Investing in commodity futures & options gives active traders several benefits over typical equities trading.
Let’s explore the top 7 advantages…
1) Leverage – Position Trading:
When trading futures, a trader can typically control a particular commodity with less than 10% of the overall value of the commodity futures contract. This amount is known as the futures contract’s ‘Margin Requirement.’
For example, the current margin requirement* for one Micro Emini S&P 500 futures contract is $1,265.00. With the current price of one futures contract trading at 4,387.00, the total contract value is $21,935.00 (one full point in the Micro Emini S&P 500 contract is equal to $5.00). Thus, in this example, an investor trading one contract is only required to put up 5.8% ($1,265.00) of the contract’s total value to trade it.
Using Crude Oil as another example, if the current futures contract price is at 63.57, the total value of one futures contract is $63,570.00 (one tick in the Crude Oil contract is equal to $10.00). The current margin requirement for a Crude Oil futures contract is $5,885.00. Thus, an investor trading one contract of this futures contract is only required to put up 9.3% ($5,885.00) of the contract’s total value.
2) Even Greater Leverage – Day Trading:
Day-Traders can trade with even lower margin requirements than those used for position trading. Day-Trading simply means any futures contracts entered in a trading session are liquidated before that day’s market closing time. Any futures contracts held past the market closing time are then considered a position trade.
Day-Trade margins are typically set at 25% of the full position margin requirements. Using the two markets from above, the current Day-Trade margin for a Micro Emini S&P 500 futures contract is $316.25 ($1,265.00 x .25); the Day-Trade margin for one Crude Oil futures contract is $1,471.25 ($5,885.00 x .25). As you can see, Day-Traders can trade with even less capital: 1.4% of the Emini S&P 500’s full contract value; 2.3% of a Crude Oil contract’s full value.
By taking advantage of the benefits of futures trading leverage, you can trade many commodity markets, from S&P 500 & Crude Oil to Gold & Soybeans, with much less capital.
3) Diversity:
Diversify your investment portfolio by adding commodity futures such as Crude Oil, Gold, Soybeans, and more. Additionally, many commodities are un-correlated to the Stock Market, giving your overall investment portfolio a level of risk control.
4) Selling Short:
When trading commodity futures & options, traders can easily enter short positions when they feel prices may be dropping. There is no need to ‘borrow’ contracts from your broker or request short-selling privileges. All of our commodity futures trading accounts are enabled for short selling for both futures and options.
5) Hedging:
Investors can utilize commodity futures & options to hedge their holdings in other assets. For example, An investor who holds physical Gold in their portfolio can sell Gold futures contracts or purchase Gold Put options to protect from falling Gold prices. Likewise, investors who have a portfolio of stocks can sell Dow Jones, S&P 500, or Nasdaq stock index futures or purchase Put options to protect their portfolio from dropping stock prices.
6) Trade 23 Hours / 6 Days:
Many U.S. commodity futures markets are available to trade Sunday through Friday, 5 pm to 4 pm (Chicago/Central time). This enables traders to be better positioned to take advantage of market-changing events in a more timely manner.
7) Simplified Tax Reporting:
For U.S. citizens, the IRS does not require the listing of each trade transaction. Instead, you will only be required to report your overall profit or loss when filing your income tax returns – a huge time saver.
Take the next step and open your own futures trading account today.
If you have any questions regarding this information or opening a futures trading account, please feel free to contact me direclty – I’ll be happy to help you.
Best Wishes,
Joe Fallico
Principal Futures Broker
Series 3 & Series 30 Registered
Phone: 1-847-379-5000 – ext. 101
Toll Free: 1-866-892-2030 – ext. 101
Insignia Futures & Options, Inc.
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