Speculating with Futures

Speculating with futures means profiting from price swings in commodities, stock indices, and financial instruments. Speculators dominate this market, taking on the risks hedgers pay to shed — and losses can exceed your initial investment.

You can speculate using the E-mini S&P 500 (/ES) or the Micro E-mini S&P 500 (/MES) contracts, both based on the S&P 500 index. The /ES contract delivers the cash equivalent of 50 times the SPX value, while the /MES contract delivers five times the SPX value. For instance, if /MES is valued at 6,000, the notional value of a contract would be $30,000. Your choice of contract depends on your trading account size.

Before buying an /MES contract, you need to meet the initial margin requirement. For example, if the initial margin is $2,400, that amount controls a position worth $30,000.

If the SPX rises by 50 points, you could gain $250. A 50-point drop instead means a $250 loss. You also need to maintain the position with additional cash, known as the maintenance margin. If it is $2,200 for /MES, falling below that triggers a margin call, requiring you to add cash quickly. Magnified losses and margin calls are the price of leverage, not an accidental side effect.

Alternatively, you could buy an ETF or mutual fund mimicking the SPX’s performance. However, trading /MES or /ES means you’re not buying securities but using leverage to speculate on the market. If your speculations are correct, you can achieve higher returns with less cash. But if you’re wrong, leverage can lead to significant losses.

Typical futures contracts often come with high prices, making them inconvenient for certain situations. Consider these alternatives:

Micro E-mini Futures

The CME Group’s Micro E-mini contracts are 1/10th the size of the E-minis, at $5 per index point, which makes them the sane entry point for a smaller account. Notional scales with the index — at an S&P 500 level of 6,000 one /MES contract carries $30,000 of exposure — so recompute instead of relying on any figure printed in a book.

Futures-Based ETFs

These ETFs hold futures or swaps so you can reach the exposure through a brokerage account. Be careful which ones you take as examples: ProShares SPXU UltraPro Short S&P500 (SPXU) seeks $-3\times$ the daily return of the S&P 500, and daily-reset leveraged products decay against you in any choppy market regardless of where the index finishes. They are trading instruments with a holding period measured in days, not viable futures substitutes. If you want plain leveraged index exposure, the future itself is cheaper and more transparent than the $-3\times$ ETF.

Options on Futures

Options on futures let you define maximum risk upfront, and they are § 1256 contracts, so they carry the 60/40 treatment of section “Section 1256 Contracts and the 60/40 Regime” — a real advantage over equity options for active trading. Their premiums are not inherently “lower” than stock options; premium scales with the notional and volatility of whatever you are trading. Compare like with like: an option’s premium and a future’s margin are not comparable numbers, since the premium is the most you can lose and the margin is merely a deposit against losses that are not capped at all.