Listed FX Futures vs Spot

Course 44 of 60 in the forex hub. Should you trade the euro through a listed CME future, or stay with the spot pair at a dealer? The future suits some traders, and for plenty of others it's one more thing to keep track of.

Pick one and keep track of it

A listed currency future and a spot position can follow the same exchange rate and still make a messy pair if you hold both. Somebody gets long spot at a dealer and short a 6E, then leaves the contract month blank and never writes down how far the two prices have drifted. If you won't keep track of both, pick one.

Margin, expiry and the rest of how a listed contract works sit in the futures course. If you already run a dealer account, what switching really costs you is bookkeeping, mostly the contract month and the roll.

Who the future suits

The future suits someone who wants published exchange hours, money at a futures broker, and a contract month that's part of the position. Spot suits someone who wants to choose their own size and is fine with the dealer's weekend hours, under the U.S. retail cap of 50:1 on major pairs. Be honest about which statement you'll actually open every week.

Either way, turn the risk into dollars before you look at a chart. On the future that means ticks, and on spot it means pips. If one contract is already more than the loss you allow, the future is the wrong tool that day, however right your view on the euro turns out to be.

Hours and dollar size

Spot can move while the future is closed, and the future can trade while your dealer's spread is wide. Globex runs the euro future from Sunday at 5:00 p.m. Central to Friday at 4:00 p.m., with an hour off from 4:00 to 5:00 p.m. Monday through Thursday, and it stays shut from Friday's close until Sunday evening. Your dealer's Sunday open runs on its own clock.

A 50-pip move is a price change of 0.0050. Spot on 50,000 euros: 50,000 times 0.0050 = $250. One 6E: a 1-cent move is $1,250, so 50 pips is $625, and 100 ticks times $6.25 is also $625. One M6E: 12,500 times 0.0050 = $62.50.

So 50,000 euros of spot fits a $250 limit on that move, and one 6E doesn't, because the same move costs $625 on it. One micro at $62.50 fits easily, though it's still its own contract with its own expiry. If the two sides can't share one dollar limit, you're carrying two bets. Check both in the P&L calculator on the day you trade.

The month has to be rolled

Spot doesn't expire. The future has a contract month, and as expiry gets close, trading moves out of the front month and into the next one. Miss that shift and you're holding a contract the market has left behind, while your spot position looks just the way it did last week.

A roll means two new fills, and each one costs you something. If you want one ticket and no calendar, the future isn't for you. And if you already know you'll forget the roll, stay in spot.

The gap between the two prices

Basis here means the gap between the 6E price and the spot euro, and it can move the whole time you think the two sides cancel. Sunday's open belongs to the dealer, so a pairing that looked tight on Thursday can be loose by Monday morning.

Write down how wide a gap you'll put up with, and keep that number in the same note as the contract month. Past it, I'd stop calling the position an offset and treat it as two trades. The exchange hours are on the contract spec, so check them there.

When I'd use the future

I'd reach for the future when I want exchange hours, a cleared contract and a tick value printed on the spec, and when I know I'll actually roll it. I'd stay with the dealer when I need a size the contract won't give me, when I won't watch the month, or when the weekend gap is a risk I've decided to hold anyway.

Options on currency futures are a separate subject, covered in the lesson on FX options. Whatever you trade, read the current spec before sizing. Working from last quarter's notes is how a roll gets missed.

Spot against futures with no month written down

The expensive version is spot and 6E held as an offset, the month left blank, the basis never written down, and the fees never added up. It feels hedged right up until the roll or the weekend shows it isn't. If the currency you're looking at turns out to be a non-deliverable one, that's a different product altogether, explained in the lesson on NDFs.

Use CME's spec for the hours, the month and the tick, and that day's statement for your fills. The future can be the right tool and still be the wrong month.

Delivery is part of the contract

Euro FX futures are physically delivered, and they expire on a quarterly cycle, while spot doesn't expire at all. If you don't want delivery to become the plan, be out of that month before the last trading day, which is listed on CME's contract spec.

Switching to the micro makes the dollars smaller. It doesn't make the expiry go away.

Choosing between them

• Use the future if you'll match both sides in dollars, write down the month, and roll on time. Otherwise stay in spot.
• Exchange hours come from the spec. The Sunday gap belongs to the dealer.
• The gap between 6E and spot can move while you hold both.
• If one contract is past your loss limit, it's the wrong size that day.

If you know the roll will slip, keep the trade in spot. Educational only. Not a recommendation to buy, sell, or hold any contract or pair.