This page has more information about the ES and why I choose to try it with my automated systems.

 

What exactly is the “ES”?

Have you heard of the S&P 500?  It’s perhaps the most famous market index in the world.  When you open the newspaper or turn on the news and hear about how the market is doing, they normally say something like, “The market is up today with the S&P 500 up 10 points.”

(in first paragraph, use imbedded image saved here:  https://docs.google.com/drawings/d/1xNv8oYtBE-nTC6A4Tuuqz2Sk3Dd-FQT_EUnvUjYiblU/edit)

The ES is what’s called a futures contract.  It’s tied to the S&P 500.  You can Google more info about futures contracts if you want, but to my mind, the key thing you need to know is that it trades like a stock (there is a bid price and ask price at any given time and the price goes up and down), but that it’s amplified.  With a normal stock, when the price goes up $1, you get $1 for each share you have.  But with the ES futures, for each contract you buy (futures are traded in contracts, not shares), when the price goes up $1 you make $50.  So the returns with futures are juiced up compared to own shares of stock.

Another thing about ES futures to be aware of is that you have to invest $6500 to buy one contract.  (Note:  this amount fluctuates depending on market conditions.  You can go here to see the current amount:  https://ww2.rjobrien.com/documents/shared/margins/margins.pdf  Find ES – S&P 500 – EMINI and look under the column Spec Init).  Ultimately it won’t really matter to you how much is required to buy one contract if you are using one of my automated systems, because the system will figure out exactly how many contracts to buy based on your account size.

One other key distinction about futures:  the contracts have expirations.  This affects us.  Every time a contract expires (which happens 4 times a year) there is a protocol we have to go through to adapt to it.  I have a video that shows step by step what you’ll need to do (and I’m always available for support), but essentially we simply exit from any positions on the soon-to-expire contract and then immediately open positions on the next contract expiration.  If you’re not familiar with futures, this may sound weird and complicated to you (just like it did to me at first!), but I will alert you by email every time you’ll need to do it, and after a few times it’ll become like clockwork.  Just exit the position and re-open it on the next expiration.  It takes me 1-2 minutes every quarter typically to do this (which is referred to as “rolling over” the position to the next expiration).

ES Liquidity

The ES is highly liquid!  That’s one of the key reasons I trade it.  It’s the most popular futures product in the world.  The bid and ask are almost always a quarter of a point apart (0.25), which represents a little over 1/10 of a percent of your investment in a contract, nice and tight.  With this service, we could have a small army of people all doing the same trades at the same time, and it will hardly move the needle on the ES price.  It’s just got such an incredibly high number of trades happening at any given moment.

That’s one of the key reasons this service is different than so many others I’ve seen.  Many other services that give you “stock picks” might send you an alert to buy a stock that has low liquidity and/or wide spreads between the bid and ask price.  So everyone following the service rushes to get into the position, causing the price to go up if it’s a small stock.  Here is an example that actually happened in me in real life when I was trying to follow someone else’s service:

They bought a stake in a stock with the ticker symbol AVGR.  Then they alerted the subscribers that they bought it.  The price they bought the stock for was $0.27 and by the time I got the alert and checked the price, it had already spiked to $0.31 because on this small stock all these people rushed in to go buy it and it drove the price up.  That’s more than a 10% swing in price from when the alert was sent!  By the time I got in, the price started to drift downward.  Not only that, but there was a 1 cent “bid/ask spread”, which is 3% of the stock price (!), which means that if I want to sell I’m looking at taking an extra 3% of my profits just to get out of the trade.  A lot of subscribers took losses on that trade, and yet the guy running the service touted it as another winner since he got in before he alerted it and everyone else followed and pushed the price up.

It just makes things complicated when there isn’t liquidity since there are more moving pieces to worry about.  Is the bid/ask spread going to be big enough?  Is the price going to move a lot if a bunch of other people follow the same trade?  With the ES, it eliminates all those questions.  You always know what the bid/ask spread is going to be and there are always buyers and sellers lined up at the door ready to transact.  It simplifies things so much!  And on top of that, of course, the automated systems I offer allowed you to get in right when I get in so that there is no lag effect like I described in that other service.  I also limit the number of subscription seats I offer for each portfolio just to be totally sure that there doesn’t get to be too much volume from my service to cause noteworthy price slippage.

Tax Benefit from Trading the ES

The automated systems I built exclusively trade ES futures.  One of the great things about trading the ES is that they have a tax benefit!

If you trade, say, Apple stock and you hold the stock less than a year and sell it, then you pay normal income tax rates on it.  This is true of most stocks, options, and other securities that you can buy in the stock market.

But with the ES, there is a tax advantage.  No matter how long you hold it, only 40% of the gain is taxed at normal income tax rates, and the other 60% is taxed at capital gains rates.  Currently, the capital gains rate is much lower than income tax rates in the USA.

Where I am, in California, this tax advantage equates to about 15-20% tax savings compared to the normal tax I’d be paying for typical stock gains.  This has a huge impact when it comes to compounding!

And compounding is the name of the game when it comes to becoming a millionaire…

This page on Investopedia has more information about the tax benefit.

I have to be clear though:  I am not a tax professional and cannot assist you with your taxes.  I encourage you to consult with a tax professional to be 100% sure how ES gains will affect your personal taxes.

No Scanning Needed

With tons of traders I know, a huge part of their trading efforts revolve around their scans.  By this I mean they spend a lot of their time just trying to find stocks/options/futures that look good to trade.  They’re looking around for great setups.  There are a number of reasons I prefer to avoid this:

  • It’s just plain old easier if I don’t have to be scanning stocks all the time. Less time spent scanning, more time spent riding my mountain bike or playing with my kids, etc.

  • Each stock/option/future is different. If Apple has a “setup” that looks exactly the same as, say, Coca Cola, it doesn’t mean that they have the same odds of having a particular price movement.  They could have two different pools of active traders with different trading tendencies.  So the bottom line is that for any given stock/option/future, I’d personally want to run a back test to see how it performed over 20+ years with the same setup before I could feel comfortable putting money into it.  It’s a ton of work to do that amount of back testing, and it fractures my focus.  I’d rather take one thing and be an absolute expert at it, and that’s why I only trade ES futures.

  • I like automation. It’s because I want my life to be simple and to have more free time.  For me it’s not reasonable to set up automation for multiple tickers.  Since my portfolios use 19-20 strategies just on one ticker, it would be a major overload to run automation for lots of tickers.

So there you have it.  I love the ES for the reasons above, and I’m an expert at it.  If you weren’t already familiar with the ES, don’t worry.  You have decent odds of growing a great fondness for it if you follow me on the journey.