How Futures Contracts Work

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Our algorithms trade futures contracts for many reasons. There are two major reasons that need to be known, however.

First, futures can be traded for very little to no money at all. For example, you can put on a 10 Year Note Contract for less than $1,500. Trading 100 shares of $TLT (the ETF equivalent) would cost you (100 * $125) or $12,500. You can day trade the eMini S&P500 futures contract for 25% of initial margin at some brokers, which would currently be $1,265. Trading 100 shares of $SPY (the ETF equivalent) would cost you (100 * $208) $20,800.

Second, futures have significant tax benefits. The first 60% of your futures gains are taxed as long-term capital gains (even if they’re not long-term). So let’s say you made $100,000 last year trading futures contracts. $60,000 would be taxed at 15% instead of 35% short-term capital gains rate. Instead of paying the government $21,000 on the first 60% of your gains you would only pay $9,000 or get to keep $12,000 MORE of your gains than if you made $100,000 trading stocks. Now imagine how much you save when you start making millions per year!

There are many other benefits to futures contracts, such as small amount to open an account, no pattern-day trade rule, best liquidity, markets open nearly around the clock so no gaps! The list goes on, but you get the point.

So how does a futures contract work? Every contract has its own minimum tick value and point value. Let us take the most popular contract in the world and do an example. The eMini S&P500 futures contract has a minimum tick value of $12.50 and has 4 ticks in a point or said otherwise has a point value of $50/point.  So if you bought the contract at 2,001.00 and sold it at 2,002.00 you would have made 1 point or (1 x 50) $50.00. So if you would have bought it at 2,001.50 and sold it at 2,003.75 you would have made 2.25 points or (2.25*50) $112.50.

Futures are so simple – please don’t hesitate to contact me if you’re still confused or need some clarification. I’m a trader not a writer! I won’t be offended.

Thanks for taking the time,

David – Founder/Head of Strategy Development



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