Calculating Profit & Loss in Futures Trading | Quantra Course
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Welcome to this video on Calculating Profit & Loss in Futures Trading. In this video, you will learn to calculate your profit and loss on a futures position.
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This works very differently from other asset classes and before you even start thinking about your strategies, you need to have a complete understanding of this logic. The good news is that calculating your profit and loss on futures positions is really quite simple, as opposed to other types of derivatives.
The key thing that you absolutely have to know about the futures market you trade is something called the point value. This is sometimes referred to as contract size or multiplier.
Every futures contract represents a certain amount of the underlying asset. The Comex gold contract represents 100 ounces of gold, Nymex crude oil is 1,000 barrels of oil, corn is 5,000 bushels and natural gas 10,000 British thermal units. Sounds confusing?
Well, you do not actually have to know what a bushel or a British thermal unit is. The units in question really do not matter to you as a speculator, but the numbers themselves do. The number tells you how many dollars you will gain or lose on a contract if it moves by one dollar.
Imagine that you buy one contract of December 2021 crude oil at 50 dollars. Two hours after you bought it, it is trading at 51 dollars. Now you have an unrealised gain, or open PnL of 1000 dollars.
In futures trading, as in all trading and finance, it is important to understand that an unrealised profit or loss is no less real than if it is realised. If you bought 5 contracts of gold at 1481.5 and two days later find that the price is 1479.0, you now have a very real loss of 1250 dollars.
The notion that this is not a real loss until you close position is not only false and contrary to financial principles, but also a dangerous delusion.
While this concept of valuing assets and liabilities at the last known price, known as mark-to-market, is valid across the entire field of finance, it becomes a little more tangible when it comes
to futures. With these particular instruments, the cash settlement is done every day, at the close of trading.
Consider a trader who takes a short position in the S&P 500 June 2021 e-mini future, selling to open 1 contract at 3,900 dollars. The point value of this contract is 50, and if you remember, that means that for every dollar the market moves, you gain or lose 50 dollars.
On the same day that the trader opened this position, the end of day closing price was 3,890. That means that the price of this futures contract changed by 10 dollars.
We know that the point value for this market is 50, so the change in value was then 500. The price went down, and the trader was short, so he now has an unrealised gain of 500 dollars.
But here’s what’s really important. At the end of the day, this amount, 500 dollars, will be added to his account. It will be transferred to him automatically and show up in the account statement.
The same trader holds onto the position for another day and at the end of the second day the settlement price was 3,950. What happens now in his account?
The change in his open PnL changed and needs to be settled in cash. What matters here is the change in value since the last mark-to-market settlement, which was a day earlier. The change in price was 3890 - 3950, which makes 60 dollars. Multiply this by 50 and you arrive at 3000 dollars.
This amount will now be automatically deducted from his cash account. This procedure of daily mark-to-market settlements mitigates risks for all involved parties.
Rather than waiting for contracts to be closed or for the last trading day, this daily settlement makes sure that all parties can meet their obligations. That is all for this video.
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