Nikkei Futures: What Every Trader Needs to Know

Nov 7th, 2022 - Cory Mitchell

Nikkei futures provide a way for traders to participate in the price movements of the Japanese stock market. The Nikkei 225 index is composed of 225 blue-chip stocks listed on the Tokyo Stock Exchange and is the main barometer of the Japanese stock market. Nikkei futures are available to U.S. traders through the Chicago Mercantile Exchange (CME), and are available in both yen and dollar terms.

There are three Nikkei futures listed on the CME: the E-Mini Nikkei 225 (Yen), Nikkei 225 (dollar) and Nikkei 225 (yen).

Nikkei Futures Liquidity

The Nikkei 225 (yen) futures are the most active, with 30,000 to 80,000+ contracts changing hands on a daily basis. This typically provides adequate liquidity for short-term traders, hedge funds, and longer-term traders to enter and exit positions. Some days can be very low volume though, so shorter-term traders may wish to avoid day trading on such days, as spreads could widen and partial fills on orders is quite possible.

Be sure to read the Ten Commandments of Futures Trading

Figure 1. Daily Nikkei 225 (Yen) Volume over 30 Trading Days (2014)

Source: CMEgroup.com

The next most active Nikkei future is the Nikkei 225 (dollar), typically trading between 10,000 and 20,000+ contracts per day.

Figure 2. Daily Nikkei 225 (Dollar) Volume over 30 Trading Days (2014) Source: CME Group

The E-Mini Nikkei 225 (Yen) has sporadic volume; some days there are no trades and other days 5 to 60+ contracts may change hands. Therefore, this contract is less appealing from a liquidity standpoint, as it may be hard to initiate or liquidate positions quickly.

Who Uses Nikkei Futures and Why?

Day traders, swing traders, hedgers, and hedge funds all trade Nikkei 225 (yen) futures. While the volume likely isn’t high enough for very active day traders, most traders will find they can get in and out of positions with relative ease. If trading very large positions there could be slippage or patience required to enter or exit positions.

Trades are usually taken for speculative reasons, anticipating the future direction of the 225 stocks that reflect the Japanese stock market. Traders can use futures to make money in up or down markets; if you buy a Nikkei future and it rises you profit, if you short a Nikkei future and it falls you profit.

Hedgers or hedge funds may also use Nikkei futures to hedge other positions. For example, if a trader owns a wide assortment of Japanese stocks the trader may short-sell some Nikkei 225 yen or dollar futures to hedge the stock positions. That way, if the index falls (and likely many of the stocks in the trader’s portfolio as well) the loss will be partially or fully offset by the gain attained by the short futures position.

The Commitment of Traders Report tracks futures position data for commercial traders, speculators and large traders. The information is publicly available, so all traders can see which side of the market commercial, large and speculative positions are being taken. The data does not explain why traders are doing what they are doing, but it shows what major market players are doing.

Figure 3. Nikkei 225 Futures with Commitment of Traders Net Positions. Source: Timingcharts.com

Nikkei Futures Terms and Expirations

Each Nikkei contract has an expiry date, on the Thursday/business day prior to the second Friday of the contract month. Traders typically close out positions before expiry, and re-establish positions in contracts where the expiry date is further out.

Nearly all volume takes place in the futures contract near expiry. For example, in February, nearly all the trading volume will take place in the March contract. In April, nearly all the volume will occur in the June contract. When the June contract is about to expire, volume will shift to the September contract.

Figure 4. Nikkei Futures Terms and Expirations (Electronic Platform)

Nikkei Futures Exchange

All Nikkei futures can be cleared through the Chicago Mercantile Exchange (CME). Nikkei 225 (dollar or yen) can also be cleared on the Singapore Exchange (SGX) through a mutual agreement between the exchanges, called the Mutual Offset System (MOS). Traders must designate a trade as MOS, if they want SGX to clear the trade

E-mini Nikkei 225 (Yen) and Nikkei 225 (Yen) futures change hands via electronic transactions only.

Nikkei 225 (Dollar) futures change hands through electronic transactions as well as open outcry on the trading floor.

Traders using a broker with access to CME products can trade Nikkei futures electronically.

Nikkei Futures Pricing, Volume and Specification Information

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

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

Figure 5. Nikkei 225 (Yen) Futures Information. Source: CMEgroup.com

The Quotes tab shows daily pricing information. The Settlement tab shows pricing data, estimated volume and prior days open interest. Click the Volume tab for volume and open interest data.

The Time & Sales shows recent transactions, and the Contract Specs tab provides the particulars of trading Nikkei 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.

Nikkei Futures Margin

Figure 6. Nikkei Futures Initial and Maintenance Margin

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.

Nikkei Futures Alternative

Another non-futures alternative is to trade the MAXIS Nikkei 225 Index ETF (ARCA:NKY). It tracks the movement of the Nikkei 225 Index and averages more than 350,000 shares per day in volume.

Nikkei Futures Summary

Nikkei futures are used by all sorts of traders, from day traders to institutional hedgers. All Nikkei futures are tradable via electronic means during certain hours, and are cleared through the CME, with Nikkei 225 (dollar and yen) also cleared through SGX. Margin requirements vary by contract, as do tick values. Volume is greatest in the Nikkei 225 (yen) futures, followed by Nikkei 225 (dollar) and then the E-mini.

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