| What are Index Futures? | | | | |
| | | | NASDAQ 100 and S&P 500 index futures is |
| Future contracts originate from commodity | | | | listed on the Chicago Mercantile Exchange |
| trading. A future contract is an obligation | | | | (CME) and trades on the Globex electronic |
| to buy/sell a certain quantity of commodity | | | | system. CME acts as the counter party for |
| at a specific date for a specific price | | | | each trade, hence if you short futures, CME |
| determined at the outset of the contract. | | | | will be taking the long position and vice |
| Future contracts are frequently used for | | | | versa. |
| hedging risks and also for speculation. | | | | |
| | | | NASDAQ 100 Emini contracts is actually one |
| For example, with the recent hike in oil | | | | fifth the size of their larger counterparts, |
| prices, an airline company which uses a lot | | | | the NASDAQ 100 index futures. Each point of |
| of fuel might want to hedge it's exposure to | | | | the index will represent $20 and the minimum |
| oil prices through the purchase of oil | | | | fluctuation ( tick size ) is 0.5 points which |
| futures. If the price of oil is $60 now and | | | | is equivalent to $10. |
| is expected to go up to $70 within 3 months, | | | | |
| the airline would hedge its exposure by | | | | S&P 500 Emini contracts is actually one fifth |
| purchasing the 3 month future contracts so | | | | the size of their larger counterparts, the |
| long as the agreed price is less than $70. | | | | S&P 500 index futures. Each point of the |
| | | | index will represent $50 and the minimum |
| Oil prices now $60 | | | | fluctuation ( tick size ) is 0.25 points |
| | | | which is equivalent to $12.50. |
| Expected oil price in 3 mth's time (by | | | | |
| airline) $70 | | | | Globex opens from 16:30(EST) on weekdays and |
| | | | 18:00(EST) on Sundays and public holidays. |
| Price of 3 mth oil contract (by oil producer) | | | | The closing time is 16:15(EST) on all days. |
| $68 | | | | However, there will be a scheduled |
| | | | maintenance of Globex from 17:30 till 18:00 |
| Actual price 3 mths later $65 | | | | (Monday through Thursday, nightly). I know |
| | | | the timings can be quite complicated, however |
| Let's assume the airline can find an oil | | | | as day traders, we are mostly concerned with |
| producer willing to sell oil 3 month later | | | | trading when the market is opened as we have |
| for $68, the company would enter a futures | | | | to capitalize on the higher liquidity |
| agreement with this oil producer for delivery | | | | available. I do not recommend entering trades |
| of a certain quantity of oil in 3 month's | | | | after market hours, due to low volume which |
| time. If the price of oil falls to $65, the | | | | leads to slippage. The time span you have to |
| airline still has to purchase at the agreed | | | | concentrate on is really the market opening |
| price of $68. But what propelled the airline | | | | hours from 9:30 till 16:15 (EST). |
| to enter the futures contract in the first | | | | |
| place is its expectations of future oil | | | | More information regarding the contract |
| prices going up to $70 in 3 months and buying | | | | specification of the Emini can be found on |
| at a price below $70 (3 months later) seemed | | | | CME's website.symbols for the S&P 500 and |
| reasonable to the company. | | | | NASDAQ 100 Emini index futures |
| | | | |
| Index futures are cash settled, there is no | | | | Both the NQ and ES emini contracts have |
| physical delivery of commodity as in the case | | | | expiry months in March, June, September and |
| of wheat, corn, etc. Although index futures | | | | December which are denoted by the letters |
| can also be held for the long term, the time | | | | "H", "M", "U", "Z" respectively. Hence NQ05Z |
| span we are concentrating on is a day. We are | | | | will represent the NASDAQ 100 emini |
| using the index futures as a vehicle for | | | | contractwith expiry month in December 2005. |
| speculation and not for hedging as in the | | | | Similarly, ES06H will be the symbol for an |
| case of the airline company. | | | | S&P 500 emini contract with expiry month in |
| | | | March 2006. |
| What is the Emini S&P 500 and NASDAQ 100? | | | | |