Here is a paper analysis based on my phone calls to a few brokerage firms and a forage through the stack of old newspapers. If anyone has the time to read through the rest of it, I would appreciate it if you could alert me to any errors in either judgement or execution. Here are the prices for the June S&P 500 Index Futures. These contracts have a value of $500 times the cost of the index when they expire in June. That means the person who bought the contract gets $500 times the index value.The person who sold a contract would have to pay that amount. The clearing house is responsible for making sure the money gets from one place to another. If the contract expired on April 6, for instance, then it would be worth $224,025. Here are some prices gathered from a stack of newspapers waiting to be recycled. They show the S+P 500 date open high low close open-close range March 25 1994 464.70 466.50 459.80 459.95 -4.75 (+1.80 - 4.80) March 29 1994 461.35 461.35 451.00 451.65 -9.70 (+0.00 -10.35) March 31 1994 451.85 453.60.445.60 446.15 -5.70 (+1.75 - 6.25) April 4 1994 435.80 441.75 434.75 439.25 +3.45 (+5.95 - 1.05) April 6 1994 448.45 451.00 440.80 447.25 -1.20 (+2.55 - 8.35) April 7 1994 447.10 452.00 445.90 450.50 +3.40 (+4.90 - 1.20) April 8 1994 450.60 450.95 444.95 447.25 -3.35 (+0.35 -5.65) April 11 1994 447.25 450.90 446.30 450.45 +3.20 (+2.65 -0.95) April 14 1994 446.05 448.00 442.90 445.95 -0.10 (+1.95 -3.15) April 18 1994 446.05 447.80 440.70 442.40 -3.65 (+1.75 -5.35) {There are other days out there, but the newspapers were thrown away or whatever.} In practice, you can usually buy futures contracts by only putting up 5% of the current value of the contract. You can (and usually want to) put up more because the banks and brokerage houses want that amount available to cover losses. You need to maintain 5% of the current value. That means that if the price goes the wrong way and you have less than 5% on hand you have to add more money to your account. This is known as a margin call. Let's assume: Assume that the market will move at least +/- 3 points in a day. Assume that the market isn't moving too fast so you're able to close out a position moving the wrong direction at 3 points off. (There is not as much need to really worry about this because the money isn't disappearing. It's just moving in the wrong way too fast to stop it.) If you want to move $50,000 in _one_ day by opening the transaction in the morning and closing it in the evening, then you would need to move 34 contracts. The 10% margin requirements for these 34 contracts would mean that you must have about $800,000 on hand to cover losses. The cost of borrowing $800,000 for a day at a 10% annual rate is about $220 in interest. Let's assume that the market inefficiencies are about .10 to open the position and .10 to close the position. That means that the difference between the price you buy the futures and the price you sell them is different by .10 in the morning and .10 in the evening. (.10 in the wrong way.) That means you could lose $3400 in trading costs if you can't execute the 34 contract trades successfully at the same price. This gives me the following approximate transaction costs: Day 1 Commissions $200 x 2 on 34 Contr. (guess) Interest Costs $220 x 2 on $800,000 Market Inefficiencies $1700 x 2 --------- 4240 Chance of Succeeding: 50%. So if things go wrong: Day 2 Commissions $400 x 2 on 68 Contr. (guess) Interest Costs $420 x 2 on $1,600,000 Market Inefficiencies $3400 x 2 --------- $8480 Assume you guess that the market will move correctly: 50%. That means you will have moved the $50,000 by now in 75% of the cases. But if things still go wrong: Day 3 Commissions $800 x 2 on 136 Contr. (guess) Interest Costs $840 x 2 on $3,200,000 Market Inefficiencies $6800 x 2 --------- $16920 Assume you guess that the market will move correctly: 50%. That means you will have moved the $50,000 by now in 87.5% of the cases. If these conservative calculations are correct, then it is possible to move $50,000 for $4240n in all but 2^{-n} of the cases. Note, there were about 60,000 S&P 500 contracts traded in the average day. I would guess that even 544 contracts wouldn't make a too much of a difference. Especially since half would be buying and the other half would be selling. There are many places where these numbers may be off, but I believe that I've erred on the side of extreme conservatism by putting up 10% of the contracts' value. Many people who do day trading have low margin requirements. As you can see, the net profits or loss in the day was never more than 3% in the days I included. And the list included a big trading day when the market lost plenty. I've also assumed that the market inefficiences would always move against me. In one sense, this is probably fair because brokers are known to buy a contract and then resell it to a customer for a fraction more. This leads me to the following conclusions: *) It is not cheap to do this well. You could do it for less with some more risk. *) It may take very good timing to execute the straddle effectively. The market inefficiencies are the biggest cost. Being a floor broker may be essential. *) If you can open the position at the same price i.e buy and sell the contracts at the same price, then you've got a good deal. I would appreciate any questions or comments about the details in this very approximate estimate. -Peter Wayner