What are stock index futures?

Stock index futures are contracts that track the value of a specific stock market index. Instead of trading individual stocks, these contracts are based on the overall value of the index. Investors use stock index futures to speculate on the market's direction or to hedge against potential downturns.

These contracts are standardized and traded on exchanges like the Chicago Mercantile Exchange (CME). Each stock index futures contract has a set expiration date and contract size. When trading stock index futures, you're not purchasing the actual stocks in the index, but rather speculating on whether the index will rise or fall.

When their forecasts are correct, traders can profit from both up and down markets by going long or short the contract. When they’re wrong, they risk losing money. For example, if a trader goes long in anticipation of the market moving higher, but it moves lower instead, they’ll likely lose money on the trade.

Stock index futures are particularly popular among investors seeking to hedge their portfolios, as they offer broad market exposure. For example, an investor with a stock portfolio could sell a correlated index futures contract to hedge against potential losses. However, factors like market timing, position sizing, and costs are important considerations when using futures for hedging.

Example

Among the various types of equity index futures, Micro Nasdaq-100 futures (/MNQ) are some of the most actively traded, known for their standardization, global acceptance, and liquidity. Each /MNQ contract represents the value of the Nasdaq-100 index multiplied by $2. For example, if the Nasdaq-100 index is trading at 15,000 points, the value of one /MNQ contract would be $30,000 (15,000 x $2). These contracts have quarterly expirations, allowing traders to speculate on or hedge against future movements in the tech-heavy Nasdaq 100.

To buy or sell an /MNQ contract, traders must put down a percentage of the total contract value, known as the margin requirement. Margin requirements can fluctuate based on market conditions but generally represent a small portion of the contract’s value (e.g., $2,000). The futures trade in increments of 0.25 index points, meaning the smallest price movement (or tick size) equals $0.50 per contract (0.25 x $2). Micro Nasdaq futures are traded nearly 24 hours a day, from Sunday at 5:00 p.m. to Friday at 4:00 p.m. CT, with a one-hour break each day at 4:00 p.m. CT.

Traders use stock index futures for both speculation and hedging:

• Speculation: Traders speculate on the future direction of the stock market by buying futures if they expect the market to rise and selling futures if they anticipate a decline.
• Hedging: Investors and portfolio managers use stock index futures to protect against potential losses. For example, if an investor holds a diversified stock portfolio and fears a market downturn, they can sell index futures to help offset potential losses in their portfolio.

The CME Group offers E-mini stock index futures on major indices like the S&P 500, Dow Jones Industrial Average, Nasdaq 100, and Russell 2000. These contracts are highly liquid, making it easy for traders to enter and exit positions. Like other futures, E-minis provide leverage, allowing traders to control a larger position with relatively small capital. However, leverage can magnify both gains and losses.

CME Group also offers Micro E-mini contracts, smaller versions of E-mini futures that are 1/10th the size. These smaller contracts are more accessible for traders with lower risk tolerance or those looking to trade in smaller sizes. Micro contracts also offer more precise risk management, allowing traders to adjust their positions more granularly, and provide a lower-risk way for new traders to gain experience in futures trading without committing significant capital.

E-mini S&P 500 futures (/ES), commonly known as "E-minis," track the S&P 500 Index, a benchmark representing over 500 of the largest publicly traded companies in the U.S. The index covers 11 sectors, offering a broad view of the U.S. economy.

Each E-mini S&P 500 futures contract is valued at $50 times the current level of the S&P 500 index. For instance, if the index is at 5,000 points, the value of one E-mini contract would be $250,000 (5,000 x $50). The minimum price fluctuation, or tick size, for these contracts is 0.25 index points, which equals $12.50 per contract (0.25 x $50). E-mini S&P 500 futures trade nearly 24 hours a day, Sunday through Friday, providing flexibility for traders to react to global market events.

The Micro E-mini S&P 500 futures (/MES) offer a smaller alternative, sized at $5 times the S&P 500 index value, making it 1/10th the size of the standard E-mini. For example, if the S&P 500 index is at 5,000 points, the value of a /MES contract would be $25,000 (5,000 x $5). The minimum price fluctuation is also 0.25 index points, equating to $1.25 per contract (0.25 x $5). Like /ES, /MES futures trade nearly 24 hours a day, 5 days a week, with quarterly expirations in March, June, September, and December. This structure also applies to micro futures contracts for the Nasdaq, Dow Jones Industrial Average, and Russell 2000.

The E-mini Nasdaq-100 futures contract (/NQ), commonly referred to as the E-mini Nasdaq, tracks the Nasdaq-100 Index, which consists of 100 of the largest non-financial companies listed on the Nasdaq stock exchange, with a heavy emphasis on the technology sector.

Each E-mini Nasdaq-100 futures contract is valued at $20 times the Nasdaq-100 Index. For instance, if the index is at 20,000 points, the contract's value would be $400,000 (20,000 x $20). The minimum price fluctuation, or tick size, is 0.25 index points, which equals $5 per contract (0.25 x $20).

The Micro E-mini Nasdaq-100 futures contract (/MNQ) is a smaller version, sized at $2 times the value of the Nasdaq-100 Index, making it 1/10th the size of the E-mini. For example, if the index is at 15,000 points, the value of a Micro E-mini contract would be $30,000 (15,000 x $2). The minimum price fluctuation is also 0.25 index points, equating to $0.50 per contract (0.25 x $2).

The E-mini Dow futures contract (/YM), often referred to as the E-mini Dow, tracks the performance of the Dow Jones Industrial Average (DJIA). Created in 1896 by Charles Dow and commonly known as "the Dow," the DJIA is a stock market index that measures the performance of 30 prominent U.S. companies.

Each E-mini Dow futures contract is valued at $5 times the DJIA. For example, if the DJIA is at 35,000 points, the contract's value would be $175,000 (35,000 x $5). The minimum price fluctuation, or tick size, for the E-mini Dow futures is 1 index point, which equals $5 per contract (1 x $5).

The Micro E-mini Dow futures contract (/MYM) is a smaller version, sized at $0.50 times the DJIA, making it 1/10th the size of the E-mini. If the DJIA is at 35,000 points, the value of a Micro E-mini contract would be $17,500 (35,000 x $0.50). The minimum price fluctuation, or tick size, for the Micro E-mini Dow futures is also 1 index point, equating to $0.50 per contract (1 x $0.50).

The E-mini Russell 2000 futures contract (/RTY), commonly referred to as the E-mini Russell, tracks the performance of the Russell 2000 Index. This index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, providing a broad representation of small-cap U.S. companies.

Each E-mini Russell 2000 futures contract is valued at $50 times the Russell 2000 Index. For example, if the index is at 2,000 points, the contract would be worth $100,000 (2,000 x $50). The minimum price fluctuation, or tick size, for E-mini Russell 2000 futures is 0.10 index points, which equals $5 per contract (0.10 x $50).

The Micro E-mini Russell 2000 futures contract (/M2K) is a smaller version, sized at $5 times the Russell 2000 Index, making it 1/10th the size of the standard E-mini contract. If the index is at 2,000 points, the value of one Micro E-mini contract would be $10,000 (2,000 x $5). The minimum price fluctuation, or tick size, is also 0.10 index points, equating to $0.50 per contract (0.10 x $5).

Overall, both E-mini and Micro E-mini stock index futures provide market participants with effective tools for speculation, hedging, and risk management in the equity markets. The Micro E-mini, in particular, has increased accessibility, enabling a wider range of traders to participate in the futures market with smaller capital requirements.