Greetings traders and welcome back.
Thank you for joining me again.
My name is Chris, and I will be your host today as we go through
another In-Depth with Chris episode.
We're going to be discussing what stock futures are, as well
as covering some of the information that you should be made
aware of before you get started trading stocks futures, or
if you're interested in trading stock futures.
A lot of traders out there are well aware of what stocks are, but then they don't
realize that a lot of stocks
can also be traded in future form. We have indexes out there
like the E-mini S&P 500, which is incredibly popular with
a whole lot of power behind it,
and that too can be traded in future formation.
So without further ado, let's dive on into it.
The stock futures market is one of those weirdly hidden in plain sight markets.
Everyone's aware of what stocks are, even non-traders have
heard of the DJIA, the Dow Jones Industrial Average, the FTSE,
or the Dax, the CAC 40, and a bunch of others.
It's easy to recognize all of these things,
but a lot of people are just not aware that we can actually
trade all of these different indices with a futures contract,
which adds a lot of different benefits, and we're going to cover all that.
So what are stock futures? Well, stock futures just fall under
a category of futures contracts that are used to trade stock
indices. So it is futures of stock indices in the short.
What they do, these indices that is, they bundle different
shares of different companies based on specific criteria.
The idea is that it's supposed to make it easier to look
at trends on the overall market based on the indexes overall
level. This is why stock or equity indices are often used
as a suitable measure of an investor sentiment in whatever
specific market that we might be analyzing. An example of
this would be if we were to look at, say a technology stock
index, that technology stock index would track a bundle of
technology stocks, and it will move with the overall performance
of the stocks within it. The idea is that us as investors
can use that index to quickly gauge the performance of technology
stocks as a whole. Either in the present or over a specific period of
time, we have the ability to analyze stocks in this manner
when we take a look at these indexes. Stock index futures
have been on the investment map since they were introduced
sometime in the early 1980s.
The first stock index future was launched in 1982
I do believe. Institutional traders originally used them as
a hedging instrument to protect against sudden price reversals.
The use case has then since evolved to be more used like a
speculative tool among day traders, and that's where the
E-mini S&P 500 and the likes of those come in.
They are also used to arrive at the pricing for just CFD index futures.
Stock future knowledge can even lead to predictive qualities
about overall market movements, and this is because stock
futures exchanges, like the CME, typically have longer trading
hours than regular exchanges.
There are also some futures contracts that are traded around the
clock. This makes them useful for predicting where a stock
index might move next, or at least where speculators think
an index will move by the time the underlying exchange opens
for the day. A good example of this is if we look at the FTSE 100 Index futures.
These futures contracts are traded from 1:00 a.m. to 9 p.m.
London time, while the regular hours for the FTSE 100 market
itself are from 8 a.m. to 5 p.m.
In this way, any news that we were to find coming out outside
of the period of the normal FTSE market can influence the
trading sentiment before the market opens. And if you are
feeling incredibly predictive and accurate in your forecast,
make sure you check out the Gauntlet Mini because it provides
a strong platform to prove your skills.
Before we further explain how stock futures trading works,
it's essential to understand the structure of index futures
contracts. Entering into an index futures contract means both
parties are bound to an agreed value for the underlying index
to be settled at a specified future date.
So this basically means that traders have the obligation,
not the right as with options, to settle the contract at a future date.
Once again, that means they have the obligation,
not the right, to settle the contract at a future date.
It means it is happening.
The value of a stock index contract is specified by the exchange
where the index is traded. Like any derivative, stock index
futures are a zero-sum game. One party takes a long position
and the other party takes a short position.
There's no physical underlying asset to deliver,
so index futures are always settled in cash. At the time of
the settlement, the loser pays the winner the difference between
the agreed index futures price and the closing value of the
index. So make sure you are the winner.
So now, we're going to take a moment and talk about some of
the exact trading implications that are involved with trading
stock futures contracts.
We can trade stock index futures through a commodity futures
broker. Pretty much any commodity futures broker out there.
And it's their job to facilitate the trade on both the buy
and the sell orders. We want to make sure that the platform
that we're using is reliable, and that we can also afford their margin requirements.
These are two pretty crucial things to remember. And if you're
ever in doubt about whatever broker it is that you're intending
to use, make sure that you visit the National Futures Association,
which we usually refer to as the NFA. Terrible handwriting
continues to be a thing with me,
but to vet any potential brokers, we can go here and check them out.
So, we want to check out their futures trading fees, the complaints
lodged against them, and we can also track the records in
generating fair, clean stock futures trades. Just like trading
traditional stock market securities, a buy order means taking a long
position, which profits from a rising stock index, where a
sell order results in a short position, and to realize profits,
we have to have a declining index. And like we previously
discussed, a stock index future is purely cash-settled since
there's no possible way to physically deliver an index.
I can't hand you the S&P 500. The settlements also
occur daily on a mark-to-market basis. Like other futures
contracts, traders are required to put up an initial
margin to enter a position in the index futures.
There's also a maintenance margin set for each contract, and
the value must not drop past a certain point, or the broker
will initiate what we call a "margin call", and nobody likes
margin calls. That basically means we need to add more money
to our account to keep our position open.
And also, if the futures market seems a tad too complicated,
it's worth noting that we could also consider trading things
that are known as ETFs, which the long word is, exchange-traded
funds. They offer similar exposure to stocks without having
to deal with the relatively high risk typically associated
with stand-alone stock index vehicles that are out there as
well. We should also discuss how calculating profit, or loss
for that matter, works in the stock futures world.
So, the opening value of a futures trade is the price that
we paid for the futures contract when we place the trade.
The resulting profit or loss is then calculated from that
value. So, to determine the size of our profit or loss, we
need to consider the number of futures contracts we traded in that session.
We also need to consider how much each contract is worth per point
of movement in the index.
So, per point of movement is going to determine really where that profit's coming.
Let's say we use an example with one of the more popular
indices out there, of the S&P 500. And we'll talk about this
example using a full-size contract, which means it has a set value of $250 per point.
So, we know the index is valued at 2,600 points
in this particular example, that's because I have it written
down, and in this situation,
I am now God. Then, it's going to be worth a $650,000 contract
if we were to buy one contract because 250 times 2,600 means
650,000. So, if we assume that the index is sitting at that
2,600 points when we bought it, and we know that it's worth that 650,000 points,
well, if we buy a contract with 10% margin, that means that
we owe 65,000 if our margin requirement is 10% of course,
because 10% of 650,000 is 65,000.
So that's what we need to get the trade going.
So, if we were to say that the underlying index of the S&P 500
were to swing somewhere of like, say 20 points, then we would
have the potential to gain, say $5,000, which
would be 5,000 coming from 250 points,
this guy here, and multiplying that just simply by 20. 250 times 20 equals 5,000.
But whether we're making profit or whether we're losing is
going to be determined on whether or not we were correct with our forecast.
So, it doesn't really become a whole lot of difficult math and calculating the
contracts. This is basically it in a nutshell, doesn't get a whole lot more
complicated than this.
I know my voice is just very, very exciting and you're probably
sitting there saying, "Oh Chris, won't you just talk some strategy to me?".
Well, you're lucky. I actually will. So, number one is going to be our bid-ask
scalping strategy. This is, once again, not in any particular order, but out of
the strategies that are employed today,
these are three of the most common. Scalping is one of the
quickest strategies that's employed, and it's done by exploiting
various price gaps in bid-ask spreads and order flows.
The idea is, it's supposed to give ourselves an opportunity
to take advantage of a discrepancy when the bid-ask
spread gets too far apart, and we're trying to buy it one
when it gets a little too low, or sell it another when it
gets a little too high, and take advantage of the distance
in between the bid-ask spread. It's relatively simple in that nature.
Then we have the buy-and-hold strategy.
The buy-and-hold strategy is quite literally what you would
think. It's taking advantage of long-term grindy indexes, or
indices out there, such as the S&P 500, that are stably showing
somewhere around 9-10% return
annually. That's where it's been at for quite some time.
And the idea is, we're just looking to take advantage of buying
and holding for a long period during any particular downswing in the market.
So, relatively simple concept there, just taking advantage of the long-term trend,
a lot more like a swing trade there.
Then we have the fundamental technical analysis side of things.
So, with fundamental and technical analysis,
So, fundamental means we can analyze certain reports and get an idea of what's going on
with different companies in the index that we're interested
in on, and use that information to get an idea of whether we
should buy or sell before maybe an earnings report comes
out because we anticipate the index to jump up due to some
positive news or vice versa. The technical analysis side of
things is exactly what we're used to with any other facet
of trading. So, that just means we're going to analyze historical
price data and use our Japanese candlesticks to get an idea
on whether or not the market is going to be going lower or
higher based on various things like support and resistance.
If you aren't already scrambling at the bits here to jump
into some stock index futures trading, here are some other
benefits we should discuss.
The first one is going to be the leverage. So, leverage in
opening a futures position means that we get to enjoy a bigger
total exposure when the capital that we actually have isn't that large.
So, we refer to this capital that we have to put down as a
"margin requirement", and it usually ranges somewhere from, say
3-12% of the contract value.
It depends on the contract as well as where you are trading. But the
idea is that we could make more money with less money. Our
second little benefit that we have here is going to be liquidity.
Futures markets themselves tend to be very liquid, which makes
them easier to trade then a lot of other markets out there.
Price movements tend to remain fairly stable too, especially
as the futures contracts near maturity.
Then we have hedging. If our portfolio contains a number of
stocks that are part of a single index,
we could hedge market-specific risks. We might do this if
we're concerned about systemic risk.
This is the risk that the overall market may decrease in
value, so we could hold a short index futures position that
could offset the stock risk. If the index does fall in value
during a market downturn, our futures contracts will earn
a profit, and the profit could potentially counteract the
losses from our individual stock position.
But remember, just like an elephant would, we have risks that
would be associated as well that we should mention, nothing
too crazy, but always going to bring it to you full and clear.
The first is going to be leverage risk, and you might be
saying, "Well Chris, didn't you just say that was a benefit?".
Well, it absolutely can be. Leverage is always a double-edged
sword. It can help us gain more money quicker, but it can
also help us lose more money quicker, so it can magnify whatever
direction the trade is going, so it can be counted as a benefit
and as a potential negative. Then we also have cash in margins.
So, when we are on the topic of cash in margins, we have to
understand that to participate in the futures markets,
we need to put up an appropriate amount of margin, as required
by the exchange in the broker.
And this means that if our trade experience is a significant
loss and we get margin called, we have to top up on our account
in order to keep our position from being liquidated.
It's neither here nor there,
but once again, it falls more in the negative side than anything
so it is worth mentioning.
So in conclusion, stock futures are obviously not going to
be for everyone, but it allows us to have access to some pretty cool tools.
It gives us the ability to hedge our portfolio, if we do have
a stock portfolio, and it also allows us to trade a fast-moving
liquid market, which if we are traders, those are some of
the things that we're always looking for. The E-mini S&P 500
is one of my personal favorites, as I'm sure all of you are
well aware because I blab about it quite a lot.
But if you do think you have what it takes guys, to pull off some serious success,
I want to see you in the Gauntlet Mini, so make sure you check that out.
But until next time everybody, please make sure you click
the like and subscribe button below, and I will see you all very soon.
Cheers everybody, over and out.