enter into a futures position: margin, point value, trading hours and expiration.

Margin

First is margin. All futures contracts are assigned a specific margin requirement, also known as a performance bond, set by the exchange. This is considered a "good faith" deposit to maintain your position. For example, the initial margin for CME S&P 500 futures is currently at $19,688, whereas the margin for the CME E-mini S&P 500 futures, which are a fifth the size of the big contract, is $3,938. This is what you need to trade a contract of either of these index products. If you have a $20,000 account, you probably don't want to use all your margin on one contract, so you'd probably be better off trading the minis. You need some cushion in case the market goes against you, and you suffer a loss. Keep in mind, the exchanges can change margin requirements at any time as conditions warrant. Margin requirements vary greatly among the various futures contracts that are available. If you are a smaller investor, a number of popular contracts (such as the S&P) offer mini-sized versions that might be more affordable to you.

Point Value

The second thing you need to know is the point value. You can't manage your risk if you don't know the tick value, which is the incremental movement of a particular product. Each futures product is priced differently. For example, CBOT Treasury bond futures move in increments of 1/32, which represent one "tick." A one-tick move (1/32) equals $31.625. For example, if you bought December Treasury bond futures at 116 1/32, and they move to 116 3/32, you are now up $63.25 on your trade. Grains are $50 for every one-cent-per bushel move, and so on so forth. Point values are part of contract specifications. Lind-Waldock clients can find this information online though our Web site, and you can also call your Trade Desk or broker for assistance. The exchange Web sites also have this information.

Hours

The third thing you need to know is trading hours. With electronic trading, most markets trade nearly 24 hours a day, so while you're sleeping the markets are still moving. Most popular markets will close their regular weekday trading day before 5:00 p.m. Central Time, but reopen after a short break for overnight trading. For example, the CME E-mini S&P 500 futures have regular daytime trading hours of 8:30 a.m. – 3:15 p.m. CT., but then reopen just 15 minutes later at 3:30 p.m. They close again for a short maintenance period from 4:30 p.m. – 5:00 p.m. before resuming trade again overnight until the next regular daytime session starts the following morning. Those markets that don't take open orders—meaning they work until filled or canceled—have to be replaced after hours to work in the evening. You don't want to leave yourself exposed overnight as there can be some big moves by the time you get up. It doesn't mean you have to stay awake all night if you want to maintain a position in these markets, but it's always wise to have the appropriate risk-management in place, and be aware that news events can happen overnight and can move the markets. On the other hand, if you do want to trade in the wee hours, there can be good opportunities. Times of war, other geopolitical events, and elections here and abroad have brought greater liquidity and volatility to our electronic futures markets when most of us in the U.S. are asleep. Remember—participants in Europe and Asia can trade our markets, too.

You want to check the trading hours for the particular contract you want to trade, and order types that are supported. Lind-Waldock clients can find this information online, or through your Trade Desk or broker. You also want to be aware of which markets trade via open-outcry (on an exchange's physical trading floor) or via electronic systems, and whether the two are fungible if both are available for the same product on the same exchange—that is, a position entered in open-outcry can be closed in the electronic session. We'd also be happy to provide you with that information here at Lind-Waldock.

Expiration

Lastly, you need to know the expiration of the contract you are trading. Most futures contracts are three-month contracts, and expire at specified dates. You can be subject to unnecessary fees and charges if you don't pay attention to when these contracts expire, and take appropriate action. For example, if you are long COMEX gold futures past first notice day (the first day at which a buyer can be called upon to take delivery of the underlying instrument) you can get hit with delivery fees which can cost you $100 per contract. First notice is defined by the exchanges and varies by contract, but the first notice day for COMEX gold is typically about a month after expiration. Of course, you don't have to take delivery of the actually commodity. You can close your position by offsetting it, or you can roll it forward to the next contract month if you want to maintain it. You'd also want to know which futures contracts are physically settled (like gold futures) or cash-settled (like S&P futures).

There is certainly much more for a new trader to know, and I've just covered a few essential facts as you get started. Lind-Waldock has a variety of educational materials on our Web site to help you learn more, at www.lind-waldock.com. I also encourage you to give me a call if you have any questions about trading, or need some extra assistance tailoring a trading strategy for your particular goals and risk tolerance.

Ken Hughes is a Senior Market Strategist with Lind Plus, Lind-Waldock's broker-assisted division. He can be reached at 866-284-7124 or via email at khughes@lind-waldock.com.

Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.

Futures trading involves substantial risk of loss and is not suitable for all investors.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

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