S&P Futures are financial futures which allow an investor to hedge with or speculate on the future value of various components of the S&P 500 Index market index. The futures instruments are derived from the S&P 500 Index is E-mini S&P Futures. S&P 500 futures contracts were first introduced by the CME in 1982. The CME added the e-mini option in 1997. The bundle of stocks in the S&P 500 is, per the name, composed of stocks of 500 large companies.
Contents
The big S&P Futures contract was originally priced by multiplying the quoted futures price by 500. For example, if the S&P was trading at $800, the value of the big contract was $400,000, or 500 x $800. Eventually, the CME cut the contract multiplier in half to 250 times the price of the futures index.
E-mini S&P Futures are one-tenth the value of the big contract. If the S&P 500 futures price is $800, this results in an e-mini being valued at $40,000. The "e" in e-mini stands for electronic.
Like with all futures, investors are only required to front a fraction of the contract value to take a position. This represents the margin on the futures contract. These margins are not the same as margins for stock trading; futures margins show "skin in the game," which must be offset or settled. Cash Settlement of S&P 500 Futures
Derived Futures
All of the S&P derived future contracts are a product of the Chicago Mercantile Exchange (CME). They expire quarterly (March, June, September, and December), and are traded on the CME Globex exchange nearly 24 hours a day, from Sunday afternoon to Friday afternoon.
Contracts
S&P Futures contracts are commonly used for hedge or speculative financial goals. S&P Futures contracts are used to hedge, or offset investment risk by commodity owners (i.e., farmers), or portfolios with undesirable risk exposure offset by the futures position.
Quotes
CME Group provides live feeds for S&P Futures and these are published on various websites like Bloomberg.com, Money.CNN.com, SPFutures.org.
Trading Leverage
S&P Futures trade with a multiplier that inflates the value of the contract to add leverage to the trade. The multiplier for the S&P 500 is 250, essentially meaning that S&P Futures are working on 250-1 leverage, or 25,000%. If the S&P Futures are trading at 2,000, a single futures contract would have a market value of $500,000. For every 1 point the S&P 500 Index fluctuates, the S&P Futures contract will increase or decrease $250. The result is that a trader who believed the market would rally huge could simply acquire S&P Futures and make a huge amount of profit as a result of the leverage factor; if the market were to return to 2,100, for instance, from the current 2,000, each S&P Futures contract would gain $25,000 in value (100 point rise x 250 leverage factor = $25,000).
US Tax Advantages
In the United States broad-based index futures receive special tax treatment under the IRS 60/40 rule. Stocks held longer than one year qualify for favorable capital gains tax treatment, while stocks held one year or less are taxed at ordinary income. However, proceeds from index futures contracts traded in the short term are taxed 60 percent at the favorable capital gains rate, and only 40 percent as ordinary income. Also, losses on NASDAQ futures can be carried back up to 3 years, and tax reporting is significantly simpler, as they qualify as Section 1256 Contracts.