In an earlier article I mentioned the Dow Futures and the E mini S&P as well as my hesitations to trade these products during the early stages of their infancy. Looking at what happened last Thursday, I am glad I wrote that article. Let's first revist the Dow contract and then talk about last Thursday.
The Dow contract was introduced the first week of October. It is an open outcry market unlike the E Mini. This future moves at $10 per point, meaning if the Dow climbed 50 points in one day, a long future would have gained $500. The commissions should be the same as any futures contract at your firm. This market also has options, which are easier to get than the E Mini contract. Margin on this futures contract is about $3,300.
Now look at last Thursdays action on Wall Street. Hong Kong's stock market went into a freefall of historic proportions last Thursday, with panic selling set off by rising interest rates and regional instability. The blue-chip Hang Seng index plummeted 1211.47 points, or 10.4% -- its largest one-day point loss in more than seven years -- to reach a 19-month low of 10426.30. The decline affected the US markets, as well as world markets abroad.
Anyone who was long Dow Futures going into Thursday morning got hammered. Why? Even thought the Dow opened down over 100 points, the Dow Futures opened down 3 1/4, or the equivelant of 325 points. The Dow limit is 3 1/2. Due to thin market trading of this contract and high volatility, many small traders headed for the exit doors only to be greeted by bad fills. Also think of the high slippage as well.
Once again, I write this to tell you that we do not trade any new markets for at least 60-90 days. I have friends who are traders in the pits begging me to give them business. This alone tells me not to. Just another lesson about illiquidity and the effect it can have on you if you trade markets with low volume. Good trading! -- Tom
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