Leverage for futures contract

margin in futures accounts is typically much lower as a percentage of the value of the assets covered by the futures contract. why does that mean leverage for futures accounts are much higher?

The lower the margin required, the more amplified the gains and losses will be. That is the classic definition of leverage. A couple of ticks in a Euro Dollar F can wipe you out.

At $25/tick, if that wipes you out you probably shouldn’t be trading futures contracts.

firehydrant1 Wrote: ------------------------------------------------------- > > why does that mean leverage for futures accounts > are much higher? Leverage is higher compared to what? But in general, this just means you can take bigger positions for a given amount of margin.

JoeyDVivre Wrote: ------------------------------------------------------- > At $25/tick, if that wipes you out you probably > shouldn’t be trading futures contracts. You have no idea how many retail “traders” open a futures account with 1K and try to get rich.

That doesn’t mean they should be doing it.

ohai Wrote: ------------------------------------------------------- > That doesn’t mean they should be doing it. Exactly. But still they do it. If someone wants to gamble Futures market is the last place they should be going, they won’t even know what hit them. The folklore is full of master Futures traders who started with 3K, 4K and struck it rich (losing the initial capital many times over though). Market Wizards 1 & 2 is full of those kind of folks. Coming back to leverage, as you said, this means you will be controlling 100K worth of underlying with 10K deposit. FED Reserve wont let you do that with stocks.

  1. I would say that you can get any sort of leverage you want on stocks as long as your prime broker lets you do it. Those laws only apply to non-institutional investors (essentially, since there are so many ways around them) 2) “Leverage” doesn’t really make sense in futures contracts. Futures contracts are about trading risk, so for example a futures portfolio that is loaded with natural gas futures might have fairly small notional size but huge vol. Eurodollars are at the other end of the spectrum (especially if you think the notional size of the contract is $1M or even $250K). I would call the above definition of leverage something more like volatility. You have no idea how many people have asked me the question about “what is the leverage on your futures portfolio?” and I said “I dunno” or “500-1” or “the daily 95% VaR is currently 2%” and they thought I was crazy or stupid or both.

Do they use leverage with futures in the CFAI books? Took the exam in June but really don’t remember… You should be thinking about VaR or total exposure imo. You can read up more on futures if you want, in a nutshell what they want to say is that you can enter huge positions with a (relatively) small amount of money deposited upfront. http://www.investopedia.com/university/futures/ http://www.investopedia.com/ask/answers/06/forexleverage.asp http://www.investopedia.com/articles/optioninvestor/07/volatility_leverage.asp