$7 Million Per Point in the S&P Futures

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.

PS – here’s an old CME paper comparing e-mini S&P futures to S&P 500 tracking ETFs.

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  1. StocktraderBMP says

    Why – what event on the horizon requires the need for the CME to adjust the maximum position limits?
    Inevitable and massive hikes in interest rates perhaps!!
    Is this the only way for the large institutions that command this sort of fire power to maintain profitability and therefore an interest in the S&P index – cynically creating volatility in the otherwise impending bog that will be the market thanks to the Fed once QE easing is in full swing. And what if QE is maintained – confirmation that all is not as well as reported and down is the only way out !!
    Is this a cynical bid by the exchange to keep the big money in the game and the ES the trading baby of the world?

    Warning – cheap money cost Europe dear – mostly because the financial institutions were encouraged to take on greater risk than was prudent – see any parallels yet ?

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