Trading Futures for a Brighter Future

Over 12 billion futures contracts are traded annually in over 80 Exchanges around the world.What does the future hold for investors who are keen to trade futures? Let’s explore.

What is a futures contract?

A futures contract is a financial instrument (stock index, commodities, currency, securities, & interest rates) traded in a Futures Exchange. It is an agreement to buy or sell a fixed amount of an asset at a predetermined price and date.In this article, we will look at examples taken from Bursa Malaysia Derivatives Bhd.

Why trade futures?

  • Leverage* makes trading in futures attractive. It involves a low capital for targeted high returns. To ’hold’ a futures contract, one has to put up a small fraction of the value of the contract (usually around 5-10%) as ’margin’.
  • Low Brokerage – Commission charged is not based on value but on contract
  • Profit earned is tax-free
  • 2-way market – Profits are possible whether in a market that going up (bullish) or going down (bearish).

*Leverage:
One of the important concepts of trading futures is ’leverage’. The definition of ’leverage’ in this instance is: the use of various financial instruments, such as margin, to increase the potential return of an investment. Investopedia.com further explains: Leverage can be created through options, futures, margin and other financial instruments. For example, say you have $1,000 to invest. This amount could be invested in 10 shares of Microsoft stock, but to increase leverage, you could invest the $1,000 in five options contracts. You would then control 500 shares instead of just 10. (Read more on Investopedia)

To appreciate the potential of trading in futures, let’s consider the following example/scenario on FTSE Bursa Malaysia KLCI Futures (FKLI):Bullish Scenario:

  • Thinks market will rise, but do not know which stock to buy
  • Thinks market will rise, but have limited money

Bearish Scenario:

  • Stuck with stocks, and thinks market will fall further
  • Major news/disaster but unable /difficult to sell stocks

Let’s assume a bullish scenario:

The KLCI is at 1515 on 2 Feb.Assuming investor A is of the opinion that the KLCI will go up, he buys 1 contract of FKLI Feb at 1515. A week later, the FKLI Feb does go up, by 35 points, to 1550. Investor A decides to sell his FKLI Feb at this point on 9 Feb.
Let’s see how much investor A made:

31 Jan Deposit margin RM4000
02 Feb Buy 1 lot FKLI Feb at 1515
09 Feb Sell 1 lot FKLI Feb at 1550
35pts** x RM50 = RM1750
Less commission RM50
Profit RM1700
Cash balance RM5700

** 1pt = RM50

Let’s assume a bearish scenario.

The KLCI is at 1580.5 on 13 May.Assuming investor A now thinks that the KLCI will go down, he sells 1 lot FKLI May at 1580.5. Five days later, the FKLI May drops 50 points to 1530.5. Investor A immediately buys 1 lot FKLI May at this point on 17 May.
Let’s see how much investor A made:

13 May Cash Balance RM4000
13 May Sell 1 contract May at 1580.5
17 May Buy 1 contract May at 1530.5
50pts** x RM50 = RM2500
Less commission RM50
Profit RM2450
Cash balance RM6450

** 1pt = RM50

The forecasting of market movement is based on:

  • Fundamental analysis
  • Technical analysis and indicators
  • Market sentiment
That’s the potential of trading in futures. However, just as money can be easily made by trading futures, money can be just as easily lost if one does not practise caution.That’s why leverage is sometimes known as a doubled-edged sword. However, with proper analysis, risk management plan, trading plan, disciplined execution, futures trading can be highly profitable by employing leverage.OSK188 offers convenient and easy access to futures markets. Click herefor more information.Speak to our Futures Broker’s Representative to find out more.