How to Speculate With Futures
Futures contracts offer traders the opportunity to speculate on price movements in commodities, currencies, indexes, and interest rates without owning the underlying asset.
For example, when trading something like an equity index futures contract—say, on the S&P 500® index (SPX)—the trader isn't actually buying securities. Instead, they're using leverage to speculate on the stock market to potentially capitalize on changes in the futures price and grow their portfolio. 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 even larger than the capital already invested. That's a good reminder that futures trading involves substantial risk and is not appropriate for everyone. Also, keep in mind futures trading requires a margin account.
Futures trade on a wide range of underlying assets and even on single stocks. Investors can get exposure to financial markets in other ways, such as an exchange-traded fund (ETF)1 or mutual fund that seek to mimic the overall performance of the SPX, but these securities lack the built-in leverage futures have.
While traders can also use futures to hedge to potentially reduce risk, this article will focus on speculating and what you need to know about equity index futures, commodity futures, and financial futures before placing speculative trades on the thinkorswim® platform.
A speculative futures trade example
Futures contracts are standardized agreements to buy or sell an asset at a predetermined price on a predetermined date in the future. Those underlying assets can range from equity indexes, like the S&P 500 or Nasdaq-100®, to commodities, like corn or oil, as well as things like currencies or interest rates.
Let's say that a trader wants to speculate on the direction of the U.S. stock market using the Micro E-mini S&P 500 (/MES) contract that is based on the SPX. A trader might do that because they're optimistic about the future of the market because they believe there might be upcoming positive news, such as a solid report on U.S. employment.
If /MES is valued at 5,800, the notional value of a contract would be $29,000. To initiate the trade, the trader would put down the initial margin requirement, which is the good-faith cash deposit that creates the leverage in the trade. In this case, we'll say it's $2,563—so that's all the cash that's required to initiate a position that could be worth $29,000. Remember, though, leverage can be a double-edged sword.
If the trade goes as planned and the SPX rises by 50 points, that could potentially be a $250 gain. However, a 50-point drop could mean a $250 loss. And futures traders need to maintain a minimum balance to stay in the position, or the maintenance margin. 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.
Futures margin, also known as a "performance bond," is the amount of money you are required to deposit in your futures account to establish and maintain a futures position. Futures margin is not a loan. If at any given time the funds in your account drop below the minimum regulatory requirement, or "house" margin requirements, you may be required to immediately deposit additional funds to maintain your position, or your position may be liquidated at a loss. You will be liable for any resulting debits. Charles Schwab Futures and Forex LLC may increase its "house" margin requirements at any time and is not required to provide you with advance notice of such requirement changes or liquidations initiated by Schwab. You are not entitled to an extension of time on any type of margin call.
How to trade futures on thinkorswim
To trade futures on the thinkorswim platform, 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. Select the contract to enter an order.
The Order Entry Tools pop-up box will appear. Here you can select the number of contracts you want, as well as the order type, such as a limit or stop.
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.
Source: thinkorswim platform
For illustrative purposes only. Past performance does not guarantee future results.
When using the Active Trader tab for futures, it can provide traders a bit more direction when making decisions about a futures trade.
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 consider 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 sections of the chart. Customize the trading buttons at the top to enter buy or sell market orders or limit orders.
Bottom Line
The thinkorswim platform’s paperMoney® feature also makes it easy to practice futures trading before a trader risks any actual cash. Whether futures are right for an individual investor or trader typically depends on objectives, resources, and tolerance for risk. For those traders interested in trying to speculate on market sentiment and price trends for specific assets like gold, oil, stocks, and interest rates, futures provide an option with built-in leverage that can increase potential returns or losses.
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.
Interested in trading futures?
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.
Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC).
Read additional CFTC and NFA futures and forex public disclosures for Charles Schwab Futures and Forex LLC.
Futures and futures options trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify.
Charles Schwab Futures and Forex LLC is a CFTC-registered Futures Commission Merchant and NFA Forex Dealer Member and a subsidiary of The Charles Schwab Corporation.
Charles Schwab Futures and Forex LLC (NFA Member) and Charles Schwab & Co., Inc. (Member 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.
ETFs mentioned are for informational purposes and not an offer to buy or sell a particular security.
The paperMoney® software application is provided for educational purposes only, and allows users to engage in simulated trading with hypothetical funds using live market data. Market activity, trade executions, transaction costs, and other elements presented in paperMoney are simulations only. Simulated performance does not ensure success in a live environment.