AboutMark Hodge Expertise Questions related to technical analysis, strategies, risk, trading plans, trading psychology and money management. Experience in trading all markets and timeframes with expertise in futures (e-minis, currency futures, commodities, European Markets-DAX) and equity options. Unfortunately I am not allowed to offer any specific trading advice (i.e. should I go long the DAX today).
Experience I have been involved in the industry since 1995 working for Morgan Stanley Dean Witter and American Express Financial Advisors before becoming a full time trader. As Head Education Coach with Rockwell Trading I have coached hundreds of students around the world to achieve their trading goals with simple strategies, a sound trading plan and proper money management for the leveraged markets.
Organizations Currently serving as Rockwell Trading's Head Education Coach www.rockwelltrading.com and moderator for Rockwell's Day Trading Forum at www.rockwelltrading.com/forum
Education/Credentials Formerly licensed as a financial advisor with Series 6, 7, and 63 licenses. B.A. in Organizational Communications with a Business Minor from California State University, Sacramento.
Past/Present Clients I have worked with institutional traders, brokers, proprietary trading firms and private traders but respect their anonymity.
One of the few distinguished World Cup Advisors www.worldcupadvisors.com
Expert: Mark Hodge Date: 6/12/2008 Subject: Leverage of options and futures
Question QUESTION: When using leverage in options or futures, are you allowed to choose how high or how low your leverage is?
ANSWER: Hello Frankie,
I'm sorry for the late response! To answer your question, you cannot select the amount of leverage you want to use like you would in Forex. However, in a sense you CAN choose the amount of leverage you will be using by the number of contracts or options you will be trading.
For example:
1 Call option on IBM would control 100 shares.
If you wanted more leverage, you could buy 10 call options to control 1000 shares (thus controlling your leverage).
With futures:
You can buy 1 E-Mini S&P 500 contract that controls about $70,000 of value in stock and adjust the number of contracts you would be to determine the amount of leverage you feel comfortable using.
Let me know if you have any other questions!
Mark
---------- FOLLOW-UP ----------
QUESTION: With the call option example, I don't see how that controls the leverage. If I buy one call option with a $300 ($3 per share) premium on 100 shares worth $30 each, I am controlling $3,000 with $300(10:1 leverage). If I control 1000 shares at still $30 per share with a still $3 per share premium, I'm now controlling $30,000 with $3,000 which would still be 10:1 leverage. The leverage hasn't changed, only the amount I'm investing. How am I controlling the leverage in this way when the leverage stays the same?
ANSWER: Hello Frankie,
My apologies, YOU are right. In attempt to make my answer simple, I believe I made it misleading.
If you buy a 110 Call option at $3.00, your leverage will stay the same whether you purchase 1 or 10 calls at the 110 strike. Your leverage will change going in the money (lower leverage) or out of the money more leverage) but the decision to purchase a specific strike price should be based on the strategy you want to employ, and not just for the sake of leverage. Since leverage is a double-edged sword, when trading options, more leverage with an Out of the Money option also means lower probability of option value at expiration.
Leverage can be adjusted trading futures, but this is really up to your broker. Let's look at the following examples
Margin on the E-Mini S&P 500 is approximately $4000, but many brokers will offer lower margin requirements for daytrading, giving you the ability to use more leverage.
I hope this helps clarify things. Please let me know if you have follow questions.
Happy Trading!
Mark
---------- FOLLOW-UP ----------
QUESTION: One last question, so a broker can change the leverage for trading futures?
Answer Hi Frankie,
The overnight margin for positions held overnight is standard and set by the exchanges. Day trading margin can vary from broker to broker. Many times margin requirements can be lower if you have a relationship with your broker and they know how you trade. Most of the larger brokerage have set margins to keep things simple, but this is an advantage of going with a broker that specializes in futures.
As an example, I just pulled up margin requirements for a major brokerage and show the following:
E-Mini S&P 500
Initial Margin Requirement: $4500
Maintenance Margin Requirement: $3500
Day Trading Margin Requirement $1125 (trades entered and closed between 9:30 and 4PM ET)
My futures broker allows me to daytrade both markets with Initial and Maintenance set at $500 a contract. So, there is some flexibility with the amount of leverage when it comes to daytrading futures. Often this is based on experience and account size but it never hurts to check. I know of quite a few brokers that offer day trading margin on the minis for as little as $500 a contract to generate new business.
Now remember, lower margin requirements and more leverage does NOT equal success. If a futures broker is requiring $1500 margin to begin, he's probably doing you a favor! I always encourage a day trader to have at least $2000 for every contract traded regardless of the margin their broker offers, then consider more leverage after they have established consistency and proven success. If hedge funds and professional traders can get themselves in trouble by being overleveraged, inspite of PHDs in economics and statistics, then this is surely the downfall of most retail traders too. Start small and grow big!
