The last several days have shown the strength of the movement of futures contracts and their ability to recover from adverse moves. The most closely watched, for sure, is the E-mini S&P 500 Futures which has recovered more than half of its losses since the lows on Monday. Some may call it a short covering rally however the shorts may have suffered enough pain yesterday. Today’s rally may just be the Stock Market rebounding to a more reasonable level.
The E-mini S&P isn’t the only Futures Market to experience substantial movement since the Brexit vote. The biggest mover has been the October Sugar Contract which hit a low on June 24th of 18.41 and traded a high today of 21.20 Cents per Pound. That’s a move of 15% in just a few days. That dwarfs the move in the British Pound and shows that Futures Contracts, including the British Pound, can be extremely volatile.
The Table below shows the movement of various Futures Contracts since the end of the year. The snapshot was taken at 4:00 PM ET on Wednesday. For the most part, it has been the year of the commodity. Listed, in order, are three currency products, the British Pound, the Euro and the Dollar Index, followed by Crude Oil, Cotton, the E-mini S&P and Gold. The following futures contracts round out the list: Copper, Coffee, Natural Gas, the E-mini NASDAQ, Sugar, Silver, Corn, Soybeans and Wheat.
The final column provides the percentage gains and losses since December 31st. Sugar is the clear winner with gains of almost 31%. Silver and Soybeans also have provided returns in excess of 20% this year. Trading futures contracts is highly leveraged, so it is much easier to make or lose a lot of money on your investment than just by trading Stocks. The returns shown are based on changes in price, not the amount one would have made or lost on a margin based transaction in a futures contract. Each contract has a different margin requirement which will change based on the individual market’s level of volatility. Trading futures contracts is not like trading stocks in which you put up either 50% of the value of the investment or the full value of the stock. Futures trading typically provides for leverage of more than ten to one. Be sure you are aware of the risks before trading any of these instruments.
If you are not satisfied with the leverage you get in futures contracts, consider options on futures contracts which provide the ultimate opportunity for leverage. If you have a strong understanding of options trading, be sure that you are analyzing the liquidity percentage of the options contract you are trading. Liquidity is essential to long-term profitability. In addition, analyzing the Implied and Historical Volatility, the Implied Volatility Skew and the appropriate options trading strategy to meet your risk/reward requirements are all necessary to ensure that you are performing your due diligence. The Options Guide PDF provides additional information on options trading.
As you can see from the Table, this has been a stellar year for futures contracts. Of those listed, Sugar, Silver, Soybeans, Gold, Crude Oil and Natural Gas all had price increases well in excess of 10%. It may be late to participate in these markets, but it always makes sense to understand the dynamics of markets, including stocks, futures and options. Our Options Syllabus is an outline of trading information.
Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results.