Stocks & Commodities V. 23:11 (54-55): Futures For You by Dan O’Neil
INSIDE THE FUTURES WORLD
Want to learn how the futures markets really work? Dan O’Neil, a principal at online futures and forex broker XPRESSTRADE (www.xpresstrade.com), responds to
your questions about today’s futures markets. To submit a question, post your question to our website at http://Message-Boards.Traders.com. Answers will be
posted there, and selected questions will appear in a future issue of S&C.
The Chicago Mercantile Exchange’s popular e-mini stock index futures have triggered an influx of newcomers to the futures markets. Perhaps the most common source of confusion for stock traders migrating to the futures markets is the difference in settlement procedures.
Suppose a trader buys 100 shares of stock for $40 per share. The value of the stock would be $4,000, and the buyer would be responsible for paying this sum to the seller. If the price of the stock subsequently rises to $50, the owner of the stock will have an unrealized profit, meaning that he won’t be able to actually spend his $1,000 profit until he formally liquidates his position by selling 100 shares at $50 per share. In the stock world, profits and losses aren’t realized until the position is closed.
Now imagine a trader who establishes a long position in e-mini S&P futures, and suppose his entry price is
1230.00. Since the value of the contract is the index multiplied by $50, we’re talking about something north of $60,000. But the futures trader doesn’t actually buy the contract—rather, he’s required only to deposit some amount of good-faith margin, which is designed to ensure that resources are on hand to cover any losses.