Futures Trading – Resources & Products from IBKR

Most exchanges enable investors to trade continuously across different time zones and have extensive trading hours throughout the week. This allows traders and investors the ability to react quickly to unexpected changes in market conditions or global news events outside of regular trading hours.

• Futures as an asset class are important because the underlying commodity or product generally act as a barometer for the health of the macro economy. Prices tend to change based upon rising demand or shrinking supplies of specific goods.
• Traders use commodity markets tied to goods that are used in manufacturing, building and to power economies. Many traders tend to buy and sell commodity futures aiming to capitalize on advantageous price movements in response to changing news about the global economy.
• As the global economy picks up steam, commodity prices tend to rise offering speculators direct exposure to a physical commodity without ever having to own it. Through the economic value chain, changes in commodity prices can have immediate impact on stock indices, foreign exchange rates, interest rates and food items. To this extent, futures markets are unrivaled.

• Futures trading occurs in a margin account. A commodities broker freezes an amount per contract set by the exchange in a client’s account in order to maintain a position in the futures market.
• As the price of the future fluctuates, changes in the value of the futures contract are credited to or debited from the client’s account. The amount of margin frozen by the broker is used to protect it and the exchange from excessive losses should the price of the contract move adversely.
• Margin accounts are typically associated with the idea of leverage, which means that a smaller amount of capital maybe used to control a larger underlying investment. The associated leverage in the futures market depends upon how volatile each commodity or financial asset has been over its recent history.
• Generally speaking, futures contracts may allow leverage of four-to-one, which means that $25,000 in margin will allow control over $100,000 worth of an underlying asset. This makes futures markets capital efficient.

• The US IRS has designated certain regulated futures contracts (RFCs), as well as options on futures contracts, as subject to preferential tax treatment, offering additional tax benefits to futures traders.
• The IRS includes RFCs, stock index and futures, options on US broad-based indices as well as certain Cboe-listed exchange traded funds and exchange trade partnership contracts as being subject to section 1256 of its code. Section 1256 contracts enjoy lower 60/40 capital gains rates of taxation under which 60% are subject to lower-longer term capital gains tax rates, and 40% are subject to short-term capital gains deducted at the ordinary tax rate.
• As an example, using the maximum tax bracket for 2023/24, the blended 60/40 rate of 26.8% in 10.2% lower than the highest regular tax bracket of 37%. Section 1256 treatment of certain futures contracts means that there are significant tax savings across various income tax brackets.
• Since Section 1256 contracts are subject to so-called ‘mark-to-market’ reporting, for tax purposes MTM reports both realized activity throughout the year and unrealized gains and losses on still open futures trades at the end of the year.