[carltonp]

Hello Fellow Traders,

Can someone please tell me in simple layman terms what my full risk exposure is when trading Futures? In particular mini-sized DOW and E-mini S&P 500.

I fully understand that when traders buy a futures contract, they are not physically buying anything - its simply a way of participating in the price movement of the the market of their choice.

So, if the market moves 10 points, traders can buy a futures contract, long or short, and make money on the move if it goes in their direction. They can also lose money if the move goes against them.

My question is what exactly do traders stand to lose?

With stocks if a trader buys 10 IBM at $10 that will cost him $100. If the share price goes down to 0 not only will he be the proud owner of worthless shares he will also have lost is $100 investment.

Now, lets say one E-mini contract is $1000 (just to keep things simple), and lets say my initial margin (performance bond) is $4000.

If I were to purchase one contract and it moves one point, i.e. from 1000 to 1001 that will translate into $50 on my P&L i.e. 50 x 1 x 1 contract = $50.

All very simple so far.

Now, question 1) If the contract went down 80 points (from 1000 to 920) would that mean my margin would be wiped out? i.e. 50 x 80 x 1= $4000

2) If the contract went down 40 points would I get a 'margin call' from my broker? i.e. the initial margin is now $2000.

3) What would happen if say the contract went down 100 points? Would that mean I owe my broker $1000? i.e. 50 x 100 x 1 = $5000 - $5000 - $4000 = $1000.

4) What would happen at the end of the settlement period if I still own the contract?

For those of you willing to provide feedback on the questions please understand that I'm just starting out with futures and plan paper trade before dipping my toe.

Really appreciate your comments.

Cheers

Carlton

[pbylina]

I also have a similar question. When I filled out an application for an account it said "Do you understand the risk of loosing more then your account balance?"

Would this only happen if there was a Market Crash? Because I would have a stop loss and or exit manually and there is margin requirements...

[SIUYA]

A conservative person would say that when you buy something you own it, and if you cant afford it going to zero then dont buy it.
for the questions - in their most simplistic form.
1) yes
2) yes
3) yes
4) depends on the contract - some are cash settled others physical delivery - assuming you mean settlement period as the expiry or deliverable date. Always understand the various dates for the contract you trade.

Remember these are generally all leveraged products, the disclaimers are there for a reason. Markets do crash, stops can be missed, slippage can be huge. There is a difference between risk and exposure.
Imagine waking up one day being long one contract in an instrument that is down 20% on a gap and the underlying value of the instrument is $125,000. your account only has $5,000 in it.....I would not want my broker wearing your risk....so you should owe the money.

[pbylina]

Originally Posted by SIUYA »

Imagine waking up one day being long one contract in an instrument that is down 20% on a gap and the underlying value of the instrument is $125,000. your account only has $5,000 in it.....I would not want my broker wearing your risk....so you should owe the money.

So you would owe the broker $120,000? Has anyone had this kind of experience, maybe during the crash of 2008? If your short during a crash are you allowed to keep the money?

...I heard theres gonna be a market crash this year...Maybe I should only take shorts just to be safe...

[SIUYA]

no you would likely owe the broker 120,000 * 20% = 24,000 - 5000 = 19,000 if you were closed out.
OR the broker would ask you for this amount.
It is kind of sobering.