Dow Futures: What Every Trader Needs to Know

The Dow Jones Industrial Average (DJIA) is a prominent stock market index that tracks 30 blue chip U.S. stocks, providing a representation of the U.S. stock market as a whole. Futures provide a way to trade the index, by betting on the direction the index will move. Futures are used by retail day traders, longer-term traders and institutional traders.

There are three types of Dow futures, the E-mini Dow, DJIA and Big Dow DJIA. These cater to different types of traders, although the E-mini is by far the most popular and the only Dow contract really used by individual traders.

Be sure to also read 30 Bizarre Facts About the Dow 30 Companies

Dow Futures Liquidity

Dow Futures are very liquid, especially the E-mini Dow futures. Between 100,000 and 300,000 E-min Dow futures change hands each day, providing adequate liquidity for both day traders and longer-term traders. (For futures news, analysis and education be sure to bookmark FuturesKnowledge.com)

Dow Futures Volume
Figure 1 Daily E-mini Dow Futures Volume over 30 Trading Days

Source: CMEgroup.com

DJIA futures contracts are less liquid, with daily volume ranging from 0 to 3000 contracts.

Big Dow DJIA futures are even less liquid, with daily volume typically under 50 contracts, and often 0.

Who Uses Dow Futures and Why?

Day traders, swing traders, hedgers and hedge funds all trade E-mini Dow futures. The liquid market allows for all these traders to attain and exit positions.

Trades are usually taken for speculative reasons, anticipating the future direction of the basket of 30 stocks. Buy a future and if the value rises, you reap a profit. Sell a future and if the value drops, you can also profit. Therefore, traders can profit from either up or down markets.

Hedgers or hedge funds may also use Dow Futures to hedge other positions. For example, if long a large contingent of stocks these traders may sell some E-mini Dow futures to hedge the long positions. That way, if the index falls (and likely many of the stocks in the fund’s portfolio as well) the loss will be partially or fully offset by the gain attained by the short futures position.

Institutional traders may use DJIA or Big Dow DJIA for the same reasons mentioned prior, although due to lower volume these instruments are used less frequently.

The Commitment of Traders Report tracks futures position data for commercial traders, speculators and large traders. The information is publically available, so all traders can see on which side of the market commercial, large and speculative positions are being taken. While this may not always explain “Why traders are doing what they are doing,” it does show what major market players are doing in the market.

Dow Futures COT
Figure 2. E-Mini Dow Futures with Commitment of Traders Net Positions

Source: Timingcharts.com

Dow Futures Terms and Expirations

Each Dow futures contract has an expiry date, on the third Friday of the contract month. Traders will typically close out futures positions before expiry, and re-establish positions in futures contracts where the expiry date is further out.

Nearly all futures volume takes place in the contract near expiry. For example, if it is February, nearly all the trading volume will be in the March contract. If it is April, then nearly all the volume will occur in the June contract. When the June contract is about to expire, volume will shift into the September contract.

Dow Futures Terms
Figure 3. Dow Futures Terms and Expirations

Source: CMEGroup.com

Dow Futures Exchange

All Dow futures are cleared through the Chicago Mercantile Exchange (CME). E-mini Dow futures change hands via electronic transactions only.

DJIA change hands through electronic transactions as well as open outcry (symbol: DJ) on the trading floor.

Big Dow DJIA futures change hands via electronic transactions only.

Any trader who utilizes a broker with access to CME products can trade Dow futures electronically.

Dow Futures Pricing, Volume and Specification Information

For current information Dow futures volume, prices and to see to when contracts are expiring, visit www.cmegroup.com. Click on “Products and Trading” and select “Equity Index.”

Choose the Dow futures contract you’d like information on.

Dow Futures Info
Figure 4. Dow Futures Information

Use the Quotes tab for daily pricing information. The Settlement tab shows pricing data, estimated volume and prior day open interest. Click the Volume tab to recent volume and open interest data (preliminary or daily finals).

The Time & Sales shows recent transactions, and the Contract Specs tab provides the particulars of trading Dow futures (similar to figure 3). The Margins tab shows what it costs to initiate and maintain positions. The Calendar tab shows when each contract begins and ends trading, and settlement dates.

Dow volume and current prices are also typically available on large financial sites.

Dow Futures Margin

Opening a futures position requires that you put a margin payment. Margins payments vary by the type of Dow future.

Dow Futures Margin
Figure 5. Dow Futures Initial and Maintenance Margin

Source: CMEGroup.com

Brokers often provide day traders with reduced initial margin rates. Initial margin is the amount needed to initiate a trade for one contract. Maintenance margin is the amount needed in the account to maintain the position.

The Bottom Line

Dow futures are used by all sorts of traders, from speculative day traders to institutional hedgers and longer-term traders. The E-mini Dow futures have the most volume, and are thus the most suitable for retail traders. While the three Dow futures have various tick values, the liquidity of the E-mini allows you to customize your trading position to gain the proper exposure for your account size. All the Dow futures trade via electronic means, and are cleared through the CME. Margin requirements vary by contract, with the E-mini requiring the least initial margin. This again makes the E-mini the logical choice for retail traders looking to trade Dow futures.

Cory Mitchell