Notional value and leverage

Here is the single most important idea in this level: a futures contract controls far more money than it takes to open one. That is called leverage. It is why futures can grow a small account quickly, and why they can empty one just as fast.

Notional value: what one contract is really worth

The notional value of a contract is the full dollar value of what it controls. The formula is simple:

futures price times multiplier = notional value

Let’s use an example price. Pretend the Nasdaq-100 futures price is 20,000.00. (That is a made-up round number to keep the math easy, not a real quote. Look up the current price on any chart and redo the math yourself.)

• One NQ ($20 per point): 20,000 times $20 = $400,000
• One MNQ ($2 per point): 20,000 times $2 = $40,000

So at that example price, a single MNQ contract moves like a $40,000 position in the Nasdaq-100. One NQ moves like $400,000.

Margin: what it takes to open one

You do not pay the notional value to open a futures position. Instead, you keep a deposit with your broker called margin. You will learn margin in detail in the next lesson. For now, the key fact is its size: CME says futures margin is typically a small percentage of the notional value, often somewhere around 3% to 12% per contract.

Margin is not a down payment, and you do not own anything. It is a good-faith deposit that sits in your account to cover possible losses.

Leverage: the gap between the two

Leverage is the gap between what you put up and what you control. Continuing the example, and pretending margin was 5% of notional (again, an example, not a real requirement):

• MNQ notional at our example price: $40,000
• 5% margin: $2,000
• You control $40,000 of market exposure with $2,000 on deposit. That is 20 times leverage.

Why leverage cuts both ways

Profit and loss are based on the notional value, not on your deposit. That is what makes leverage so powerful and so dangerous.

Using our example: a 1% move in the Nasdaq-100 futures price, from 20,000 to 20,200, is 200 points.

• On one MNQ: 200 points times $2 = $400.
• Against a $2,000 deposit, that is a 20% gain or loss from a 1% market move.

The market moved 1%. Your money moved 20%. If that move is in your favor, it feels great. If it is against you, a few bad days can wipe out the deposit. Regulators warn that futures traders can lose all their money, and can even be required to pay more than they first deposited.

The real lesson

Leverage is not something you can switch off in futures. It comes built into every contract. What you can control is how many contracts you trade and how much of your account you let any one trade put at risk. That is why this course starts you on the Micros and spends a whole level (Local) on risk.

Key ideas

• Notional value = futures price times multiplier. It is the full value one contract controls.
• Margin is a deposit, typically a small percentage of notional value. It is not a down payment.
• Leverage lets a small deposit control a large position, so small market moves become big account moves.
• Leverage magnifies losses exactly as much as gains.