Learn How to Trade Stock Indexes – The Tutorials
An Introduction
The first stock index to be traded was the Value Line, introduced on the Kansas City
Board of Trade on February 24, 1982. Just a few short months later, the Chicago
Mercantile Exchange (CME) launched the S&P 500 futures contract in April of that same
year. The S&P 500 is based on the Standard and Poor’s Index of 500 common stocks. It
is this successful contract that not only garnered individual investors and institutional
level investors but fostered a multitude of other stock index contracts traded around the
globe.
The acknowledged leader is the CME in this space. The CME, according to their
statistics do approximately 90% of all domestically traded stock index trading.
What are Stock Index Futures?
Stock index futures are contracts, or agreements in essence to purchase or sell the value
of a specific stock index at a specific day in the future at a specific price. This versatile
futures contract can be used for speculators desiring to profit from market fluctuations.
Others, from individuals to hedge fund managers may wish to use stock index futures to
hedge themselves from adverse market moves to their existing portfolio of actual stocks.
This is also known as hedging. Keep in mind that participating in futures trading
involves the use of leverage and as such comes with substantial risk.
Stock index contracts closely follow the movement of the respect index they mirror.
These indexes are sometimes referred to as the underlying market. One of the benefits of
participating in the stock index futures market is the versatility to potentially profit from
both up and down moves in the market. An investor can purchase an index contract and
at a later buy it back, hopefully at a higher price that the index was purchased for, thus
potentially earning a profit. Conversely, the investor may believe that the index is going
to go lower of a certain period of time. As such they would initially sell (selling short) a
contract with the expectation of buying it back at a lower price in the future. Again, this
ideally would generate a profitably transaction. Of course, should your prediction be
incorrect, you run the risk of losing money was well.
Why Trade Stock Index Futures?
In our opinion, there are many reasons why investors should consider stock index futures.
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Potentially lower transaction costs compared to trading the actual basket of
stocks.
Useful tool for hedging a portfolio of stocks.
Due to the electronic nature of most stock index markets and access to worldwide
markets the stock index market is amazingly versatile and potentially responsive.
Due to its popularity, many stock index futures contract offer excellent liquidity.
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
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Many, many indexes are available on a global basis offering the investor the
ability to participate in a multitude of markets.
Buying vs. Selling – Going Long or Short
Just as you may do with your stock investments, the concept of buying low and
selling high exists in stock index investing. Investors will to accept the inherent risk
may buy a stock index (go long) and ideally sell it for a higher price at a later time.
Via the versatility of the futures markets, it is just as common for an investor to sell
short, or sell a futures contract first, then buy it back at a later time. Again, hopefully
buying it back at a lower price.
To recap, if you believe prices are going higher, you “buy,” also known as going
long. If you think prices will decline, you would “sell,” also known as going short.
How Long does the Investment Last?
You don’t need to wait for a futures contract to expire to exit your position. Simply
take the opposite position from the one you are currently in to exit. If you are long,
sell a contract or if you are short, buy one to exit.
For those that wish to take a longer-term stance or position in the market there are a
couple of options. One route is to simply buy or sell (depending upon your outlook) a
futures contract far enough out in the future to satisfy your expectations. For
example, you may believe the stock market is going higher over the next year. You
could then buy a futures contract with an expiration one year from now. Another
possible strategy is to buy the nearest contract and do what is called “rolling
forward.” In rolling forward, as the expiration of your contract nears, simply exit that
position and simultaneously buy the next farther our contract.
Futures Contracts Mechanics
What is a Contract Worth?
As mentioned before, a futures contract is a specific item, delivered at a specific time
with equally specific requirements for grade and content of the commodity.
Here is an example of computing the value of a stock index:
CME E-Mini S&P 500 Futures Contract
Index value X $50 = One CME E-Mini S&P 500 futures contract value
The CME E-Mini S&P 500 Futures Contract multiplier is $50. If the S&P 500
futures contract is at 1200, you simply multiply this value by $50.
1200 X $50 = $60,000 (Contract Value)
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
What are the Minimum Fluctuations (Ticks)?
Each futures contract has it’s own tick value. This value represent the value of one
increment in price movement. In stocks it is one penny in the price of the stock. For
futures, it is the tick.
We will continue using the CME E-Mini S&P 500 Futures contract as our learning
tool.
The CME E-Mini S&P 500 Futures Contract tick value is 0.25 index point, or $12.50
per contract. Therefore:
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A one increment (tick) move from 1200.00 to 1200.25 equals $12.50.
If you bought one contract for 1200.00 and the market moves to 1200.25, your
account would be credited $12.50. Conversely, if you sold a contract at
1200.00 and the market moved up to 1200.25, your account would be debited
$12.50.
A move from 1200.00 to 1201.00 would equal $50.
Futures Terminology
American-style options
Options that permit exercise at any time on or before the expiration date.
Arbitrage
The simultaneous purchase and sale of identical or equivalent financial instruments or
commodity futures in order to benefit from a discrepancy in their price relationship.
Ask
Also called "offer." Indicates a willingness to sell a futures contract at a given price. See
Bid.
Assignment
Notice to the seller of an option that has been exercised by the buyer.
Associated person (AP)
A person, commonly called a commodity broker, associated with and soliciting
customers and orders for a futures commission merchant or introducing broker. The AP
must pass a Series 3 examination, be licensed by the CFTC and be a member of the
NFA.
At-the-money
An option with a strike price equal to the underlying futures price.
Back months
The futures or options on futures months being traded that are furthest from expiration.
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
Also called deferred or distant months.
Bar chart
A graph of prices, volume and open interest for a specified time period used by the
chartist to forecast market trends. A daily bar chart plots each trading session's high, low
and settlement prices.
Basis
The local cash market price minus the price of the nearby futures contract.
Basis contract
A forward contract in which the cash price is based on the basis relating to a specified
futures contract.
Bear
One who believes prices will move lower.
Bear market
A market in which prices are declining.
Bear spread
A vertical spread involving the sale of the lower strike call and the purchase of the
higher strike call, called a bear call spread. Also, a vertical spread involving the sale of
the lower strike put and the purchase of the higher strike put, called a bear put spread.
Bearish key reversal
A bar chart formation that occurs in an uptrending market when the day's high is higher,
low is lower and close is below the previous day's. Can signal an upcoming downtrend.
Bid
The price that the market participants are willing to pay.
Blowoff volume
An extraordinarily high volume trading session occurring suddenly in an uptrend
signaling the end of the trend.
Breakaway gap
A gap in prices that signals the end of a price pattern and the beginning of an important
market move.
Breakeven
The point at which an option buyer or seller experiences no loss and no profit on an
option. Call breakeven equals the strike price plus the premium. Put breakeven equals the
strike price minus the premium.
Broker
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
A firm or person engaged in executing orders to buy or sell futures contracts for
customers. A full service broker offers market information and advice to assist the
customer in trading. A discount broker simply executes orders for customers.
Brokerage house
A firm that handles orders to buy and sell futures and options contracts for customers.
Bull
One who expects prices to rise.
Bull market
A market in which prices are rising.
Bull spread
A vertical spread involving the purchase of the lower strike call and the sale of the
higher strike call, called a bull call spread. Also, a vertical spread involving the purchase
of the lower strike put and the sale of the higher strike put, called a bull put spread.
Bullish key reversal
A bar chart formation that occurs in a downtrending market when the day's high is
higher, low is lower and close is above the previous day's. Can signal an upcoming
uptrend.
Buy On Opening
To buy at the beginning of a trading session at a price within the opening range.
Cabinet Trade or cab
A trade that allows options traders to liquidate deep out-of-the- money options by trading
the option at a price equal to one-half tick.
Call
An option to buy a commodity, security or futures contract at a specified price any time
between now and the expiration date of the option contract. See Option
Call breakeven
See Breakeven
Call profit/loss
For a long call, equal to the call value minus the premium. For a short call, equal to the
premium minus the call value.
Call value
At expiration, equal to the futures price minus the strike price of the call.
Car
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
A loosely used term to describe contract quantities.
Carryover
Last year's ending stocks of a storable commodity.
Cash commodity
The actual physical commodity as distinguished from a futures contract.
Cash price
Current market price of the actual physical commodity. Also called "spot price."
Cash sales
The sale of commodities in local cash markets such as elevators, terminals, packing
houses and auction markets.
Cash settlement
Final disposition of open positions on the last trading day of a contract month. Occurs in
markets where there is no actual delivery.
CFTC
Acronym for the Commodity Futures Trading Commission as created by the Commodity
Futures Trading Commission Act of 1974. This government agency currently regulates
the nation's commodity futures industry.
Chartist
One who engages in technical analysis.
Clearing House
An adjunct to the CME responsible for settling trading accounts, clearing trades,
collecting and maintaining performance bond funds, regulating delivery and reporting
trading data.
Close
The period at the end of the trading session. Sometimes used to refer to the closing
range.
Closing range
The high and low prices, or bids and offers, recorded during the period designated as the
official close. See Settlement price.
Commission
For futures contract, the one-time fee charged by a broker to cover the trades you make
to open and close each position, payable when you exit the position. Also called roundturn. Commissions on options are usually half on initiation and half on liquidation.
Commitment
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
When a trader or institution assumes the obligation to accept or make delivery on a
futures contract.
Commodity exchange
An organization that formulates rules and procedures for the trading of futures and
options on futures contracts, provides physical facilities for trading and/or access to
electronic trading technologies, and oversees trading practices.
Contract
Unit of trading for a financial or commodity future. Also, actual bilateral agreement
between the parties (buyer and seller) of a futures or options on futures transaction as
defined by an exchange.
Contract month
The month in which futures contracts may be satisfied by making or accepting delivery.
Also called the delivery month.
Credit spread
An option spread in which there is a net collection of premium.
Day order
An order that will be filled during the day's trading session or canceled.
Day trader
A trader who establishes and liquidates positions within one day's trading, ending the
day with no established position in the market.
Day trading
Refers to establishing and liquidating the same position or positions within one day's
trading, thus ending the day with no established position in the market.
Debit spread
An option spread in which there is a net payout of premium.
Deferred
See Back Months.
Deferred pricing agreement
A cash sale in which you deliver the commodity and agree with the buyer to price it at a
later time.
Delivery
The tender and receipt of an actual commodity of financial instrument in settlement of a
futures contract.
Delivery month
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
See Contract Month
Delta
The measure of the price-change relationship between an option and the underlying
futures price. Equal to the change in premium divided by the change in futures price.
Demand
The quantity of a commodity that buyers are willing to purchase from the market at a
given price.
Discount broker
See Broker
Distant
See Back Months
Double top, bottom
A bar chart formation that signals a possible trend reversal. In a point and figure chart,
double tops and bottoms are used for buy and sell signals.
Downtrend
A price trend characterized by a series of lower highs and lower lows.
DRT
See With discretion
Electronic trading
Trading via computer through an automated, order entry and matching system.
GLOBEX® is an example of an international electronic trading system.
Elliot wave theory
A type of technical analysis that studies price wave sequences.
Ending stocks
The amount of a storable commodity remaining at the end of a year.
European-style options
Options that may be exercised only on the option's expiration date.
Exercise
The process of an option holder exchanging it for the underlying futures contract.
Exercise notice
A notice tendered by a brokerage firm to the CME Clearing House that exchanges an
option for a futures contract.
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
Exercise price
The price at which the holder (buyer) may purchase or sell the underlying futures
contract. Also called strike price.
Exhaustion gap
A gap in prices near the top or bottom of a price move that signals an abrupt turn in the
market.
Expiration date
The last day that an option may be exercised into the underlying futures contract. Also,
the last day of trading for a futures contract.
Expire
Letting the expiration date for an option pass without exercising or offsetting the option.
Fast market
Term used to define unusually hectic market conditions.
Fill-or-kill order (FOK)
A limit order that must be filled immediately or canceled.
FLEX® options
Flexible term options providing more expiration dates and a broader range of strike
prices, available in American- or European-style.
Floor broker
An exchange member who is paid a fee for executing orders for clearing members or
their customers. A floor broker executing orders must be licensed by the CFTC.
Floor trader
An exchange member who generally trades only his or her own account or for an
account controlled by him or her. Also referred to as a local.
Forward contract
A private agreement between buyer and seller for the future delivery of a commodity at
an agreed price.
Full service broker
See Broker
Fundamental analysis
The study of supply and demand information to help project futures prices.
Fundamentalist
One who engages in fundamental analysis.
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
Futures
A term used to designate all contracts covering the purchase and sale of financial
instruments or physical commodities for future delivery on a commodity futures
exchange.
Futures commission merchant (FCM)
A firm or person engaged in soliciting or accepting and handling orders for the purchase
or sale of futures contracts, subject to the rules of a futures exchange and, who, in
connection with solicitation or acceptance of orders, accepts any money or securities to
margin any resulting trades or contracts. The FCM must be licensed by the CFTC.
Futures contract
A standardized agreement, traded on a futures exchange, to buy or sell a commodity at a
specified price at a date in the future. Specifies the commodity, quality, quantity, delivery
date and delivery point or cash settlement.
Gamma
The measure of the change in an option's delta given a change in the futures price. Equal
to the change in delta divided by the change in futures price.
Gap
A price area at which the market didn't trade from one day to the next. See Breakaway
gap, Exhaustion gap, Runaway gap.
Gap theory
A type of technical analysis that studies gaps in prices.
Good-til (GT)
An order that remains in effect until it's canceled or until the specified date is passed.
Good-til-canceled (GTC)
An order that remains in effect until it's canceled, filled or until the contract expires.
Historical volatility
See Volatility
Holder
One who purchases an option.
Head and shoulders
A sideways price formation at the top or bottom of the market that indicates a major
market reversal.
Hedge
The purchase or sale of a futures contract as a temporary substitute for a cash market
transaction to be made at a later date. Usually it involves opposite positions in the cash
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
market and futures market at the same time. See Long Hedge and Short Hedge.
Hedger
A person or firm who uses the futures market to offset price risk when intending to sell
or buy the actual commodity. See Pure hedger, Selective hedger.
Hedging
The purchase or sale of a futures contract as a temporary substitute for a cash market
transaction to be made at a later date.
Hedging line of credit
Financing from your lender for the purpose of hedging the sale and purchase of
commodities.
Holder
One who purchases an option.
Hundredweight
100 pounds. Abbreviated cwt.
Implied volatility
See Volatility
Initial performance bond
The funds required when a futures position (or a short options on futures position) is
opened. Previously referred to as initial margin. See Performance Bond.
Inter-commodity spread
A spread trade involving the same month of different but related futures contracts.
Inter-market spread
A spread trade involving same or related commodities at different exchanges. Also
called an inter-exchange spread.
In-the-money
A call option with a strike price less than the underlying futures price. A put option with
a strike price greater than the underlying futures price.
Intra-market spread
A spread trade involving different contract months of the same commodity. Also called
an inter-delivery spread.
Intrinsic value
The relationship of an option's in-the-money strike price to the current futures price. For
a put: Strike Price - Futures Price. For a call: Futures Price - Strike Price.
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
Introducing broker (IB)
A firm or person engaged in soliciting or accepting and handling orders for the purchase
or sale of futures contracts, subject to the rules of a futures exchange, but not in accepting
any money or securities to margin any resulting trades or contracts. The IB is associated
with a correspondent futures commission merchant and must be licensed by the CFTC.
Leverage
The use of a small amount of assets to control a greater amount of assets.
Limit order
An order that can be filled only at a specified price or better.
Limit move
See Maximum price fluctuation.
Liquidation
Any transaction that offsets or closes out a long or short futures or options on futures
position.
Livestock cycle
A long, repeating pattern of increasing and decreasing livestock supply and prices.
Long
One who has bought a futures or options on futures contract to establish a market
position and who has not yet closed out this position through an offsetting procedure. The
opposite of short.
Long cash
You own and plan to sell a commodity.
Long hedge
The purchase of a futures contract in anticipation of an actual purchase in the cash
market. Used by processors or exporters as protection against an advance in the cash
price. See Hedge.
Lot
The term used to describe a designated number of contracts, e.g., a 5 lot purchase. Also
called "cars."
Margin
See Performance bond.
Maintenance performance bond
A sum, usually smaller than the initial performance bond, which must remain on deposit
in the customer's account for any position. A drop in funds below this level requires a
deposit back to initial performance bond levels. Previously referred to as maintenance
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
margin. See Performance bond call.
Market-if-touched (MIT)
An price order that becomes a market order when the market trades at a specified price at
least once.
Market-on-close (MOC)
A market order filled during the close of a trading session.
Market order
An order filled immediately at the best price available.
Mark-to-market
The daily adjustment of performance bond accounts to reflect profits and losses.
Maximum price fluctuation
The maximum amount the contract price can change up or down during one trading
session, as stipulated by Exchange rules.
Minimum price fluctuation
The smallest increment of price movement possible in trading a given contract, often
referred to as a tick.
Moving averages
A type of technical analysis using the averages of settlement prices.
Moving average chart
A chart recording moving averages (3-day, 10-day, etc.) of market prices.
National Futures Association (NFA)
A self-regulatory organization for the commodity futures industry comprised of firms
and individuals that conduct business with the public. Overseen by the CFTC
Nearby
The nearest active trading month of a futures or options on futures contract. Also
referred to as the lead month.
Non-serial options
Options for months for which there are existing futures contracts of the same months.
Not-held (NH)
A discretionary note on an order telling the floor broker that he or she won't be held
accountable if the trade is executed outside the requirements of the order. Gives the
broker discretion on getting the order filled.
Offer
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
Indicates a willingness to sell a futures contract at a given price.
Offset
Selling if one has bought, or buying if one has sold, a futures or options on futures
contract.
Offsetting a hedge
For a short hedger, to buy back futures and sell a commodity. For a long hedger, to sell
back futures and buy a commodity.
Offsetting a long option
Offset a put by selling a put with the same strike price. Offset a call by selling a call with
the same strike price.
Opening
The beginning of the trading session.
Opening range
The range of prices at which the first bids and offers were made or first transactions were
completed. Must be initiated by at least one trade.
Open interest
Total number of futures or options on futures contracts that have not yet been offset or
fulfilled for delivery.
Open order
See Good-til-canceled.
Open outcry
The method of trading publicly so that each trader has a fair chance to buy or sell.
Option
The right, but not the obligation, to sell or buy the underlying (in this case, a futures
contract) at a specified price within a specified time.
Option assignment
The random selection of an option writer to take a futures position when an option is
exercised.
Option buyer
One who purchases an option and pays a premium.
Option seller
One who sells an option and receives a premium.
Order-cancels-other (OCO)
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
An order that includes two orders, one of which cancels the other when filled. Also
referred to as one-cancels-other.
Out-of-the-money
An option with no intrinsic value. A call option with a strike price greater than the
underlying futures price. A put option with a strike price less than the underlying futures
price.
Out-trades
A situation that results when there is some confusion or error on a trade - for example,
when both traders think they were buying.
Overbought/oversold
A technical opinion of a market which has risen/fallen too much in relation to underlying
fundamental factors.
Performance bond
Funds that must be deposited by a customer with his or her broker, by a broker with a
clearing member or by a clearing member with the Clearing House. The performance
bond helps to ensure the financial integrity of brokers, clearing members and the
Exchange as a whole. Previously referred to as margin.
Performance bond call
A demand for additional funds to bring the customer's account back up to the initial
performance bond level whenever adverse price movement has caused the account to go
below the maintenance. Previously referred to as a margin call. See Maintenance
performance bond.
Point and figure chart
A graph of prices charted with x's for price increases and o's for price decreases, used by
the chartist for buy and sell signals.
Position
An interest in the market, either long or short, in the form of open contracts. See Open
interest.
Position trader
A trader who takes a position in the market and might hold that position over a long
period of time.
Premium
The amount agreed upon between the buyer and seller for the purchase or sale of a
futures option - the buyer pays the premium and the seller receives the premium. The
excess of one futures contract price over that of another or over the cash market price.
Price order
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
An order to sell or buy at a certain price or better.
Pure hedger
A person who places a hedge to lock in a price for a commodity. He or she offsets the
hedge and transacts in the cash market simultaneously.
Put breakeven
See Breakeven.
Put option
An option granting the right, but not the obligation, to sell a futures contract at the stated
price prior to the expiration of the option.
Put profit/loss
For a long put, equal to the put value minus the premium. For a short put, equal to the
premium minus the put value.
Put value
At expiration, equal to the strike price minus the futures price.
Rally
An upward movement of prices following a decline. The opposite of a reaction.
Range
The high and low prices or high and low bids and offers recorded during a specified
time.
Retracement
A price move in the opposite direction of a recent trend.
Registered representative
A person employed by, and soliciting business for, a commission house or futures
commission merchant.
Resistance line
A price level above which prices tend not to rise due to selling pressure.
Round-turn
See Commission.
Runaway gap
A gap in prices after a trend has begun that signals the halfway point of a market move.
Scalp
To trade for small gains. Scalping normally involves establishing and liquidating a
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
position quickly, usually within the same day, hour or even just a few minutes.
Selective hedger
A person who hedges only when he or she believes that prices are likely to move against
him or her.
Selling climax
An extraordinarily high volume occurring suddenly in a downtrend signaling the end of
the trend.
Serial options
Options for months for which there are no futures contracts. The underlying futures
contract for a serial option month would be the next nearby futures contract.
Settlement price
A figure determined by the closing range that is used to calculate gains and losses in
futures market accounts, performance bond calls and invoice prices for deliveries. See
Closing range.
Short
One who has sold a futures contract to establish a market position and who has not yet
closed out this position through an offsetting procedure. The opposite of long.
Short cash
Describes a trader who needs and plans to buy a commodity.
Short hedge
The sale of a futures contract in anticipation of a later cash market sale. Used to
eliminate or lessen the possible decline in value of ownership of an approximately equal
amount of the cash financial instrument or physical commodity. See Hedge.
Sideways trend
Seen in a bar chart when prices tend not to go above or below a certain range of levels.
Speculator
One who attempts to anticipate price changes and, through buying and selling futures
contracts, aims to make profits. Does not use the futures market in connection with the
production, processing, marketing or handling of a product. The speculator has no
interest in taking delivery.
Spot Price
See Cash price.
Spread
The price difference between two contracts. Holding a long and a short position in two
related futures or options on futures contracts, with the objective of profiting from a
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
changing price relationship.
Spread order
An order that indicates the purchase and sale of futures contracts simultaneously.
Spread trade
The simultaneous purchase and sale of futures contracts for the same commodity or
instrument for delivery in different months or in different but related markets. A spreader
is not concerned with the direction in which the market moves, but only with the
difference between the prices of each contract.
Stop close only order
A stop order that is executed only during the closing range of the trading session.
Stop limit order
An order that becomes a limit order only when the market trades at a specified price.
Stop order
An order that becomes a market order only when the market trades at a specified price.
Stop with a price limit
A stop order with a specified worst price at which the order can be filled.
Storage gain
The selling price received after storage minus the previous harvest market price.
Straddle
The purchase of a put and a call, in which the options have the same expiration and same
strike price, called a long straddle. Also, the sale of both a put and a call in which the
options have the same expiration and same strike price, called a short straddle.
Strangle
The purchase of a put and a call, in which the options have the same expiration and the
put strike is lower than the call strike, called a long strangle. Also the sale of a put and a
call, in which the options have the same expiration and the put strike is lower than the
call strike, call a short strangle.
Strike price
The price at which the option buyer may purchase or sell the underlying futures contract
upon exercise. See Exercise price.
Supply
The quantity of a commodity that producers are willing to provide to the market at a
given price.
Symmetrical triangles
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
A price formation that can either signal a reversal or a continuation of price movement.
Synthetic futures
A combination of a put and a call with the same strike price, in which both are bullish,
called synthetic long futures. Also, a combination of a put and a call with the same strike
price, in which both are bearish, called synthetic short futures.
Synthetic call option
A combination of a long futures contract and a long put, called a synthetic long call.
Also, a combination of a short futures contract and a short put, called a synthetic short
call.
Synthetic option
A combination of a futures contract and an option, in which one is bullish and one is
bearish.
Synthetic put option
A combination of a short futures contract and a long call, called a synthetic long put.
Also, a combination of a long futures contract and a short call, called a synthetic short
put.
Target price
An expected selling or buying price. For long and short hedges with futures: Futures
Price + Expected Basis. For puts: Futures Price - Premium + Expected Basis. For calls:
Futures Price + Premium + Expected Basis.
Technical analysis
The study of historical price patterns to help forecast futures prices.
Theta
The measure of the change in an option's premium given a change in the option's time
until expiration. Equal to the change in the option's premium divided by the change in
time to expiration.
Tick
Refers to a change in price, either up or down. See Minimum price fluctuation.
Time value
The amount by which an option's premium exceeds the intrinsic value of the option.
Usually relative to the time left to expiration.
Trader
A member of the exchange who buys and sells futures and options on the floor of the
exchange. See Day trader, Floor broker, Position trader and Scalper.
Trend
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
The general direction of the market.
Uptrend
A price trend characterized by a series of higher highs and higher lows.
Vega
The measure of the change in an option's premium for a 1% change in the volatility of
the underlying futures contract. Equal to the change in premium divided by 1% change in
volatility.
Vertical spread
The purchase of a call (put) and the sale of a call (put), where the options have the same
expiration and different strike prices.
Volatility
A annualized measure of the fluctuation in the price of a futures contract. Historical
volatility is the actual measure of futures price movement from the past. Implied
volatility is a measure of what the market implies it is, as reflected in the option's price.
Volume
The number of transactions in futures or options on futures made during a specified
period of time.
With discretion (DISC)
A discretionary note on an order telling the floor broker to use his or her own discretion
in filling the order.
Writer
An individual who sells an option.
How Leverage Works
Futures trading involves the use of margin to hold a position. This is also known as
leverage. In such an arrangement, only a small fraction of the actual value of the contract
is required. This quite literally is a double edged sword. For example in the CME Emini NASDAQ-100 futures each point is worth $20 and if prices are at 1500, the value of
that contract would be:
$20 X 1500 = $30,000
The Chicago Mercantile Exchange sets a minimum good faith deposit amount, also
known as margin of $3,750 to either buy or sell one contract.
If you purchase one contract and the price goes up, you prospered and you only had to
put up around 10% of the total contract value. However, should you buy and the market
falls, the losses can add up fast.
Here are some sample transactions:
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
If the CME E-mini NASDAQ-100 futures are at 1700 when you buy one contract and the
price moves to 1750 when you exit:
$20 (point value) X 50 (1750 – 1700 = 50) = $1000 gross profit (does not include
commissions or fees)
…and if prices go against you…
If the CME E-mini NASDAQ-100 futures are at 1700 when you buy one contract and the
price moves to 1650 when you exit:
$20 (point value) X 50 (1700 – 1650 = 50) = $1000 gross loss (does not include
commissions or fees)
List of Stock Index Markets
This is by no means the inclusive of every globally traded stock index, but is a good
cross-section of the more popular indices:
NASDAQ 100 Index and E-mini NASDAQ 100 Index
Traded on the Chicago Mercantile Exchange, these futures contracts are based on the
NASDAQ-100 Stock Index, a modified capitalization-weighted index of 100 of the
largest and most active non-financial, domestic stocks traded on the Nasdaq Stock
Market.
NASDAQ 100 Index
Ticker Symbol
ND
Contract Size
$100 times the NASDAQ-100 Index
Minimum Price Fluctuation
0.50 index points = $50 per contract
Trading Hours (Chicago Time)
Virtually 24 hour trading, Sunday afternoon
through Friday afternoon
Contract Months
March, June, September & December
NASDAQ 100 Index E-mini
CME E-mini® NASDAQ-100® futures provide investors with an innovative tool for
accessing and managing risks on stock market investments. Fully electronic and 1/5th the
size of a standard CME NASDAQ-100® futures contract, it closely tracks the price
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
movements of the NASDAQ-100 Index, a leading benchmark that follows 100 of the
largest (in market-capitalization terms) U.S and international non-financial companies
listed on The Nasdaq Stock Market. CME E-mini futures are some of the mostly highlytraded futures contracts in the world, reinforcing CME’s position as the world’s leading
provider of stock-index futures.
Ticker Symbol
NQ
Contract Size
$20 times the NASDAQ-100 Index E-mini
Minimum Price Fluctuation
0.50 index points = $10 per contract
Trading Hours (Chicago Time)
through Friday afternoon
Virtually 24 hour trading, Sunday afternoon
Contract Months
March, June, September & December
NIKKEI 225 Index
CME Nikkei 225™ futures and options are designed to offer investors a fast,
effective way to access the opportunities of the Japanese market, which rose to
prominence in the 1980s and checks in today as the second largest world market (in
terms of market capitalization). The contracts track the benchmark Nikkei 225 Stock
Average.
Ticker Symbol
NK
Contract Size
$5 times the Nikkei 225 Index
Minimum Price Fluctuation
5.00 index points = $25 per contract
Trading Hours (Chicago Time)
through Friday afternoon
Virtually 24 hour trading, Sunday afternoon
Contract Months
March, June, September & December
Russell 2000 Index
Traded on the Chicago Mercantile Exchange, the Russell 2000 and Russell 2000 Emini futures contracts, a capitalization-weighted index of approximately 2,000
actively traded, small-capitalization U.S. stocks. These stocks are traded on the New
York Stock Exchange, the American Stock Exchange, and the Nasdaq Stock Market.
The index is computed and distributed by the Frank Russell Company.
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
Ticker Symbol
RL
Contract Size
$500 times the Russell 2000 Index
Minimum Price Fluctuation
0.50 index points = $25 per contract
Trading Hours (Chicago Time)
through Friday afternoon
Virtually 24 hour trading, Sunday afternoon
Contract Months
March, June, September & December
Russell 2000 Index E-mini
CME E-mini Russell 2000® futures provide investors with exposure to the smallcapitalization equity market. Fully electronic and 1/5th the size of a standard CME
Russell 2000® futures contract, it closely tracks the price movements of the Russell 2000
Index.
Ticker Symbol
ER
Contract Size
$100 times the Russell 2000 Index
Minimum Price Fluctuation
0.10 index points = $10 per contract
Trading Hours (Chicago Time)
through Friday afternoon
Virtually 24 hour trading, Sunday afternoon
S&P 500 Index
Recognizing a growing need for investors to be able to effectively manage risks on
their stock market investments, CME developed the CME S&P 500® futures, the first
successful stock-index futures contract. Based on the Standard & Poor’s 500® (S&P
500) Index, which is widely followed as the key benchmark for large capitalization
U.S. stocks, this innovative product sparked a new asset class of futures and helped
establish CME as the world leader in stock-index futures.
Ticker Symbol
SP
Contract Size
$250 times the Standard & Poor’s 500 Stock
Price 2000 Index
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
Minimum Price Fluctuation
0.10 index points = $25 per contract
Trading Hours (Chicago Time)
through Friday afternoon
Virtually 24 hour trading, Sunday afternoon
Contract Months
March, June, September & December
S&P 500 Index E-mini
CME E-mini® S&P 500® futures provide investors with an innovative tool for accessing
and managing risks on stock market investments. Fully electronic and 1/5th the size of a
standard CME S&P 500® futures contract, it closely tracks the price movements of the
S&P 500® Index, the premier benchmark of stock market performance. More than 1
million contracts traded on average per day in 2006, making it one of the most highlytraded futures contracts in the world and reinforcing CME’s position as the world’s
leading provider of stock-index futures.
Ticker Symbol
ES
Contract Size
$50 times the Standard & Poor’s 500 Stock
Price 2000 Index
Minimum Price Fluctuation
0.25 index points = $12.50 per contract
Trading Hours (Chicago Time)
through Friday afternoon
Virtually 24 hour trading, Sunday afternoon
Contract Months
March, June, September & December
S&P Midcap 400
CME S&P MidCap 400® futures offer customers access to the mid-cap equity sector
of the stock market with a single transaction. These contracts track the S&P MidCap
400®, the most widely used index for mid-sized companies.
Ticker Symbol
MD
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
Contract Size
$500 times the Standard & Poor’s MidCap
400 Stock Price Index
Minimum Price Fluctuation
0.50 index points = $25.50 per contract
Trading Hours (Chicago Time)
through Friday afternoon
Virtually 24 hour trading, Sunday afternoon
Contract Months
March, June, September & December
S&P Midcap 400 E-mini
CME E-mini® S&P MidCap 400® futures provide a valuable tool for investors
seeking access to trade the attractive mid-cap equity market sector. Fully electronic
and 1/5th the size of a standard CME S&P MidCap 400® futures contract, it closely
tracks the price movements of the S&P MidCap 400® Index, the most widely used
performance indicator for mid-sized companies.
Ticker Symbol
EMD
Contract Size
$100 times the Standard & Poor’s MidCap
400 Stock Price Index
Minimum Price Fluctuation
0.10 index points = $10 per contract
Trading Hours (Chicago Time)
through Friday afternoon
Virtually 24 hour trading, Sunday afternoon
Contract Months
March, June, September & December
Other stock index markets include:
CAC-40
EURONEXT
CCI
NYBOT
DAX 30
EUREX
Dow
CBOT
Dow, Big
CBOT
Dow, Mini
CBOT
Euro Stoxx
EUREX
FTSE 100
LIFFE
FTSE 250
LIFFE
Hang Seng
Hong Kong Futures Exchange
Hang Seng Mini Hong Kong Futures Exchange
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
FTSE 100
Hang Seng
Dow
Chicago Board of Trade
COMMODITY FUTURES, OPTIONS, AND FOREX
TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.