Last Updated on July 26, 2024
As we have seen during the Covid pandemic, the markets can be incredibly volatile. This has attracted many people to trading futures, which are leveraged financial derivatives. As many traders will testify, leverage only works if the markets are moving in your favor!
If you’re looking to open a futures trading account, it is important you know the type of futures contracts available, the pricing structure, and how much money you need to start trading futures.
What is a futures contract?
A futures contract is a financial transaction traditionally based on a commodity, assets, or a stock market index. Under futures contracts, a trader is obligated to buy or sell a specific asset at a predetermined price by a specific date.
Volume in futures trading has increased dramatically in recent years, with S&P 500 futures contracts proving particularly popular. This contract offers exposure to the S&P 500 index, an index covering 500 of the largest companies listed on the US stock exchange. Rather than buying and selling shares in each individual company, you simply buy and sell the index futures depending upon your investment strategy. However, in order to trade futures contracts, you will need to hold what we call “margin” in your account.
Futures trading and margin accounts
The S&P 500 index is the underlying asset of some of the most heavily traded futures contracts in the world. Initially, there was only one S&P 500 futures contract, which was valued at $250 x S&P 500 index. The following figures will give you an idea of how much its value increased over the last ten years:
| Date | Index Points | Contract Value |
| January 2012 | 1,408 | $352,000 |
| January 2022 | 4,662 | $1,165,500 |
It soon became obvious that even trading on margin, the original S&P 500 futures contract was way too expensive for many market participants. Consequently, we saw the emergence of two new futures contracts:
- E-mini S&P 500 – $50 per index point ($233,100 on January 1, 2022)
- Micro E-mini S&P 500 – $5 per index point ($23,310 on January 1, 2022)
While the E-mini S&P 500 is one of the most heavily traded futures contracts, the Micro E-mini S&P 500 is also attracting attention. As the margin required to trade futures is based upon the value of each futures contract, the lower the value, the lower the margin required.
Different types of margin
When trading futures, there are three different types of margins to be aware of. These are the initial margin, maintenance margin, and intraday margin.
Initial margin
The initial margin required to gain exposure to an individual futures contract is set by the exchange. If you look at the E-mini S&P 500 futures contract, the initial margin required will take into account historical volatility. The more volatile the index, the higher the margin required when opening a trading position. At the moment, the initial margin required per E-mini S&P 500 futures contract is $12,650.
Maintenance margin
After the initial margin deposit, all eyes turn to the maintenance margin, which allows traders to keep their positions open. Looking at E-mini S&P 500 futures contracts, the maintenance margin is $11,500. What does this mean?
If the value of the underlying E-mini S&P 500 futures contract was to fall by $1,500, this would reduce the investor’s margin account balance to $11,150 ($12,650 – $1,500). As the balance dipped below the $11,500 maintenance margin limit, this would trigger a margin call. The investor would need to add an additional $1,500 to take the account balance back up to the initial margin of $12,650.
Intraday margin
Often referred to as day trader margin, intraday margin replaces initial margin for those looking to close their positions by the end of each trading day. There is no legal requirement for initial margin when day trading, but obviously, brokers need to have a degree of cover. As the risk of holding the position overnight is eliminated, the margin required can be as little as $500 per E-mini S&P 500 futures contract. This intraday margin compares favorably to the initial margin, hence the growing popularity in day trading.
Calculating margins
Due to the excessive volatility of markets as the pandemic worsened, the initial margin required when trading E-mini S&P 500 futures contracts effectively doubled between January and March. This meant that E-mini S&P 500 futures traders needed to hold more money in their margin accounts.
Trading strategies
If we concentrate on E-mini S&P 500 futures contracts, there are a number of investment strategies to minimize losses and maximize gains. Movements on the E-mini S&P 500 futures contract are measured in ticks, with four ticks to each point. As each point is worth $50, each tick is worth $12.50.
Day trading
When looking to day trade E-mini S&P 500 futures contracts, there are two factors to consider:
Deposit requirements
There are no regulations as such when it comes to minimum deposit requirements for those looking to day trade futures. Consequently, it is down to the individual broker as to the level of deposit required. This may be anything from as little as $1,500 on a margin account for some brokers.
Intraday margin requirements
Again, those looking to day trade futures contracts are not subject to the same regulations as those taking overnight positions. You will find that some futures brokers require as little as $500 in margin to trade E-mini S&P 500 futures contracts. This compares to a $12,650 initial margin requirement when holding overnight positions. However, the deposit requirements create a safety net in case of losses beyond the $500 margin account balance.
Holding a position overnight
When looking to trade overnight in E-mini S&P 500 futures contracts, there are two factors to consider:
Initial margin
The initial margin on an individual E-mini S&P 500 futures contract is $12,650, which is transferred to your margin account. There is no requirement to hold funds on deposit when trading in this manner. However, you will need to have funds available in the event of future margin calls.
Maintenance margin
The maintenance margin on the E-mini S&P 500 futures contracts is $11,500. If your margin account balance falls below this level, then you will be obliged to add additional funds to take it back to the initial margin figure. Failure to do so will lead to your position being closed, and you will be liable for the resulting losses.
When trading over a prolonged period of time, the volatility and range of movement tend to be greater. With the five-day chart below, the market ranged from 4600 up to 4750, which equates to a potential profit/loss of $7500 ($50 x 150 points) per contract.
Stop-loss limits
This is where stop-loss limits come into play, with many traders using the four ticks (loss $50 per contract) or six ticks (loss $75 per contract) approach. In theory, the idea is simple, run your winners and cut your losers to maintain your investment funds. If you decide to trade futures contracts, in theory, you should be able to limit losses while maximizing your profits within your chosen timescale.
The cost of trading futures contracts
It will depend upon the type of trades you undertake as to the level of margin and deposit required to open and maintain investment positions. However, there are additional charges per contract to take into account.
Commission per side
This term relates to the charge per contract when buying or selling futures contracts. For example, some brokers may offer a sliding scale with commissions per contract falling the more contracts you trade. This could range from as little as $0.10 to $0.50 per contract and above, depending on the number of contracts you trade.
Round turn commission
Round turn commission is a one-off commission that will take into account both the opening and closing of a futures contract. Again, for relatively large traders, the round turn commission per contract can be extremely competitive.
Other costs to consider
As a means of creating a competitive edge, many brokers will initially ignore other fees such as regulatory fees, transaction fees, and exchange fees when quoting trading charges. It is important that you factor these into your calculations as they can add up for regular traders.
Adding Up The Costs
In theory, you could open a margin account at a futures broker with a deposit of as little as $1,500. However, getting started with such a small amount may not be viable in practice. Here are some examples of the current intraday margins on a few of the most popular assets:
- E-Mini S&P 500 Futures: $500
- E-Mini Dow Jones Futures: $500
- COMEX 100 Gold Futures: $1,000
- Crude Oil Futures: $2,000
Even if you were to only trade index futures, you would still be risking 30-60% of your total balance on every single trade. That’s not even accounting for commissions. Savvy traders usually don’t recommend risking more than 10%, 5%, or in some cases even 2% of your total balance on one trade. A trader would need a starting account of at least $5,000 to $10,000 to match those trade sizes, just to trade with intraday margins. While that may seem high, there is an alternative.
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