D
O
G
Dance with Devils
T-
Index Futures
D
O
G
Module I
T-
Lecture 01
A Masterpiece trading journey with T-GOD
D
O
G
T-
What is futures?
D
O
G
• Futures are instruments can trade up to almost 23 hour per day, with
T-
an exception of 5-6pm EST, even during some national holidays.
• You may ask why the US Market index opens differently at 9:30 AM
D
compared to it was closed at 4:00 PM in previous trading days?
O
G
1. The market never sleeps, when US market close, other market, Asian Pacific (Nikkei/HK) will start trading,
T-
then EU Market (DAX/Stoxx) take over after late midnight.
2. All of these market fluctuation will have an impact on US index opens next trading day at 9:30 AM.
3. D
The Impacts are accumulated but have different weight and fluctuation due to the size of the ‘overnight’
market, the trading window of the oversees market, and the liquidity of the futures contract.
O
• US index futures, such as /ES (SP 500) and /NQ (Nasdaq 100) are the
G
T-
most liquidity contracts in the world
Why trades futures?
D
O
G
• The future market is highly liquid(except of some nonprime date
T-
option chains)
1. During overnight market (typically defined as 8 pm to 4 am), the spread between ask and bid of /ES
D
(SP500 futures) are normally 0.25, which defined as the minimum tick of the /ES.
O
2. The normally filled time for US Index future contracts is negligible.
G
• The future contract is good instrument to used for macro event
T-
hedging such as black swan event.
1. D
Market is sensitive to macro events, for example, declaration of regional wars, the overnight fiscal and
monetary policy and political event (election, crucial congress votes and etc.)
O
G
2. During the non-cash session (4pm to 9:30 am next day), futures provide the best instrument for reacting
to these type of event with very few commitment of margin. (we will talk this later)
T-
The Size of Futures (US Market)
D
O
G
• The full size of SP500 index futures is
T-
➢ 250 * US 500 Future index Price
➢ For example, if the index is trading at 3900, the underlying asset will be 975,000 US Dollars.
D
➢ SP500 full size futures (ticker: /SP) is not popular to retail investors due the size of underlying asset and risk
O
profile, normally is used by institutional investors to speculate or hedge large number of portfolios.
G
• Two versions of SP500 index futures are available to retail investors
T-
• The E-mini futures, under the ticker of /ES, which is 1/5 of the OG contract
• The Micro E-mini futures, under the ticker of /MES, which is 1/10 of /ES and 1/50 of OG contract
D
➢ Let’s use E-mini futures as an example, the underlying asset, instead of multiply by 250 of index price, we
O
multiply 50, for example, the index trading at 3900, will imply a 195,000 US Dollars.
G
➢ Similarly, the Micro E-mini futures, will imply an asset of 19,500 US Dollars.
• Futures normally trading at high risk profile of leverage
T-
The Risk Profile of Futures
D
O
G
• Index futures are highly leverage product
T-
➢ There are several margin requirements across different trading platforms
➢ A large swing of index move can quickly trigger a margin call, the result is the broker may force you to close
D
your position (even the trading loss is recovered quickly)
O
• Understanding the risk is the No. 1 rule before trading Futures
G
T-
➢ Different Brokers handle risk differently.
➢ Low Margin requirement normally is a trap of candy for new futures investors
➢ High Margin requirement may restrict the ability of the flexibility of trading strategies of veteran investors
D
O
➢ Some Brokers have different margin requirement for cash session and overnight session, the margin
requirement may increase dramatically overnight and force the investors to close their position with
G
unrealized loss.
T-
An Intro to Margins of Futures
D
O
G
• Different Platforms have different Rules and Threshold
T-
➢ Big Brokers usually require higher margin threshold compared to those of smaller one
➢ Big Brokers maintain same margin requirements throughout all trading windows, including cash session,
D
from 9:30 to 4 pm and overnight session (excluding 5pm to 6pm, before 2021, also excluding 4:15 pm to
O
4:30 pm).
G
➢ Smaller Brokers normally set two margin requirements; A much smaller size of margin requirement
compared to overnight session.
T-
1. For example, initial margin for holding a /ES in cash session is $1166 with a maintenance margin of $1060 during cash
session, will turn into $11660 and $10600 respectively. The reduced margin requirement is called intraday rate, which is
10%, in another word, the leverage is 10 times bigger during the cash session.
D
2. The advantage for reduced margin in cash session provide the better flexibility for those who pool good amount of money
O
with higher risk appetite. The flip side effect is the risk of losing great amount of money due to over leverage your
position.
G
To explain this well, one trading example is provided on next slide
T-
Margin risk examples (answer will be provided in next lecture)
D
O
G
• Say Mr. Bright has an account with 25k US Dollars, he bought (Long position) 1 /ES at 3 PM during the cash session
at 3900. The initial margin is $ 1166 for this contract with a $1060 maintenance margin during the cash session (10
T-
times the value of overnight margin), then the /ES dived 30 points within 15 mins after the trade was filled. Now
Mr. Bright, lost 50*30 = $1500, the value of Mr. Bright’s account now sit at $ 23,500.
• Mr. Bright decided to add 1 long /ES position at 3870. the initial margin now is increased to $ 2332.
D
• Unfortunately, the index keep diving due to the weak performance of that day, another 30 mins later, the index dip
O
another 20 pts.
G
• In total, Mr. Bright lost another $2000 and his account now sit at $21,500.
T-
➢ At 3:45 pm, if you are Mr. Bright,
1. Will u keep averaging down the /ES holdings toward 4 pm cash session cut off window?
D
2. If you decide not to average down, will you hold these two exist contracts overnight, or in other word, do you
have enough money in you account for the contracts to carry over into overnight session?
O
3. If you decide to carry over and you have enough margin to carry those two contracts over, how many more points
G
dip will trigger maintenance margin call assuming Mr. Bright has no ability to deposit more money in next 5
T-
trading days? (normally, you will have time to deposit money to meet the margin request, or close the position by
you or forced to cover/sell partial position by your brokers)
Some terminologies
D
O
G
• Day trade initial margin
T-
➢ The amount of money required to open a future position during cash session (9:30 am to 4pm)
➢Day trade maintenance margin
D
➢ The minimum amount of money in your account to maintain the position during cash session (9:30 am to
O
4pm)
G
➢Overnight initial margin
T-
➢ The amount of money required to open a future position during overnight session
➢Overnight maintenance margin D
➢ The minimum amount of money in your account to maintain the position during overnight session
O
➢Intraday rate
G
T-
➢ Overnight initial(maint.) margin/ Day trade initial(maint.) margin
Accessing the Different Leverage of futures
D
O
G
• Futures is an instrument that contains high leverage of risks
T-
➢ The leverage profile of a future position against initial margin is calculated by the equations:
• Leverage ratio = Number of contracts * per points price * index price / initial margin (locked/dynamic)
D
➢ Using /ES contract and 25k account as example under Think or Swim platform,
O
• The required margin for one E-mini futures is $14,157 and /ES is trading at 4,000, the numerator of the leverage ratio
G
is 1*50*4,000 = 200,000 nominal value asset, and then the leverage ratio for this trade against the initial margin is
T-
200,000/14,157 = 14.13 excluding fees. This is the leverage ratio of initial margin.
➢ The leverage ratio is a dynamic number due to the tick-by-tick fluctuation, as well as the initial margin change set by
brokers. D
O
• Normally, the initial margin doesn’t change without the notice of the broker, so the leverage ratio against initial margin
is fluctuated with the index price changes.
G
Say, if the index price increase 40 points to 4040, this ratio will go from 14.13 up to 14.13 * 1.01 = 14.27
T-
Accessing the Different Leverage of futures
D
O
G
• Another approach (better) to access the risk
T-
• The leverage profile of a future position against account value is calculated by the equations:
➢ Leverage ratio = Number of contracts * per points price * index price / account value (dynamic)
➢ Using /ES contract and 25k account as example under Think or Swim platform,
D
• The required margin for one E-mini futures is $14,157 and /ES is trading at 4,000, the numerator of the leverage ratio is 1*50*4,000 = 200,000
nominal value asset, and then the leverage ratio for this trade against the total is 200,000/25,000 = 8 excluding fees. This is the leverage ratio of initial
O
account value.
G
➢ This Leverage ratio is also a dynamic number due to the tick-by-tick fluctuation of index price, as well as the account value due to gain or loss due to
the open position, other than the previous leverage ratio we present in last slide (assuming initial margin is fixed) which is a linear model, this ratio is
T-
not a linear model
• For example, the index price went up to 4040, the ratio will not be 8.8, instead it is 7.48, a even smaller number, that is due to the increase of the
account value is much faster than the nominal value. In other words, a dip of index price, will squeeze this ratio up quickly.
•
•
Let me show you some numbers
D
If the index is at 4040, the ratio will be 7.48; if the index is at 4080, the ratio is 7.03, the incremental is decreasing
O
• If the index is at 3960, the ratio will be 8.61, if the index is at 3920, the ratio is 9.33. the incremental is increasing
G
• HW. Draw the ratio versus index range from 3600 to 4400, what can you find, assuming the margin requirement doesn’t matter.
T-
• If the range extended, are there asymptotes can you find? (both answer will be provided next lecture)
