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Okay, I'll bite. Why is having a naked futures contract in the S&P500 (which costs around $100,000 for the e-mini) any more risky than owning $100,000 of stocks

Okay, I'll bite. Why is having a naked futures contract in the S&P500 (which costs around $100,000 for the e-mini) any more risky than owning $100,000 of stocks? [0] http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_contract_specifications.html http://www.cmegroup.com/trading/equity-index/us-index/e-mini...

stygiansonic 12y ago
I'm not an expert (this is not my industry, so please correct me if I'm wrong) but I imagine it has to do something with the initial cost of entering the position. With a futures position you may end up losing more than you put in (your initial margin) but assuming you went long a stock without using margin, the most you could lose would be your initial investment. But perhaps it's not a fair comparison. I would say that buying 100K of stocks on margin is similar in risk to having a futures contract with a similar value, all other things equal. Also, with forwards (not exchange traded) there would be counterparty risk if no clearing house was involved.
- yiransheng 12y ago
  Also, if you are comfortable taking that amount of risk, you'd be better off to participate in the future market than buying large chunks of stocks on margin, at least you have extra liquidity.
mikkom 12y ago
I would claim it's actually less risky because it's more diversified if we are talking about volatility but owning 100k in stocks would also get you dividends that futures won't. (Also you can get higher margins much more easier with futures than with stocks and high margin of course means more volatility (=risk) )
- throwaway283719 12y ago
  > I would claim it's actually less risky because it's more diversified Yes, I agree (but then again, you could just replicate the index in your stock portfolio...) > owning 100k in stocks would also get you dividends that futures won't. Sure, and that's why the futures will generally appreciate faster than the stocks will - it makes up for the fact that you don't get dividends. Similarly, the fact that you only need to use a small part of your capital to hold futures means that you can earn interest on the rest, which provides a pull in the opposite direction, slowing down the rate of appreciation.
pitnips 12y ago
Ah, good question. I should have been more clear. I meant futures/forwards on commodities and currencies, not stocks. Most investors don't use futures/forwards in the stock market unless they are hedging something. They just don't add value (if naked positions) compared to buying outright. Hopefully my comparison to poker is easier to see now.
dalore 12y ago
Well when you own $100,000 of stock, that's the most you can lose. But vary rarely will ever go down to $0. With futures contracts and derivatives you can potentially lose infinity dollars.
- mikkom 12y ago
  That depends on the leverage you use. If you have 100k and use it to own one 100k contract, it cannot go below zero.

stygiansonic 12y ago

I'm not an expert (this is not my industry, so please correct me if I'm wrong) but I imagine it has to do something with the initial cost of entering the position. With a futures position you may end up losing more than you put in (your initial margin) but assuming you went long a stock without using margin, the most you could lose would be your initial investment. But perhaps it's not a fair comparison. I would say that buying 100K of stocks on margin is similar in risk to having a futures contract with a similar value, all other things equal. Also, with forwards (not exchange traded) there would be counterparty risk if no clearing house was involved.

yiransheng 12y ago
Also, if you are comfortable taking that amount of risk, you'd be better off to participate in the future market than buying large chunks of stocks on margin, at least you have extra liquidity.

mikkom 12y ago

I would claim it's actually less risky because it's more diversified if we are talking about volatility but owning 100k in stocks would also get you dividends that futures won't. (Also you can get higher margins much more easier with futures than with stocks and high margin of course means more volatility (=risk) )

throwaway283719 12y ago
> I would claim it's actually less risky because it's more diversified Yes, I agree (but then again, you could just replicate the index in your stock portfolio...) > owning 100k in stocks would also get you dividends that futures won't. Sure, and that's why the futures will generally appreciate faster than the stocks will - it makes up for the fact that you don't get dividends. Similarly, the fact that you only need to use a small part of your capital to hold futures means that you can earn interest on the rest, which provides a pull in the opposite direction, slowing down the rate of appreciation.

pitnips 12y ago

Ah, good question. I should have been more clear. I meant futures/forwards on commodities and currencies, not stocks. Most investors don't use futures/forwards in the stock market unless they are hedging something. They just don't add value (if naked positions) compared to buying outright. Hopefully my comparison to poker is easier to see now.

dalore 12y ago

Well when you own $100,000 of stock, that's the most you can lose. But vary rarely will ever go down to $0. With futures contracts and derivatives you can potentially lose infinity dollars.

mikkom 12y ago
That depends on the leverage you use. If you have 100k and use it to own one 100k contract, it cannot go below zero.