Learn about Futures - The Speculator
- What is a Future?
- Elements of a Futures Contract
- Participants in the Futures Market
- The Hedger
- The Speculator
Welcome to the fifth article in the Futures Education Series. This article will take a closer look at the role of the speculator in the Futures markets.
Speculators seek to take profit from the price movements in a particular market. They speculate about how they fill a price will perform over a given period of time and then take an investment position that will allow them to benefit from that movement if it occurs.
Mr. Olsen is a speculator and believes that the U.S. Stock market is going to rally and would like to take advantage of the upward move. Since he thinks that the S&P mini contracts are a good reflection of the Stock market, he decides to buy an S&P E-mini future. Mr. Olsen selects the contract in his SaxoTrader (ESM6) where the market is currently trading at 1284,75 / 1285,00 (Bid / Offer).
Mr. Olsen knows that the margin for a S&P E-mini is USD 4,000 per contract. He has USD 23,000 cash in his account so that would be sufficient for 5 contracts (5 x USD 4,000 = USD 20,000).
Mr. Olsen places an order to buy 5 contracts at 1285,00 and receives his Order and Trade confirmation tickets.
Two hours later the market rallies to 1302,25/1302,50 and he decides to sell his 5 contracts back, thus closing his position.
The Balance Sheet
The results of futures trades are outlined in your Account Summary, but let's take a closer look at the profit and loss calculations for Mr. Olsen's trade:
Mr. Olsen bought 5 S&P E-mini contracts at 1285.00 and sold 5 contracts at 1302.25.
|1302.25 - 1285.00||17.25 points|
|1 point||USD 50|
|17.25 x USD 50 x 5 contracts||USD 4,312.50 + profit (and margin refunded to the account)|
Role of Speculating in the Futures Market
While historically speaking investors entered the Futures markets looking for ways to protect their tangible assets from adverse market conditions, i.e. hedging, more and more traders enter the futures markets to profit from the rise and fall in market prices, i.e. speculating. This development is aided by the rise in popularity of online trading, thus making it easier for speculators to participate in the futures markets. Speculators now play a valuable role in the futures market, ensuring the continual liquidity necessary for the Futures market to function effectively.