This is a question that I am often asked by prospective clients. If I could answer this question in a few words or better yet one number, I could save us all some time. Unfortunately, for time’s sake, this is not an option, so let me get right to it!
Trading futures is not like FOREX, Stocks or CFDs. The leverage is not negotiable because it is intrinsic to the commodity value. To make matters more complicated the leverage changes with every tick- or change in value/price. A second important consideration for the equation is margin requirement, also can be instantly adjusted by the exchange, but less frequently. Below are two examples to shed further light, ES and CL are some of the most popular futures markets.
Example #1
ES – S&P 500 Futures. Current Margin: $6930 Current price: 2980. Constant multiplier: 50(price per point)
Total value of contract = current price*multiplier
X= 2980*50 X= $149,000
Leverage = total value of contract / margin requirement.
X= $149,000/$6930 X= 21.5:1 Leverage.
Using $1000-day margin X becomes 149:1
As you can see if the price or the margin changes so does the equation and ultimately leverage.
Example #2
CL– Crude Oil Futures. Current Margin: $4015 Current price: 55.20 Constant multiplier: 1000 (# of barrels /contract)
Total value of contract = current price*multiplier
X= 55.20 *1000 X= $55,200
Leverage = total value of contract / margin requirement.
X= $55,200/$4015 X= 13.75:1 Leverage.
Using $1000-day margin X becomes 55:1
As you can see it is not a simple answer, however there is a reasonable explanation. It is important to also consider volatility along with leverage. A broker at Cannon Trading would be happy to help discuss more in depth and also suggest ways to minimize your leverage using options or smaller contract like Micro Futures.
Good Trading
Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.
This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts here in contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgement in trading.
RISK DISCLOSURE: Past results are not necessarily indicative of future results. The risk of loss in futures trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
