Futures are essentially a way of trading on a particular contract, at a specified future price at a specific time in the future. Clients are obligated to close position on an expiring contract or they will be closed automatically.
Brokers usually offer a rollover from the old contract to the new one when the contract is about to be expired allowing the clients to keep the position open.
Futures, which allow traders to speculate on the value of the underlying instrument without holding the instrument, are traded on margin and can be used for hedging.
What are 'Index Futures'?
Index futures are futures contracts on a stock or financial index. For each index, there may be a different multiple for determining the price of the futures contract.
For example, the S&P 500 Index is one of the most widely traded index futures contracts in the United States; stock portfolio managers who want to hedge risk over a certain period of time often use S&P 500 futures.
Why is a Future Contract different to other symbols available for trading?
‘Futures’ are essentially a way of trading on a particular contract, at a specified future price. Future contracts have specified trading times and expiry dates. Clients must close positions on an expiring contract or they will be closed automatically.
HBGM offers a rollover from the old contract to the new one when the contract is about to be expired allowing the clients to keep the position open.
For example, if a client holds a long position on Crude Oil and the price at the expiry date closes at $45,00 while the new contract trades at $47,00 then the difference will be charged as a commission, otherwise the client will earn a riskless profit.
On the contrary, if the client holds a short position, the difference will be added to the client’s account also as a positive commission.
What are the benefits to trading Futures?
Futures allow traders to speculate on the value of the underlying instrument without actually holding the instrument. Futures contracts are traded on margin (similar to CFDs), allowing traders to trade a much greater amount. Futures can be used by traders to hedge/manage the risk from other assets which they may be holding.
Why do Futures have Expiry Dates?
Futures have expiry dates as the agreement between actual trading counterparties is for a specific timeframe set by the Exchange, at the end of this timeframe the counterparty holding the contract may take delivery of the asset or they will settle the payment owed with their counterparty.
BREAKING DOWN 'Index Futures'
By shorting these contracts, stock portfolio managers can protect themselves from the downside price risk of the broader market. However, if this hedging strategy is used perfectly, the manager's portfolio will not participate in any gains on the index; instead, the portfolio will lock in gains equivalent to the risk-free rate of interest. Alternatively, stock portfolio managers can use index futures to increase their exposure to movements in a particular index, essentially leveraging their portfolios.
The underlying commodity associated with an index future is a particular stock index, which cannot be traded directly. This causes futures to be the main way stock indexes can be traded, functioning and trading in the same way as other investments on the futures market.
Since an index is comprised of stock from multiple companies, settlement cannot be handled through the transition of ownership of a particular stock certificate. Instead, most index futures are settled in the currency associated with the investment.
Popular Index Futures
Within the United States, some of the most popular index futures are the mini Dow Jones (YM) and the mini Nasdaq (NQ) on the Chicago Board of Trade, and the mini Russell 2000 (ER2) and mini S&P 500 (ES) on the Chicago Mercantile Exchange.
Index futures are also available in foreign markets. This includes the DAX and the SMI index futures in Europe, and the Hang Seng Index future in Asia.
Index Futures Contracts
An index futures contract states that the holder agrees to purchase an index at a particular price on a specified date in the future. If on that future date the price of the index is higher than the agreed-upon price in the contract, the holder has made a profit, and the seller suffers a loss. If the opposite is true, the holder suffers a loss, and the seller makes a profit.
Futures contracts are legally binding documents specifying the detailed agreement between the buyer and seller. It differs from an option in that a futures contract is considered an obligation, while an option is considered a right that may or may not be exercised.