November 15, 2012 – Investment Returns Versus Number of Trades to Becoming a Millionaire: So you want to be a millionaire – welcome to the club. Many investors gravitate to commodities for this very reason. Since futures only require a small good faith deposit called a “Margin,” which is worth roughly 5% to 10% of the total value of that contract, this makes these investment vehicles highly leveraged.
For example, one soybean futures contract is 5,000 bushels. With soybeans currently priced at roughly $15/bushel, one contract is worth $75,000 (5,000/bu. Times $15 = $75K). However, the margin for soybeans is currently about $5,000. That means soybean futures are leveraged at 6.7% ($5K divided by $75K = 6.667%).
This is a good news bad news story. The good news is that if you wagered correctly your profits are multiplied by this leverage. Therefore, if I buy one soybean contract and get 30 cents worth of profit, that turns out to be $1,500 (30 cents times 5,000/bu. = $1,500) for one contract. If I buy 10 contracts it’s $15,000. The bad news is that the leverage work against the investor when he/she loses.
Back to our “Millionaires” chart. The blue numbers on the “Y” axis are number of trades. The gold numbers on the “X” axis are the amount the investor won in trading profits. For example, if the investor won $50 and parlayed that 16 times, they would have $1.6M – presto millionaire. Of course that would mean 16 trades in a row with no losers, which is pretty hard to do. However, this chart reflects the tremendous earning power that is the futures game.
Continuing on with our example, the bar on the right is labeled $50K. That means that if the trader won $50,000 and doubled that on every trade, they would be a millionaire in 6 trades (actually $1.6M).
However, today’s post is about The S&P 500 E-Mini (ES) and Gold (GC) markets. The current margin on ES is $4,375, while GC is $9,113. Since most commodities are very volatile, almost all trade are executed in the options on futures market. Therefore, traders do not need to put up margin funding. They need to fund the options premium, which can run as little as $150 for out-of-the-money calls or puts.
If we do see a significant drop in ES and a rise in GC, then becoming a millionaire on this one trade, is possible. If you believe you will receive. Plan your trades and trade your plan. Losers walk and winners talk. See you in the Caribbean. More details tomorrow.
The Master of Disaster