Futures provide a fast and cost-effective way for you to trade across six different asset classes around the clock. Futures give you the flexibility to respond to market conditions and economic events that may arise outside equity markets trading hours. Futures offer the opportunity to diversify your portfolio.
Contract Specifications A futures contract is an agreement to buy or sell a financial instrument such as the E-mini S&P 500 (/ES) or a physical commodity such as crude oil (/CL), for a future delivery on a regulated commodity futures exchange. There are five key components to futures contracts.
- Contract size
- A futures contract has a standardized size that does not change.
For example, one contract of crude oil (/CL) represents 1,000 barrels of crude oil. If you are trading Gold futures (/GC,) the contract size represents 100 troy ounces of gold. The E-Mini S&P 500 futures (/ES) represent $50 times the price of the S&P 500 Index.
- Contract value
- Also known as a contract’s notional value, is calculated by multiplying the size of the contract by the current price.
For example, the E-mini S&P 500 contract is $50 times the price of the index. If the index is trading at 2,250, the value of one E-mini S&P 500 contract would be $112,500.
- Tick size
- A “tick” is the minimum price increment a particular contract can fluctuate. Tick sizes and values vary from contract to contract.
For example, a tick in /ES is 0.25 per point. Since /ES represents $50 times the S&P 500 Index, every 0.25 move in /ES equals $12.50.
- Trading hours
- Futures markets are open 23-1/2 hours per day 5-1/2 days a week however each product has its own unique trading hours. Trading Hours can be found HERE.
- Delivery
- Contracts are either financially settled or physically settled.
i. Financially settled futures contracts expire directly into cash at expiration. /ES is an example of a financially settled product.
ii. Physically settled futures contracts expire directly into the physical commodity. /CL is an example of a physically settled product and at expiration, anyone long a contract in /CL will receive 1,000 barrels of crude oil. However, don’t be worried about 1,000 barrels of crude oil showing up at your front door! TD Ameritrade Futures & Forex LLC (TDAFF) doesn’t allow clients to take physical delivery of a futures contract.
How do you read a futures contract symbol?
Futures symbology differs from other asset classes and since there are specific expiration dates, you need to include the expiration date within the product symbol to display the product.
Margin Requirements
- Just like equities, the margin requirement for futures is the amount of funds required by TDAFF to enter into a position. In the futures market, the general term for margin is called initial margin requirement and refers to the minimum amount of funds required to enter into a futures contract.
- The initial margin requirement represents a fraction of the total value of the futures contract, often 3% to 12%, which makes futures a leveraged trading vehicle. Therefore, futures contracts represent a large contract value that can be controlled with a relatively small amount of capital. This provides you with an alternative strategy to maximize your capital efficiency. To find out more about maximizing your capital efficiency with futures, see this video.
- The initial margin to purchase or sell a Futures contract can be seen on the Futures tab in the thinkorswim trading platform and will be deducted from your buying power in real-time before the order is sent to the market.
***margin requirements were correct as of January 3, 2017 and are subject to change without notice***
How can you get started?
Test drive your futures trading theories before putting any money on the line. Get access to a virtual account loaded with $100,000 of play money and see how you do through our paperMoney platform.
- Select a futures product
- Have a trading plan
- Determine the right size for your account
- Define your risk parameters
- Stick to your plan