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I have a few questions:

  1. For example I am going LONG on ES1! with leverage. I don't acquire an actual S&P 500 fund but as how futures work I just have a contract that I believe its price is going to go up. Does my initial LONG position influence an actual price of S&P 500? Or it does so only after I close out my position and settle for that difference?

  2. If it does influence price then how differently with cash settled or asset settled futures influence price?


To be more precise I am curious how price is influenced by longing on futures if you don't actually buy that stock, commodity, currency or whatever. How does price inflate then if you don't actually put money in it you just make a contract that you will pay money if needed?

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Yes position on futures influence current price and vice versa. However one individual position the influence is insignificant.

But say enough number of investors/traders believe in futures will go up, the current price starts to go up.

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  • To be more precise I am curious how price is influenced by longing on futures if you don't actually buy that stock, commodity, currency or whatever. How does price inflate then if you don't actually put money in it you just make a contract that you will pay money if needed? – Keni Jutsu Jun 14 at 13:42
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After the US markets close, the closing price of stock indexes are determined. Throughout the rest of the day, US stocks are traded on overseas markets and they may rise or fall. Outside of regular US trading hours, US indexes do not reflect that.

Index futures trade outside of regular hours and they reflect what is happening on the area of the world that is open at the time. This correlation isn't set in stone because developing news such as economic reports can affect market perception and direction. Further complicating this is that there is an arbitrage connection between the futures and the components. So yes, stock index futures prices affect stock prices and vice versa.

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  • To be more precise I am curious how price is influenced by longing on futures if you don't actually buy that stock, commodity, currency or whatever. How does price inflate then if you don't actually put money in it you just make a contract that you will pay money if needed? – Keni Jutsu Jun 12 at 23:07
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They OBVIOUSLY do - unless you have a 100% balanced market where both sides are purely speculating, there is some overhang. This overhang will be handled by market makers and the market makers WILL HEDGE THEIR BET IN THE REAL MARKET.

I.e. your S&P long - someone has to have a short. Unless that is a speculant running an open short - there is a hedge.

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  • Shorts are not always covered at the same time, though. Pension funds, for example, can short index futures to reduce their existing equity exposure (and risk) without having to do a lot of actual selling. – D Stanley Jun 11 at 13:19
  • Yeah, but unless ALL positions are TOTALLY balanced, the overhang IS hedged. – TomTom Jun 11 at 13:28
  • To be more precise I am curious how price is influenced by longing on futures if you don't actually buy that stock, commodity, currency or whatever. How does price inflate then if you don't actually put money in it you just make a contract that you will pay money if needed? – Keni Jutsu Jun 12 at 23:08
  • For your long, SOMEONE has to be short. Unless you get another speculator, that SOMEONE will offset his short with a long on the physical product. Or the chain is longer (furtures, offset via an option, offset via physical). Done. – TomTom Jun 12 at 23:20

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