What are S&P 500 Futures?

S&P 500 futures contracts are like pre-ordering a video game…

When a hot new game is scheduled for release, you can order your copy in advance. That way, you don’t have to worry about it selling out before you get your copy. Of course, you also run the risk that the game is a dud and you regret buying. Similarly, S&P 500 futures contracts are advance purchases. If the future price ends up higher than what you paid in advance, you’ll be happy. But there’s also a risk that you’ll end up regretting your decision.

Standard and Poor 500 futures, aka S&P futures, are advance agreements for the S&P 500, an index consisting of 500 of the largest stocks traded in the US. The buyer and seller agree to a price in the present, then compare it to the market value of the index on the contract expiration date. The underlying shares of the 500 companies don’t actually move from the seller to the buyer. Instead, the contracts are settled electronically. In this way, futures trading is more like trying to predict the direction the index will move, rather than purchasing actual securities.

These futures contracts change hands on the CME Group’s futures exchange, while the stocks themselves trade on stock exchanges. There are four contract periods per year, with contract dates ending in March, June, September, and December.

The futures market opens on Globex (CME’s electronic trading platform) each Sunday at 6 p.m. until Friday at 5 p.m. Eastern time. But trading on Globex halts 15 minutes before the start of open outcry trading (the active market trading process of calling out bids and asks in the pit) and resumes 15 minutes after each open outcry session ends. That means that trading on S&P 500 futures is only closed from Friday at 5 p.m until Sunday at 6 p.m. Eastern time, plus two 15 minute halts during each weekday.

S&P 500 futures contracts are traded through the CME Group (which operates several futures and options exchanges, such as the CME, CBOT, NYMEX and COMEX). The standard contract trades under the symbol SP. A smaller version (one-fifth the size) of the SP futures contract, called an E-mini, which trades under the symbol ES. There is also a micro version of the contract, which is one-fiftieth the size of the standard contract and trades as MES. Traders sometimes refer to S&P 500 futures informally as SPX futures, since SPX is the ticker symbol for the S&P Index.

The S&P 500 is a stock index, not a stock. Just like the Dow Jones Industrial Average or the Nasdaq Composite Index, there are no shares of S&P 500 for traders to buy directly. Traders would need to purchase shares of the underlying 500 companies represented in the index. But traders can buy shares of an index fund, mutual fund, or exchange-traded fund (ETF), which matches the price changes of the index by owning the stocks that make up the S&P 500.

To look up the current market value of the S&P 500 Index in real time, you can use the symbol ^GSPC, INX, or SPX — Depending on which the website or platform you’re using. One of the most popular ETFs tracking the S&P 500 is the SPDR S&P 500 Trust, which uses the ticker symbol SPY.

S&P 500 futures work just like most futures contracts. However, they are always settled with cash rather than physical delivery. With commodity futures, buyers sometimes want the actual product listed on the contract. For example, a person buying oil futures might actually want crude oil. By contrast, buyers of S&P 500 futures wouldn’t want the underlying asset (stocks) represented by the contract. They would just want the money represented by the price movement between the futures price and the market price at expiration.

A trader can take a long or a short position on a futures contract. The long position (buyer) believes the price will go up, while the short position (seller) is betting that the price will fall. When the trading period ends, the long and short positions compare the contract price to the market price. If the price went up, the short position pays the long position the difference. If the price goes down, the long position pays the short position the difference.

The CME Group (a US-based operator of futures and options exchanges) creates index futures contracts when there is enough interest in buying and selling them. Those contracts are traded among investors as long as they are open. But the interest in a futures contract tends to increase as the expiration date gets closer. That means that the current S&P 500 futures change over time. In June 2020, the most traded S&P 500 futures contract was the September 2020 contract. Some traders were already exchanging the December contract but at a much lower volume. As September approaches, interest will shift to the December futures. So the current S&P futures contract is the next one to close — Whether in March, June, September, or December.

The S&P 500 comprises the 500 US companies with some of the largest market capitalization across all sectors. That list changes from time to time, as companies shrink and grow. S&P Dow Jones Indices maintains the list of the constituent companies at https://us.spindices.com/indices/equity/sp-500#data.

E-mini futures are electronically traded and are smaller than the standard equivalent futures contract. They allow traders with less money to participate in the trades. The E-mini S&P 500 futures contract is 20% of the big S&P futures contract. Still, even an E-mini S&P 500 future trades for a lot more money than a casual trader can often afford. In 2020, the price of an E-mini is well over $100,000 per contract. The CME Group (a futures exchange operator) also trades micro E-mini contracts that are 1/10th of an E-mini (2% of a big S&P futures contract).

The S&P 500 is often considered to be the best representation of the entire stock market. So, many traders measure a trading strategy against the S&P 500 as a benchmark. They might consider an investment “good” if it outperforms the index. However, Warren Buffet (a famously successful investor) has often said that buying an index fund is among the smartest investments.

Futures are more sophisticated than buying shares in an index fund. They are inherently short-term investments. Profiting from a futures contract requires you to correctly guess how the market will move in the coming weeks. That’s a much different type of investment than buying common stock in companies that you think will grow over time.

Like any stock market trading, buying S&P 500 futures requires an account with a broker. But not all brokers allow traders to buy and sell futures contracts. Those that do will require traders to apply for a margin account (an account that allows the trader to borrow money from the broker) before trading futures like the SP, ES, or MES. The futures broker will have trading rules, margin requirements, and other conditions to ensure traders stay in line with federal laws. Once a futures account is open, the trader can place orders for futures contracts directly on the platform.

Trading futures is complex, involves additional substantial risks and is not suitable for most investors. They may lose all or more of their initial investment.