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