Tuesday, November 3, 2009

Futures and Leverage

One reader asked about futures, and if there a simple way to understand them.

After all....most advanced traders will immediately launch into some diatribe using big and confusing words, fancy formulas appropriate for a high level college math course, etc.

First off---they want to confuse you and make you think this stuff is so confusing that only they cam help you (translation--take your money).  Second, its like every business out there....obscuring the simple realities of their business with a fog of confusion that provides a barrier to entry, so once again, they can confuse you and take your money. 


$.25 move on the S&P (/ES Futures) results in a $37.50 change in your account, per contract.

150 to one leverage.

Let’s say S&P=1000 to keep it simple.  Lets assume a 2% move = 20 points, or (80) ¼ point ticks, 80 * 37.50= $3000 gain per option

You need around $5000 of buying power in your account to buy one ES future.  NQ future are lower leverage and lower “price”.

Works same to the downside as the upside.  It is a direct bet with a counterparty.

Shorts and puts will likely become illegal….very soon.   Obama has the mental and financial capacity to back that bandwagon.   Then as everything sells off, only HBB and Steveo will have short futures.

Although tonight I have long futures...hedging many short positions as most Fed days get a 1.5% pop.  Long at 1045.75.

With index futures, 2/3 of your trading profit is automatically taxed at long term capital gain tax rates, and 1/3 at short term capital gains tax.   A massive advantage….and one clearly designed to help the “big money” get even bigger.

Futures are hunted at night, and Asian and Europe markets bet on the American markets.   Volumes are way lower at night, but in the last 2 years, the night volume has gone up maybe 300% or 400% just by personal observation.

HBB is, in my humble opinion, gaming the markets by pushing futures around at night, creating more gaps up and down that take people out of there positions.

Daytraders don't get a chance to get a piece of these moves, and swing and long term traders can get whipped out of their positions.  Our financial overlords have really outdone themselves this time.

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Insightful and Useful Comment!