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S&P Futures: What Every Trader Needs to Know | TraderHQ

- Cory Mitchell

Standard and Poor’s provides prominent stock market indexes that track stocks of various sizes to provide a gauge of how different segments of the economy are performing. Futures provide a way to trade these indexes, by betting on the direction the index will move. Futures are used by retail day traders, longer-term traders as well as institutions.

There are four main S&P futures, the E-mini S&P 500, E-Mini S&P MidCap 400, E-Mini S&P SmallCap 600 and the S&P 500. These cater to different types of traders, with the E-Mini S&P 500 being the most popular among all traders.

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S&P Futures Liquidity

E-mini S&P 500 futures are very liquid, with approximately 1 million to 3 million contracts changing hands each day. This provides adequate liquidity for active day traders, hedge funds and longer-term traders.

Figure 1. Daily E-Mini S&P 500 Volume over 30 Trading Days (2014)

Options contracts can also be traded on E-mini S&P 500 futures, with Figure 1 also showing the daily options volume (red).

The E-Mini S&P MidCap 400 futures contract is less active, with daily trading volume between 10,000 and 75,000 contracts. The volume is enough for retails traders and institutional traders, although typically retail traders will trade the E-mini S&P 500 when possible.

The E-Mini S&P SmallCap 600 has sporadic trading volume. On many days no contracts change hands, but some days may see volume of 1 to 20 contracts. Lack of volume makes this contract difficult to trade for retail traders.

S&P 500 futures see daily volume between 5,000 and 100,000 contracts. S&P 500 futures cost more to trade (discussed below), so while there is adequate volume for retail traders, S&P 500 futures are primarily used by funds.

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Who Uses S&P Futures and Why?

Day traders, swing traders, hedgers and hedge funds all trade E-mini S&P 500 futures. The liquid market allows for all these traders to attain and exit positions with ease, and in quantities that suite each class of trader.

Trades are usually taken for speculative reasons, anticipating the future direction of the basket of 500 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 any of the S&P contracts to hedge other positions. For example, if a trader owns a wide assortment of stocks the traders may sell some E-mini S&P 500 or S&P 500 futures to hedge the long 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.

Institutional traders may use the E-mini S&P MidCap 400 or E-mini S&P SmallCap 600 for the same reasons mentioned prior, as well as providing funds with more precise exposure to a certain segment of the economy.

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 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.

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Figure 2. E-Mini S&P 500 Futures with Commitment of Traders Net Positions

S&P Futures Terms and Expirations

Each S&P 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 to the September contract.

Figure 3. S&P 500 Futures Terms and Expiration (Electronic Platform)

S&P Futures Exchange

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

S&P 500 futures change hands through electronic transactions as well as open outcry on the trading floor.

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

S&P Futures Pricing, Volume and Specification Information

For current information on S&P futures volume and prices, and to see when contracts are expiring, visit CME Group. Click on “Products and Trading” and select “Equity Index.”

Choose the S&P futures contract you’d like information on.

Figure 4. E-Mini S&P 500 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 for recent volume and open interest data (preliminary or daily finals).

E-mini S&P 500, and S&P 500 futures volume and current prices are also typically available on large financial sites.

S&P Futures Margin

Opening a futures position requires that you put a margin payment. Margins payments vary by the type of S&P future you trade.

Figure 5. S&P 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.

Additional S&P Futures

There are a number of S&P futures, but they do so little volume (if any) that they serve little purpose for a retail trader. The additional S&P futures include: S&P MidCap 400 (0 to 500 contracts most days), S&P 500 Growth, S&P 500 Value (minimal volume several days a month), S&P MLP Index, S&P SmallCap 600 and Euro-denominated E-mini S&P 500 (usually no volume).

The Bottom Line

S&P futures are used by all sorts of traders, from speculative day traders to institutional hedgers and longer-term traders. All the S&P futures trade via electronic means, and are cleared through the CME. Margin requirements vary by contract, as do tick values. Volume is an issue in a number of S&P futures, which could make attaining or liquidating a position difficult. Therefore, retail traders typically focus on the E-Mini S&P 500 for speculative or hedging purposes, with the E-Mini S&P MidCap 400 being a secondary alternative.

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