Maximizing Capital Efficiency With Futures Trading Leverage


This article on Futures Trading Leverage is the opinion of Optimus Futures.

Futures Trading Leverage

What do equity options, real estate, and futures have in common?

They all harness the power of leverage.

For example, in some cases, all you need is 20% for a down payment to get some property.

Here’s how it works with futures. One gold futures contract leverages 100 troy ounces. If gold futures are trading at $1800, then one gold futures contract leverages you $180,000 worth of gold.

At a smaller scale, micro gold futures contracts control 10 troy ounces, or $18,000 worth of gold using the scenario above.

Yet, you only need to put down a fraction of that total value in order to initiate the trade.

When trading futures, your “down payment” is called the exchange margin. Currently, the exchange margin for one gold futures contract is about $7500. We rounded for illustration purposes. Please note that exchange margins and day trading margins are subject to change at any time.

You see, for a $180,000 piece of property, you need $36,000 for a down payment. But in the futures market, you can leverage an asset valued at $180,000 for less than $10,000.

Every dollar in the gold futures market is equal to $100. In other words, if a trader is long one gold futures contract, and it rises $30 that day, it would be a gain of $3,000. At a maintenance margin of $7500, you can see how trading futures is an excellent way of maximizing capital efficiency.

And similarly, every dollar in the micro gold futures market equals $10. In other words, if a trader is long one micro gold futures contract, and it rises $30 that day, it would be a gain of $300.

Now let’s explore how futures maximize capital efficiency, how to use leverage correctly, why futures can be a good choice, and some trading tactics and opportunities available.

Maximizing Capital Efficiency

If you wanted to buy the SPY ETF at 375, it would cost $18,750 for 50 shares.

However, if you bought one E-mini S&P 500 futures contract, the exchange margin is currently $11,500. Every point move in ES futures is $50. If ES futures are trading at 3800, one futures contract has a notional value of ($50 x 3800) of $190,000.

The futures contract offers higher leverage and may require less capital exposure to initiate the transaction.

While futures options can offer greater leverage than trading futures, they are more complicated to trade. For example, while the main concern for trading futures is price action, price action is just one concern option traders have. In addition, they must monitor the implied volatility, time decay, and strike price, just to name a few.

An example is Buying a 4000 December 2022 Call on the ES contract.

Depending on the volatility of the market, time decay can eat away at the value of an option. If the underlying market is stable and far from the strike price, then time decay will take its toll on an option’s value. However, if volatility is high in the market, options will be profitable because they have a higher chance of being “in the money” than out of it.

Since futures options trades are more complex than simply betting on the direction of the market, you must consider several variables other than price movement. Note: even if your trade is correct and you theoretically deserve a payout, your profit may be smaller due to liquidity issues in the market.

Let’s use a single stock as an example:

In many cases, stock houses can provide up to 4X leverage, so if you put $5,000 into a fund, you could be provided with $20,000. If the underlying stock moves 1%, your return is $200 (1% X 20,000).

$200/$5000 (Initial Deposit) =4%.

If the index rises 1% from 4000 to 4040, that translates into $5X40=$200 on MES, but if you use MES margins, your return is about 20%.

While leverage can work to your advantage, it can also be used against you. Any underlying asset with a higher return always assumes a higher level of risk.

Utilizing Futures Trading Leverage Correctly

Leverage works in two ways. And while it’s exciting when it works in your favor, it can be extremely painful when it doesn’t.

Futures contracts are highly leveraged instruments. That’s why you should only trade with money you can afford to lose.

While that might sound obvious to most, some need to hear it. Of course, that’s not all. Traders should think about volatility and risk management before making their trading decisions.

To gauge volatility, you can look at the underlying futures’ historical volatility or a trading indicator like the average true range. You want to do this because you want to make sure you understand the potential risk associated with normal and outlier moves.

For example, some traders can be in the right trade at the right time but still lose because they set too tight stops.

Generally, you want to reduce your position size when volatility is elevated. Trading smaller allows you to absorb the swings better. That’s why micro futures can be a good choice, giving traders the same capital efficiency with more flexibility.

Disclaimer: the placement of contingent orders such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts since market conditions may make it impossible to execute such orders

Are Trading Futures Riskier Than Equities?

Yes, due to the leverage involved, you could potentially lose more than your initial investment. Yet, stocks have their own unique risk.

Equities are likely to move on rumors and social buzz. A company is a lot more complicated than saying what drives the price of crude oil.

This is known as company-specific risk, which is widely different when aggregated across the components of an index like the S&P 500.

Of course, if you’re an investor, there are certain things you can do with stocks that you can’t do with futures. And that’s buy-and-hold investing.

But if your goal is to maximize your capital, trading futures is a viable option.

Trading equities doesn’t offer nearly as much leverage as trading futures. Stock trading is not a way of maximizing capital efficiency.

Futures trading has better risk vs. reward opportunities than stocks. That is if you can respect the leverage and have a proper risk management plan.

Getting Tactical With Futures

Trading futures is more capital efficient than real estate or stock trading. And while futures trading is risky, there are strategies that you can incorporate to mitigate that risk.

For example, a trader who is long a futures contract can sell a call against their long position. This allows the trader to maintain a long bias while collecting some income.

If the trader was even more conservative, they may take the proceeds from the call sale and buy puts to reduce their downside risk.

If the trader wanted to keep their upside but still wanted to mitigate their downside, they would buy a put against their long futures positions.

All of this is possible because futures trading maximizes capital efficiency.

Opportunities With Futures Trading

Some people may look at the ES futures contract, see an exchange margin of $11,500, and say that it’s too expensive for their small account.

Of course, not everyone starts trading a 5, 6, or even 7-figure account. And the exchange knows that too.

That’s why they created micro-contracts.  While one ES futures contract has a margin of $11,500, the micro ES futures contract has an exchange margin of $1,150. 

Bottom Line

One tool that has helped real estate investors make fortunes over the years is leverage. And while the leverage real estate offers is impressive, it’s nothing compared to the leverage futures traders receive.

Of course, leverage works both ways. If you are overleveraged, then you’ll be wiped out quickly.

Whether your interests are in crude oil, bitcoin, or gold, futures trading offers one of the best ways to maximize capital efficiency.

Optimus Futures is geared towards both new and experienced traders.

We offer an array of products for trading, including micro futures across multiple categories.

Plus, you can open a free demo account and access our flagship Optimus Flow platform, with all indicators and analytical tools preloaded as well as real-time news and an automated trading journal.

Get started trading futures with as little as $100 and set up your account within hours.

Click here to get started. 

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The high degree of leverage that is often obtainable in commodity interest trading can work against you as well as for you. You could lsoe more than your initial investment. 

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