How to Speculate With Futures

February 29, 2024 Advanced
Learn about speculating with futures trading and how to use thinkorswim® to trade futures.

A futures contract—an agreement to buy or sell something at a specific price at some point in the future—lets traders speculate on the direction of a range of products, from the S&P 500® index (SPX) to commodities like gold or corn. Futures can help traders manage risks and diversify their portfolios.

For example, the price a consumer paid for a box of Twinkies could depend on corn (/ZC) or wheat futures (/ZW). Gasoline prices may be tied to crude oil futures (/CL). The price of a stock being traded could also be related to price swings in S&P 500 futures.

Futures trading involves substantial risk and is not appropriate for everyone. However, what happens in the futures markets can spill over into the equity markets, so it can be helpful for non-futures traders to know what's happening with the futures market, even if they aren't actively trading any futures. Before the stock market opens each day, futures are already trading. Equity index futures activity can indicate which way the markets might open.

Speculating using equity futures

A trader can speculate using either the E-mini S&P 500 (/ES) futures or the Micro E-mini S&P 500 (/MES) contract, both of  which are based on the underlying S&P 500 index. /ES delivers the cash equivalent of 50 times the value of the SPX, while /MES delivers the cash equivalent of five times the value of the SPX. So, if /MES is valued at 3,386, the notional value of a contract would be $16,930. Which futures contract a trader uses depends on the size of their trading account.

Before buying an /MES contract, a trader may need to provide some cash to cover the initial margin requirement. It's possible to find the initial margin requirements in the Futures Trader subtab under the main Trade tab. For example, if the initial margin is $1,320, that's how much is required to initiate a position that could be worth $16,930. That's called leverage. And leverage can be a double-edged sword.

If the SPX rises by 50 points, that could potentially be a $250 gain. A 50-point drop could mean a $250 loss. Note: An account may need more cash to maintain the position. This is known as maintenance margin, and the amount needed for maintenance margin can be found on the CME Group website. Typically, for /MES, a trader might expect to keep at least $1,200 in their account. If the account value falls below the maintenance margin, it'll trigger a margin call, and the trader must add cash to the account quickly. Concerns about potentially magnified losses and margin calls are among the considerations when deciding to use leverage.

It's possible to buy an exchange-traded fund (ETF)1 or mutual fund that mimics the overall performance of stocks on the SPX. However, when trading /MES or /ES, the trader isn't actually buying securities. Instead, they're using leverage to speculate on the stock market. In the event that a trader's speculations are correct, they can potentially make better returns while using less cash. On the other hand, if the trader's speculations are wrong, the leverage involved can potentially lead to significant losses.

Connecting futures to everyday products

Beyond equity indexes, there are futures on physical commodities and financial instruments. Nearly everything consumers buy is associated with price-changing factors—weather, politics, supply, demand, and transportation. With futures, traders can take these factors into account when creating a trading strategy.

For example, a consumer probably won't find significant day-to-day price movements in their weekly grocery bill. Food price fluctuations are often dependent on agricultural futures. Farmers often use futures to protect their commodities from price changes. Gas prices usually fluctuate more often, in part because it's a harder product to produce. Oil must be discovered, extracted, refined, and distributed before it goes to the pump. On the other hand, financial futures are more abstract than physical commodities. Foreign currency markets, interest rate futures, and equity indices aren't tangible products, but they are still products that can be speculated on by traders.

Before markets open, traders might observe equity futures. Often index futures that represent the Dow Jones Industrial Average® or SPX react first, potentially providing insight into how the market might perform during the day or how traders could be interpreting a current news event. The movement in the futures markets might also help a consumer understand how interest rates are likely to move, or maybe what to expect to pay next time they fill up a gas tank.

How to trade futures on thinkorswim

To trade futures on the thinkorswim®, select the Trade tab, then Futures Trader. Several dashboards and charts appear. In the symbol box, enter a symbol, such as /MES for Micro E-mini S&P futures. The quote box displays the bid (sell) and ask (buy) price, as well as the number of contracts at those prices.

With a futures account, it's possible to place trades directly from the dashboard.

Using thinkorswim to trade futures

An example of a futures trading grid with multiple symbols, as well as the ability to buy or sell from the chart.

Source: thinkorswim platform

For illustrative purposes only. Past performance does not guarantee future results.

Futures traders can also use the Active Trader tool found under the Trade tab, as seen in the image below. This tool provides additional information that some futures traders might find useful as they consider their strategy.

Active trader tool

Image demonstrates how to use the Active Trader tool on the thinkorswim Trade tab to display information about multiple futures.

Source: thinkorswim platform

For illustrative purposes only. Past performance does not guarantee future results.

When using Active Trader tools for futures, the following items, as illustrated in the image above, might help provide more direction.

  1. Charting.  Enter a symbol such as /MES to pull up the chart. The platform defaults to the most active contract, but the user can customize the chart as desired.
  2. Analyzing. It's possible to add studies such as moving averages, Fibonacci retracement levels, or the Commodity Channel Index (CCI) to a futures chart to help you consider trade entry and exit points.
  3. Placing orders. From the Control bar on the right, a user can view the order-book depth, time and sales, trade price, and trade size. Prices are displayed vertically, with the prevailing price at the center. It's also possible to see the number of contracts on the bid/ask and volume. Customize the trading buttons at the top to enter buy or sell market orders or limit orders to buy on the bid price or sell on the ask price.

1An exchange-traded fund (ETF) is typically listed on an exchange and can be traded like stock, allowing investors to buy or sell shares aimed at following the collective performance of an entire stock or bond portfolio or an index as a single security. ETFs are subject to risks similar to those of stocks, including short selling and margin account maintenance.

Futures, and Futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure Statement for Futures and Options prior to trading futures products.

Forex trading involves leverage, carries a substantial level of risk and is not suitable for all investors. Please read the NFA Booklet Trading Forex: What Investors Need to Know prior to trading forex products.

Futures and forex accounts are not protected by the Securities Investor Protection Corporation (SIPC). Forex accounts do not receive a preference in any bankruptcy proceeding pursuant to Part 190 of the CFTC's regulations.

Additional CFTC and NFA futures and forex public disclosures for Charles Schwab Futures and Forex LLC can be found here.

Futures, futures options, and forex trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify. Forex accounts are not available to residents of Ohio or Arizona.

Charles Schwab Futures and Forex LLC is a CFTC-registered Futures Commission Merchant and NFA Forex Dealer Member.

Charles Schwab Futures and Forex LLC (NFA Member) and Charles Schwab & Co., Inc. (Member FINRA/SIPC) are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.

The S&P 500® is a product of S&P Dow Jones Indices LLC or its affiliates ("SPDJI") and has been licensed for use by Charles Schwab & Co., Inc. Standard & Poor's® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC ("S&P"); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"). Charles Schwab & Co., Inc is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Schwab does not recommend the use of technical analysis as a sole means of investment research.