Exactly What Is The S&P 500 Futures Market?

A Brief Introduction

The Chicago Mercantile Exchange (CME) introduced the S&P 500 futures contract back in spring of 1982. The S&P 500 futures market has now become today's most actively traded equity futures contract. The S&P's futures contract represents roughly 90% of all US stock index futures trading. The S&P 500 is comprised of the largest 500 listed stocks, therefore allowing you to easily and effectively buy or sell an extremely well diversified portfolio of stocks in one stock index futures contract. This allows you to make trading/investing decisions based on your overall outlook of the stock market. Let me quickly give you a couple advantages of trading the S&P 500 stock index futures contract:

• You can easily participate in broad market moves, with one trading decision (one chart) - instead of having to choose individual stocks (looking at many charts). Why bother looking at various stocks when you can trade the S&P 500 - one chart - one market.

• You can easily protect the value of a portfolio during adverse markets without incurring high transaction fees.

What Are S&P 500 E-mini Futures?

And in October 1997 the Mini S&P 500 (symbol = ES) was introduced - which is the same as the S&P 500 (symbol = SP), except it is one fifth the size in terms of point and tick size, discussed shortly.

Exactly What Is The S&P 500 Index?

I think everyone knows what the Dow Jones Industrial Average (DJIA) Index consists of; The DJIA is made up of only 30 blue chip stocks. The S&P 500 index on the other hand is based on the stock prices of 500 different companies - generally 76% industrials, 12% financial institutions, 10% utilities and 2% transportation. As you can readily see, the S&P 500 is much more representative of the overall market than that of the DJIA. Also, the market value of the 500 firms that comprise the S&P 500 index is equal to roughly 80% of the value of all the stocks that are traded on the New York Stock Exchange (NYSE).

What Is The Value Of The S&P 500 Futures Contract?

The value of the S&P 500 futures contract can be calculated by multiplying the futures price by $500. For example, if the S&P's are trading at 1089.50, the value would then be $500 X 1089.50, or $544,750. The minimum price fluctuation (tick) for the S&P's are .10, so a tick up or down is worth $25 per contract. A full point has 10 ticks in it, which is worth $250 per contract (.10 X $25 = $250). The Mini S&P 500 is on the same price scale as the regular (full) S&P 500, the difference lies in the tick and point values. The Mini S&P trades in .25 ticks and is worth $12.50 per tick; and a point is worth $50
($12.50 X 4 = $50). As you can see it is one fifth the size of the full S&P 500 contract.

As you can readily see by now, since the S&P 500 Futures Market represents roughly 90% of all US stock index futures trading, you can use the S&P 500 futures contracts to try and forecast the market's overall direction - you can in turn position yourself with a profit from such a move. That is, of course, if you're right on the market move.

What Are Futures Contracts?

A future's contract is an agreement between the seller and buyer to respectively deliver and take delivery of a commodity at a specified future date. But in the case of the S&P 500 futures contract, the commodity is a portfolio of stocks represented by a stock price index. The delivery is actually a cash settlement of the difference between the original transaction price and the final price of the index at the termination of the contract. More accurately, the cash settlement occurs in the increments daily until the termination of the contract, as the contract trading price changes.

The futures contract price responds to the changes in the overall underlying index, with the index recalculated as the component stock prices change. The prices of the futures contract looks very similar to the index price itself; the future's price may be higher or lower than the index itself. While the future's price does not move point-for-point with the index, it does track it closely enough to act as a very effective proxy.

How Much Does It Cost To Trade The S&P 500?

The margin requirements to trade the S&P 500 is quite small compared to the overall value of the contract itself. Margin requirements to keep the S&P 500 Overnight (you need roughly $22,000 per contract to keep an S&P overnight) is much more costly than it is to Daytrade the S&P 500 (you need roughly $10,000 per contract to daytrade), but it really depends on the discount futures house that you trade through. The firm I recommend only requires $5,000 to daytrade the S&P and $12,000 to keep an S&P overnight. The Mini S&P's on the other hand are much less expensive to trade. It costs roughly $2,500 to daytrade the mini S&P's and roughly $7,500 to keep a mini S&P overnight. I highly recommend to all my students to start off trading the mini S&P's until they fully understand what they're doing before moving on to the full S&P 500 contract. I personally think that's a smart move for anyone just starting out.

Future's Risk

Please Remember: Trading the S&P 500 market (or any market for that matter) is NOT without risk and as a trader/investor you must accept the possibility of being incorrect in your predictions (trades) of the market. The opportunity to profit from trading futures can be very substantial, however keep in mind that the risk of trading futures can also be very substantial.

Trading stocks is fine for long-term investing, but not ideal for generating consistent daily cash flow. In order to do that, you're going to need to be trading in a market that offers the highest daily profit potential. It's no wonder why so many stock traders are making the switch to the exciting world of trading futures, especially the stock index futures, such as; the S&P 500, Dow Futures and the NASDAQ Futures Contract. I suggest anybody out there wanting to (day) trade to definitely look into the futures market(s) that were just mentioned above (E-Mini and full contracts). You may be asking yourself…

Why should you consider trading the full S&P 500, the E-mini S&P 500, Dow Futures or Nasdaq futures markets?

There are a lot of practical reasons why, here's just a few of them:

• No market research required.

• Futures margin requirements are a fraction of those needed for day trading stocks ($2,000 vs. $25,000).

• You can profit no matter which way the market moves, up or down. Bad market news can be real good news to you.

• Great potential for daily cash flow.

• Tremendous leverage, liquidity and daily volatility for maximum profit potential.

• No Uptick rule

What you need to successfully day trade the S&P 500 and
Nasdaq E-mini or full contracts is:

• An easy to understand trading methodology that tells you when to enter the market, where to set your initial stops, trade management, money management, logical fixed profit targets and to know when to catch the bigger market moves.

• How to use the tightest possible stops for maximum risk management.

• Understanding how to look for several clear and powerful trading signals daily.

• State of the art trading instruction that goes beyond the trading method to include money management and the psychology of successful trading.

• Reliable post-training support- 100% guaranteed!

Before you start trading, you should at least have what I just mentioned. And I feel that if you decide to learn how to trade by me, that my professional step-by-step Course(s), LIVE Training and other Services I provide, WILL give you exactly what you need in order to become a successful trader in today's markets.

So, if you have any questions whatsoever, please don't hesitate to give me a call at (800) 664-3343 or (248) 593-5851 or just email me at todd@tradingconceptsinc.com, whichever is easier for you. I hope this trading report gave you more insight into stock index futures trading. That certainly was my intention.