S&P futures

S&P Futures are financial futures which allow an investor to hedge with or speculate on the future value of various components of the S&P 500 Index market index. The futures instruments are derived from the S&P 500 Index is E-mini S&P Futures. S&P 500 futures contracts were first introduced by the CME in 1982. The CME added the e-mini option in 1997. The bundle of stocks in the S&P 500 is, per the name, composed of stocks of 500 large companies.

The big S&P Futures contract was originally priced by multiplying the quoted futures price by $500. For example, if the S&P was trading at $800, the value of the big contract was $400,000, or $500 x $800. Eventually, the CME cut the contract multiplier in half to $250 times the price of the futures index.

E-mini S&P Futures are one-tenth the value of the big contract. If the S&P 500 futures price is $800, this results in an e-mini being valued at $40,000. The "e" in e-mini stands for electronic.

Like with all futures, investors are only required to front a fraction of the contract value to take a position. This represents the margin on the futures contract. These margins are not the same as margins for stock trading; futures margins show "skin in the game," which must be offset or settled. Cash Settlement of S&P 500 Futures^[1]

Derived Futures

All of the S&P derived future contracts are a product of the Chicago Mercantile Exchange (CME).^[2] They expire quarterly (March, June, September, and December), and are traded on the CME Globex exchange nearly 24 hours a day, from Sunday afternoon to Friday afternoon.^[2]

S&P 500 Futures (ticker: SP) contract's minimum tick is 0.25 index points = $62.50^[2] While the performance bond requirements vary from broker to broker, the CME requires $21,000 to maintain the position.^[3]

Contracts

S&P Futures contracts are commonly used for hedge or speculative financial goals. S&P Futures contracts are used to hedge, or offset investment risk by commodity owners (i.e., farmers), or portfolios with undesirable risk exposure offset by the futures position.^[4]

Quotes

CME Group provides live feeds for S&P Futures and these are published on various websites like Bloomberg.com,^[5] Money.CNN.com,^[6] SPFutures.org.^[7]

Trading Leverage

S&P Futures trade with a multiplier that inflates the value of the contract to add leverage to the trade. The multiplier for the S&P 500 is 250, essentially meaning that S&P Futures are working on 250-1 leverage, or 25,000%. If the S&P Futures are trading at 2,000, a single futures contract would have a market value of $500,000. For every 1 point the S&P 500 Index fluctuates, the S&P Futures contract will increase or decrease $250. The result is that a trader who believed the market would rally huge could simply acquire S&P Futures and make a huge amount of profit as a result of the leverage factor; if the market were to return to 2,000, for instance, from the current 2,000, each S&P Futures contract would gain $25,000 in value (100 point rise x 250 leverage factor = $25,000).

US Tax Advantages

In the United States broad-based index futures receive special tax treatment under the IRS 60/40 rule.^[8] Stocks held longer than one year qualify for favorable capital gains tax treatment, while stocks held one year or less are taxed at ordinary income.^[9] However, proceeds from index futures contracts traded in the short term are taxed 60 percent at the favorable capital gains rate, and only 40 percent as ordinary income.^[10] Also, losses on NASDAQ futures can be carried back up to 3 years, and tax reporting is significantly simpler, as they qualify as Section 1256 Contracts.

References

External links

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