Quote from coolweb:
b) NQ0506 = $1425 Right now, Lets say I buy 10 lots of NQ0506 for $14,250
NASDAQ is 20x ( profit size? )
Some terminology might help.
In futures trading the things you trade are called contracts, not lots,
(people also call them cars for short). The minimum trade size is one
contract.
When you buy or sell a contract, you don't pay or receive money, other than
commissions and fees.
This is because what you've actually done is to enter into a contract with
someone else, to trade a fixed quantity of the commodity that underlies the
contract, at today's purchase or sale price, at a specified time in the
future.
So if you buy, (go LONG), one NQM5 at 1425, you've made a contract to take
delivery of the underlying from the person who sold you the contract, and pay
a specific price. In this case the underlying is defined to be a specific
basket of stocks with a cash value equal to $20 x (the point value of the
NASDAQ 100 index), and the price you agreed to pay for the basket of stocks at
expiration is $20 x 1425 = $28500.
Delivery takes place on the expiration date of the contract. For the NQM5
the expiration date is 06/17/05.
If instead you sell (go SHORT) you've made a contract to deliver the
underlying at expiration and receive the current futures price in return.
Stock index futures contracts are actually settled in cash, not by the actual
delivery of stocks, but it still makes a lot of sense to think of the
transaction in the above way.
Recapitulating: in futures trading the LONG position agrees to take delivery
of the underlying from the SHORT position at expiration, and the price and
size of the trade are agreed upon beforehand.
If the underlying price on the expiration date is
higher than the
current futures price, the LONG position will pay a lower price than it would
have had to pay for the underlying in the market on the expiration date, and
the SHORT position will obtain less money than it would have obtained for
selling the underlying on the expiration date. The opposite is true if the
underlying price is lower than the current futures price at expiration.
Of course, you don't have to hold a SHORT or a LONG until the contract
expires. You can offset the SHORT or LONG position any time before expiration,
if the market allows it, by making a trade in the opposite direction, as you
suggested below:
So lets say if NQ0505 drops from $1425 -> $1410 for a 15 point drop.
I would make 20 * $15 ( $300 ) PER LOT?
So say you sold 1 contract: NQM5 @ 1425. You were then SHORT 1 NQM5, which
meant you agreed to deliver a specific basket of stocks for a price of $20 x
1425 = $28500 on 6/17/05. Then the price dropped to 1410, and you bought 1
NQM5 @ 1410. The new LONG position exactly offsets your SHORT position, leaving you
flat.
You won't need to do anything on 6/17/05, and you immediately receive: $20 x
(1425 - 1410) = ($28500 - $28200) = $300, less, of course, commissions and
fees.
So with 10 LOTS it would be $3000 ?
Right: with 10 contracts, it would be $3000.
So the margin rate is around 10x it seems?
Margin in futures trading is a bit different than in stock trading. It works
like this: as long as you are either net SHORT or net LONG some number of
contracts in the market, you are required to post a cash performance bond in
your account for each contract either long or short. The money is supposed to
serve as a guarantee that you will fulfill the terms of the contract.
The amount of cash you have to put up depends on the market, the type of
trader you are, and your broker, and it is subject to change at any time.
For the NQ the CME lists the following margins:
Initial Maintenance
Spec $3,750 $3,000
Hedge/Member $3,000 $3,000
CBOE $3,000 $3,000
So the exchange requires that a speculator post at least $3750 per NQ contract
traded as an initial performance bond, and requires at least $3000 per
contract traded be kept in the account in order to maintain a position.
In practice, many brokers let you trade futures on an intraday basis using a
lot less than exchange minimum margins, but they
require that you get
flat at the end of the day, or at best, that you hold no more contracts long
or short overnight than the exchange minimums allow for. If your margin drops
below the maintenance minimum, you generate a margin call, or, fairly likely,
your broker will liquidate positions in your account to bring the margin into
line with exchange minimums.
All of your open positions in any case are marked to market at the end of the trading day.
In the case of the exchange minimum and the trade you described, the ratio of
the value of the contract to the initial margin was:
$28500/$3750 = 7.6
The ratio of the value of the contract to the maintenance margin was initially
9.5, but that ratio will fluctuate with the price of the contract.
More important to consider is probably the value of the contract relative to
the overall size of your account. If you have, say $50K in your account, you
can trade 10 NQM5, because the initial margin is $37500. But with the index at
1425, 10 contracts is equivalent to a position in the underlying market worth
$285,000: so the actual leverage you have is 5.7 to 1.
If some broker let you trade NQ intraday using margins of $500 per contract,
you could in principle trade 100 contracts in a $50K account, which would
amount to an overall leverage of 57 to 1.
Needless to say, this is extremely likely to be a recipe for disaster, and you
should keep the overall leverage considerably smaller. Ideally, it could even
be sensible to keep leverage no bigger than 1 or so if you're just learning to
trade futures, until you're sure you have an edge.
Meaning: trade only 1 NQ in an account of $30K.
No shame in that at all, and you should also consider the typical volatility of a contract when
placing your stops and deciding how to trade it. If the volatility is too large, you may have a hard time placing stops that are acceptable if you require that you risk no more than 1-2% of your
account on any given trade. I think this would
often be true when trading 1 NQ on a 1-3 day time scale in a $30K account.
c) Can I buy 10 lots? or do I have to buy either a 1 lot or a 100 lots
contract (contract like options?)
You can buy 10 contracts if you have the margin, and 1 contract is the
minimum.
Options on futures are options on 1 contract, unlike stocks, where options are
on 1 lot or 100 shares.
Cheers!
