4

The S&P closed at 1588.85 on April 12th.

On

www.bloomberg.com/markets/stocks/futures/

For stock futures, it gives the following data:

> Index Future | Future Date | Last     
   S&P 500     |    Jun13    |1,581.90

If I buy the above future contract, does that mean I pay $1581.90 on June 13th, but I get the closing value of the S&P on 13th June?

How much do I have to pay to buy the future contract?

5

No, it means that is only the notional value of that underlying asset of that contract, generally. The contract specification itself is listed on the exchange's websites, and there are really no assumptions you can make about a particular contract. Where S&P futures have one set of specifications, such as what it actually represents, how many each contract holds, how to price profits and losses... a different contract, such as FTSE 100 stock futures have a completely different set of specifications.

Anyway in this one example the s&p 500 futures contract has an "initial margin" of $19,250, meaning that is how much it would cost you to establish that contract. Futures generally require delivery of 1,000 units of the underlying asset. So you would take the underlying asset's price and multiple it by 1,000. (what price you use is also mentioned in the contract specification), The S&P 500 index is $1588 you mentioned, so on Jun2013 you would have to delivery $1588 x 1000, or $1,588,000.

GREAT NEWS, you only have to put up 1.2% in principal to control a 1.5 million dollar asset!

Although, if even that amount is too great, you can look at the E-Mini S&P futures, which require about 1/10th the capital and delivery.

This answer required that a lot of different subjects be mentioned, so feel free to ask a new question about the more specific topics.

  • Thanks, yes it is quite a wide area and one question on S.E. can't present me with all the answers. I want to ask, eventhough I need only $19,250 to control "the asset", do I actually have to have $1,588,000 in my bank account before I can actually establish that contract? – NL49 Apr 21 '13 at 15:58
  • @NL49 Nope. If the value of the asset decreases then you will get a margin call from your broker and your position will eventually be liquidated, leaving you with a loss and shortfall that your broker will demand that you fix. – CQM Apr 21 '13 at 16:00
  • Thanks. When you mean liquidated, does that mean if I cannot meet the margin, I automatically lose $19,250, or my contract which I paid $19,250 will be sold on my behalf? – NL49 Apr 21 '13 at 16:05
  • @NL49 if you have a margin call to begin with, that means the price of the contract has already moved against you and you are already out $19,250 or much more. The broker will sell the contract on your behalf and still demand that you make up for the shortfall if your account is negative, as you now owe the broker. – CQM Apr 21 '13 at 16:46
1

The other answer covers the mechanics of how to buy/sell a future contract. You seem however to be under the impression that you can buy the contract at 1,581.90 today and sell at 1,588.85 on expiry date if the index does not move.

This is true but there are two important caveats:

  • the index on expiry date will likely be at a different level than today - and it is that level that will determine if you made money or not;
  • the reason why the future trades at a discount vs the index is that stocks in the index will pay dividends by June 13th and every time that happens, the index drops mechanically.

In other words, it is not the case that your chance of making money by buying that contract is more than 50%...

  • Thanks, regarding your point on the 13th, on the website above the date was stated as Jun13, so does it mean June 13th 2013? I initially thought it was the date (lets say today) that you purchased the contract, and thus it would become 22nd June 2013, no? – NL49 Apr 21 '13 at 16:09
  • Yes 22nd you are right (3rd Friday of June) – assylias Apr 22 '13 at 10:44
1

The two answers given previously provide excellent information.

In relation to your statement:

If I buy the above future contract, does that mean I pay $1581.90 on June 13th

You cannot buy the futures contract at that price. The 'price' you are seeing quoted is not a dollar value, but rather a value in points. Each contract has a point value, and this varies from one contract to another according to the specifications set out by the exchange. The point value is in dollars, and it therefore acts as a multiplier for the 'price' that you've seen quoted.

Let's look at an example for the E-Mini S&P futures. These trade electronically on the Globex exchange, the ECN order book of the CME, and carry the ticker symbol ES.

The ES contract has a point value of $50.

If the quoted price for the ES is 1581.75, then its dollar value is 50 x 1581.75 = $79,087.50

So in order to buy this contract outright, with absolutely no use of leverage, then one theoretically requires $79,087 in one's account. In practice though, futures are traded on margin and so only a deposit amount is required at the time of purchase, as CQM has explained.

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