Daren Markisic

Futures traders normally fall into two groups with each having a typical ‘holding period’, based on the purpose of that futures position. The first group of traders, hedgers, have an interest in the underlying commodity and are seeking to minimise price risk in the physical market. Farmers are typically hedgers, and normally hold positions from the start to finish of a particular contract month. This makes them long-term traders. In the second group fall the speculators, who attempt to predict market movements on a short to medium-term basis. Due to initial margin requirements and price fluctuations, most day-traders hold their positions for the short-term. Day-traders look for high volatility and short-term trends, effectively attempting to maximise profits, minimise losses but not tie up capital in the one place for too long.

Futures markets are popular due to the amount of leverage attained when trading. Leverage on a futures contract is determined by the value of the underlying commodity divided by the initial margin (IM) requirement. IM’s are determined by Futures Exchanges and domestically the Sydney Futures Exchange (SFE) sets the margin requirement for the ASX/S&P 200 Share Price Index (SPI) futures. Currently, the IM on the SPI is $6,200, which at first might seem high. However, the June 2007 SPI is trading at 6216, the underlying value of the contract is $155,400 ($25, the tick value, multiplied by the price). Ultimately, the trader would need to post, as a security deposit to the SFE, only 3.9% of the contract value. For this reason the SPI is a very popular and a highly leveraged product.

Many traders look for offshore exposure when drafting their trading plans and strategies and the E-Mini S&P 500 is extremely popular. Calculating the underlying value versus the IM is very simple because each futures contract is standardised. They have the following attributes: underlying commodity; quantity, quality; tick value; initial margin; expiry date; and settlement method. Knowing what constitutes one futures market makes it very easy to grasp other international markets. Looking back to the SPI example, and shifting the contract value formula to the E-Mini S&P 500, we can easily work out that a trader needs only 4.6% of the contract value to have an position in the E-Mini S&P.

E-Mini S&P 500 last trading @ 1500.00

Point Value = $50 per point

Underlying contract value = 1500 x 50 = $75,000

IM requirements = $3,500 per contract

Percent of contract value = 75,000 / 3,500 = 4.6%

Most initial margin requirements will be small relative to the underlying contract value. This together with international exposure and the ability to short sell makes futures trading one of the most popular ways to trade."

Daren Markisic