CME Group Is Launching Elon Musk's Tesla and SpaceX Futures Contracts on July 27. Here's the Investment Case.

There will soon be a new way to trade shares of Tesla (NASDAQ: TSLA) and Space Exploration Technologies (NASDAQ: SPCX). On June 27, commodities and futures exchange CME Group will introduce futures contracts on both tickers.

That won't be of much interest to most investors. For a small segment of the market, though, there's a case to be made for reaching into this toolbox.

But first things first. What are futures?

Image source: Getty Images.

Just know the leverage works both ways

Simply put, like stock options, single-stock futures contracts are highly leveraged bets on that stock's price movement within a particular time frame. CME's futures will magnify SpaceX's and Tesla's price changes by a factor of 10 or even 100, allowing investors to capitalize on even modest changes in the underlying ticker's value. For every $1 put to work, you could see up to $100 worth of gain.

That leverage also works against you just as much, though, and unlike buying ordinary equity options, investors' potential losses on futures aren't limited to the amount of money put into a particular trade. If the stock in question moves too far in the wrong direction, your broker could require you to add more capital to the account. In theory, your potential loss is infinite, although most investors will let go of losing trades soon enough, even if it means locking in a loss.

Sounds scary? It can be. And such leverage certainly isn't something most investors will want or need.

As was noted, however, there's a case to be made for utilizing these instruments. Namely, they're a way of temporarily hedging against an adverse move from a stock you may already hold a position in. For instance, if you own SpaceX but fear it may be due for a short-term drop, shorting futures on this stock will let you make some money on such a pullback. Conversely, if you've shorted Tesla shares, going long on Tesla futures -- even with just a relatively small trade -- will let you offset some of your loss if the stock moves higher.

Just remember that futures contracts eventually expire. You'll want to buy or short the ones with enough time left to do you enough good. Your broker can help you identify the symbol of the specific contract you may be looking for.

Of course, if you simply want to make a bold, highly leveraged bet on a move from Tesla or SpaceX shares with a big potential payoff (and don't mind the risk), futures are a way of doing so.

Also know that not all brokerage accounts are necessarily capable of buying or shorting futures contracts. They usually require special permissions and, often, a minimum amount of capital.

Not for the inexperienced

They're still not for everyone. And, given the extreme volatility of both SpaceX and Tesla stocks, even veteran futures traders should think carefully before buying or shorting futures on either ticker.

It's still an interesting way to temporarily curb your risk if you're long or short either stock, though.

If you're curious as to whether or not you're ready to add futures to your investing repertoire, you may want to hypothetically "paper trade" them -- not using actual money -- for a while to make sure you understand how they work and how they trade.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group and Tesla. The Motley Fool has a disclosure policy.