Posted By: Ilan Levy-Mayer Vice President, Cannon Trading Futures Blog
Written By John Thorpe, Senior Broker
In 1957 the American financial company, Standard & Poor’s established the S&P 500, a market index that tracks the value of 500 corporations on the NYSE and NASDAQ that are determined to reflect the overall shape of the United States Economy. Since then, the S&P 500 has stood as a trendsetter that indicates the ebbs and flows of the U.S. economy during both steady periods defined by incremental growth, and erratic periods of market unrest.
The S&P 500’s unflappable performance has made it a popular destination for passive index traders, who buy and sell at a minimum and swear by the strategy of “slow and steady wins the race”. However, this does not mean the S&P is completely immune to large fluctuations, in 2009 the housing crisis dropped the S&P 500 by 57%.
In 1982, the first S&P 500 futures contracts were introduced. The S&P 500 Futures Contract is priced by multiplying the S&P 500 value by $250. As with all futures contracts, the investor is required to front a fraction of the contract in order to take a position. This is also known as the “margin” of the contract. Unlike stock margins, futures margins increase a trader’s risk because they must be settled.
Because of the substantial investment required to trade S&P 500 Futures Contracts, in 1997 the CME introduced the E-mini (electronic mini) S&P 500 Futures Contract. This contract is only priced by multiplying the S&P 500 value by $50, making it one-fifth the price of a standard S&P 500 Futures Contract. This introduction opened up the S&P 500 Futures market to a large number of new investors who perhaps did not possess the risk capital to invest in the standard contract.
Advantages of Trading in S&P 500 Futures
An investor in the S&P 500 benefits from many advantages. First, it trades almost 24 hours a day, 5 days a week on financial exchanges across the globe, allowing the investor a substantial amount of flexibility. Next, the S&P 500 is widely covered and reported on by analysts, giving the investor the advantage of a large amount of analytics to go over to decide how to proceed in their trades. In addition, the S&P 500 has clear technical chart patterns, it’s easy to find clear exit and entrance points.
Another huge benefit of the S&P 500 futures contract is that you can day trade it and NOT be subject to the “Pattern Day Trader” rule which limits the amount you can trade unless you have greater than $25,000.00 in your trading account. With futures contracts, you can trade an unlimited number of times within the day. You can Day trade by yourself, you can employ an algorithm, and you can employ an automated system or hire a CTA (Commodity Trading Advisor).
The NEW Micro S&P 500 Futures Contract
With all of its advantages, it’s easy to see why so many investors have added the S&P 500 Futures Contract to their portfolios. And due to popular demand, CME made the contract even more accessible with the introduction of the S&P Micro Futures Contract in May of 2019. The S&P Micro Futures Contract is priced at the bargain rate of multiplying $5 by the S&P 500 market value, making it a whopping 1/50th the price of a standard contract.
The move to Micro by CME has opened the S&P 500 futures market to a wide range of new individual investors. With an average annual gain of 10% over the past 90 years, the S&P 500 is perhaps one of the steadiest contracts on the futures market. And on the futures side, an investor can control a large amount of the value of the contract with a relatively small initial deposit. One of the most common traders to take advantage of the brand-new micro contract is the self-directed trader.
Trading on the S&P 500
A self-directed trader can use many different trading platforms to trade S&P 500 Futures Contracts, from simple and free to more sophisticated and still free, to very sophisticated and at a cost, on a month-to-month basis. Self-directed traders can find any tool they need to trade in S&P 500 Futures Contracts at Cannon Trading. At www.cannontrading.com , an investor can download a live simulated account with live data to see if these contracts are right for their portfolio.
Trading options on the S&P 500 is a possibility for many investors. Traders with a proclivity to trade options on the S&P 500 have an incredible number of ways to invest in the futures contracts using only options. Most people buy and sell the options strictly by themselves, but trading platforms offered at Cannon Trading can also enter complex options strategies.
An investor with a large stock portfolio may want to Hedge their stocks portfolio with S&P 500 Futures. Investors can hedge their gains against price risk from a potential market sell off. They can even inexpensively use a number of Futures contracts to hedge their portfolio.
There are many ways to trade in the S&P 500 Futures Market, here are some examples of how trading works on this market:
S&P 500 Futures Trading Math
The E-Mini S&P’s value is determined by multiplying the current index value x $50.00
On August 8-2019 the ESU19 futures contract was trading around 2,900.00
The notional value was $145,000.00
In a futures account, you are asked to place a small (relative to the notional value) “Good Faith” deposit (margin) for each contract you buy or sell. Currently, that Overnight “Good Faith” deposit or margin requirement is $6,930.00.
Assume you bought the ESU19 at $2,900.25 and it is currently trading at $2,920.25, you have made 20 points if you sell it at $2,920.25.
You post a $6,930.00 good faith deposit
You Buy 1 ESU19 @ $2900.25 X 50 =$14,5012.50
You Sell 1 ESU19 @ $2920.25 x 50 = $14,6012.50
The difference you keep: $1,000.00*
Your account balance is now $7,930.00*
*Not including clearing, regulatory fees and commissions
The E-Microi S&P’s value is determined by multiplying the current index value by $5.00
On August 8, 2019 the ESU19 futures contract was trading around 2900.00
The notional value was $14,500.00
In a futures account, you are asked to place a small (relative to the notional value) “Good Faith” deposit (margin) for each contract you buy or sell. Currently, that Overnight “Good Faith” deposit or margin requirement $693.00
Assume you bought the ESU19 @ $2900.25 and it is currently trading at $2,920.25 you have made 20 points if you sell it at $2,920.25.
You post a $693.00 good faith deposit
You Buy 1 ESU19 @ $2900.25 X 5 =$14,501.25
You Sell 1 ESU19 @ $2920.25 x 50 = $14,601.25
The difference you keep. $100.00*
Your account balance is now $793.00*
*Not including clearing, regulatory fees and commissions
The S&P 500 has, by its very nature, been exponentially smoothed over the years. It represents over 500 of the most highly capitalized stocks in the United States. Trading in the index rather than individual stocks makes it a wise and less volatile investment over time. Traders on the S&P 500 benefit from many advantages, the most important of which may be the steadiness of the S&P market itself. Now, with the introduction of E-mini and Micro versions of the S&P Futures Contract, more and more traders are able to take advantage of this time-tested staple of the U.S. economy. Remember, on the futures side, you can control a large amount of the value of the Contract with a relatively small, initial deposit ( which increase both risk and potential reward).
At Cannon Trading, our professionals can point you in the right direction, and help you determine if becoming a trader in S&P Futures Contracts is right for you. . Contact us at www.cannontrading.com to talk to a professional, start a live demo, or learn more about trading in S&P Futures today!
Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.