More and more people are looking for a way to get involved in the gold market due to the recent run up it has experienced. Most traders believe that they either have to trade the standard futures contract or purchase an option to get involved. This article will focus on how the E-Micro Gold futures contract can offer an opportunity to get involved with a smaller contract size.
What is an E-Micro Gold Futures Contract?
The E-Micro Gold futures contract offers traders the ability to control 10 ounces of gold as a futures position. This is one-tenth the size of the standard gold contract. If the price of gold is 1880.0, this would mean that you would be controlling $18,800 worth of gold. Each point in the E-Micro Gold contract is either a credit or debit of $10 (i.e. from 1880.0 to 1881.0). The initial margin required to initiate a position is $945.00. This is much less than the $9,450.00 required to initiate a position on the standard gold contract. Thus, the E-Micro Gold contract offers traders a less capital-intensive way to participate in the gold market. Other than its size, the E-Micro Gold futures contract and the standard gold contract are very similar: they have the same tick size and last trading days.
Why Should You Use the E-Micro Gold Futures Contract?
The E-Micro Gold futures contract offers a way to get involved in the gold market without having to tie up a lot of capital in your account. The initial margin requirement is low ($945) and the per point value is only $10. If you have an opinion on the gold market but you don’t want to put up the initial margin required by the standard contract, or have the risk associated with the standard contract, then the E-Micro Gold Futures contract is right for you.
Many traders have also chosen to use the E-Micro Gold futures contract as a hedge for their stock portfolio. If they have a stock portfolio that is valued at $20,000, they might chose to purchase an E-Micro Gold futures contract to protect their stock portfolio since gold and stock indices have been known to move adverse to each other.
Example
John the trader has a futures account with $5,000 in it. He has watched the run in gold and doesn’t think that it is over. Because he does not have enough capital in his account to cover the margin to control the standard contract, John speaks with his broker about a way other than purchasing a standard contract to get involved in the market. John’s broker is savvy enough to point him in the direction of the E-Micro Gold contract. John agrees that this is an appropriate way to use the capital in his account. He decides to purchase two E-Micro Gold futures contracts at a price of 1860.0.
Three days later, the gold market has climbed to a price of 1916.0. John decides that he wants to exit the position because he believes the market might pull back some. He has his broker exit the trade for him at a price of 1916.0.
After exiting the trade, John has made a profit of 56 points, or $560 per contract for a total gain of $1,120. The E-Micro Gold futures contract gave John a way to get involved in the market when he was looking for a way to do so without purchasing the standard contract.
Summary
The E-Micro Gold futures contract offers a great way to get involved in the gold market by requiring a small amount of capital to initiate a position. It’s low per point value offers the ability to withstand some swings that a trader may normally not be able to withstand had they gotten involved with the standard contract size.
Complete Gold Futures Trading Kit
Take your knowledge of the Gold Markets to the next level. Our complete Gold Futures Trading Kit includes four insight guides that will help answer many of your trading questions.
Risk Disclosure
This material is conveyed as a solicitation for entering into a derivatives transaction.
This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.
Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.
