Index futures

Stock indices represent the performance of the broad stock market in a country or region. An index is a kind of average value that is calculated and published by the stock exchange. However, the index itself cannot be bought or traded. This requires a financial instrument whose underlying value is the corresponding index and which therefore reflects the price performance of the index. IndexFutures are futures contracts that fulfill this purpose and can be used to hedge an equity portfolio or for short to medium-term speculation, which is why they are popular with retail traders and professional investors alike.

What are index futures?

Index futures are forward contracts whose underlying is a stock index (or commodity or currency index). Index futures are usually tradable in a very liquid manner and are therefore very popular with both professional and private traders.

Excursus: History of futures trading

Futures contracts have been used for several hundred years to hedge against price fluctuations in commodities. Standardized commodity futures contracts as we know them today were first traded on the U.S. futures exchange CBOT (Chicago Board Of Trade) in 1884. Over the years, futures trading became increasingly popular and numerous new futures contracts for commodities were developed. Among traders, the term "commodity trading" or "commodities" became established as a synonym for trading in futures.

In the beginning, only physical commodities were tradable, but due to the increasing need for hedging against price fluctuations of stock markets, bonds and currencies, so-called financial futures have also been issued since the 1970s. Incidentally, many traders also referred to these as "commodities", although they are not commodities in the original sense.

Hedging vs speculation

In addition to commercial market participants who use futures to hedge against price fluctuations, futures are also popular among speculative investors for short- to medium-term trading. In particular, index futures (futures on stock indices) are very popular and futures contracts for all major stock indices are available today.

Special features of index futures

Like all other forward+ contracts (or futures), index futures also have a limited term. As a rule, the contract months March, June, September and December are available for the important American and European stock indices. Trading takes place until the third Friday of the month.

On this day, also known as the witches' Sabbath among stockbrokers, futures and options on the most important indices expire, which is why there is often above-average volatility.

Settlement method

If a futures contract expires, the underlying is (theoretically) due for delivery. Since an equity index cannot be physically delivered, a cash settlement takes place. (For commodity futures whose underlying is a physical commodity, you are also protected from physical delivery at CapTrader. With currency futures, however, the underlying - i.e. the currency - is "delivered").

Multiplier

The multiplier of each future can be found in the contract details. Depending on the underlying, the multipliers and thus also the tick value, the margin requirements, etc. are different. For many futures, in addition to the regular contracts, mini- or micro-contracts are also available, whose multiplier is significantly lower. Mini and micro contracts can therefore also be used by private traders with smaller accounts.

The most important index futures at a glance