The CME came out this week with revised (up) position limits for S&P 500 futures and options, Nikkei 225 futures, and Dow Jones U.S. Real Estate futures… but we couldn’t help but do some quick math on the S&P 500 futures and their E-mini S&P counterpart. With the new limits of 28,000 full size S&P 500 contracts, and 5 times that amount, 140,000 E-mini S&P contracts; a single trader/entity can, in theory, control a nominal value of $11.8 Billion in stock exposure (140,000 E-Minis * $50 per point * 1690 index value). And they can do that with just half a billion in their account ($539 Million = exchange margin of $19,250 * 28,000 contracts), for a built in leverage factor of 22 to 1.
At an average move of 16.5 points per day in the S&P 500 futures prices over the past 50 days, our fictitious maxed out position limit trader would stand to make/lose around $115 million per day. And what about a flash crash? Or another Oct. 1987 Black Monday when the S&P lost -20% – we’re talking big losses there in the neighborhood of $2.3 Billion (ouch).
Finally, how big would your typical systematic managed futures program need to be to flirt with these position limits. If we assume a risk per trade of 0.50%, and a risk amount of 3 times the Average True Range, a managed futures program would need to have over $37.8 Billion to trigger 28,000 full size S&P futures or 140,000 contracts in the emini.
I guess 99.9% of the managers out there don’t need to worry about these limits for a very long time… And can stick to their 1, 10, and 100 lot trades.