Starting with Futures: S&P 500 E-minis


Do you love to trade stocks, but are confused by futures? Keep reading.

Many clients are initially puzzled, or even scared, by these derivative instruments. The lingo is different. Their hours are weird. The rules seem bizarre, along with their settlements and expirations.

But guess what? That’s really all that’s strange about them. Once you get past the initial obstacles, they’re no different than any other market. You want to go long when you think the price is going up, and short when it’s going down.

Let’s start by looking at the single most popular futures contract in the market: CME’s S&P 500 E-mini, which tracks the good, old-fashioned S&P 500 stock index.

First, notice that the symbol consists of a root, an expiration month and an expiration year. The “current” contract is ESU18:

  • ES is the root. It’s always ES for the S&P 500 E-mini.
  • U is the month of September. E-minis always expire with the quarter. December is Z, March is H and June and M. Don’t get hung up on this.
  • 18 is the year 2018. Pretty simple.

These key points will prevent you from getting bogged down on needless details:

  • Trades almost always occur close to expiration. Right now that means September, so that’s where all the volume is.
  • The only time traders look beyond the nearest contract is the week before expiration. That’s when they “roll” forward to the next one. You cannot hold past expiration.
  • People refer to futures by their root, in this case, “ES.” You’ll learn them just like all the stock tickers you know and love.
  • For convenience, TradeStation uses the @ symbol to provide “continuous contracts” for the major products. “@ES” will show all the historical prices for the current, or “on the run” S&P 500 E-mini contracts over time. This is essential for developing and back-testing strategies.
  • Next, what’s margin? While the concept is essentially the same as trading stocks, it works in a completely different way with futures.
  • Margin is the amount of money you need in your account to go long or short a futures contract. For @ES, it’s currently $5,800.
  • Traders never really own a futures contract. They simply go long or short.
  • You will earn or lose $50 every point that @ES moves up or down. This $50 number is somewhat arbitrary, and it varies for different kinds of futures products. Oil, Nasdaq E-minis, gold, etc, all have different values. But for @ES, remember it’s always $50 for each point in the S&P 500 index.

So, what’s the point of using futures? First, because they trade almost entirely around the clock, limit orders are much more likely to get filled at the correct price. This is a lot better than having a stock or ETF “gapping” against you when news hits overnight!

Another benefit of futures is that you can generate significant leverage with fewer complications. Many of you doubtlessly trade options on SPDR S&P 500 ETF (SPY), which is based on the same index as @ES. While calls and puts are terrific instruments, they are subject to other variables like time decay and changing bid/ask spreads.

Sometimes you might also want to go long or short the broader market but aren’t sure which option contract to buy or sell. @ES, on the other hand, it’s extremely simple. And, you always know what you’re getting: A simple $50 per point. No delta, gamma, theta or vega to worry about!

With that simplicity, it’s also super-easy to reverse a trade. Say you went long one contract of @ES to profit from a rally up to a certain level. What if you think it’s not only going to stop moving, but suddenly change direction and fall? In this case, TradeStation’s platform can sell two contracts. One will close you’re long position and the other will initiate a new short.

Finally, traders absolutely must understand the hazards because futures can cause you to lose more than your initial investment. TradeStation will always try to close positions when you’re running out of margin, but the risk remains.

Fortunately risk management can be much better because futures trade 23 hours per day. E-minis, for instance, only shut down between 4:15 p.m. ET and 4:30 p.m. ET, and again between 5 p.m. ET and 6 p.m. ET. Aside from that, you can take positions anytime from Sunday night through Friday night.

In conclusion, futures may seem daunting at first because they’re so different from stocks on the surface. Hopefully, the basics in this post give you a good starting point. Remember in the end, you’re still trying to buy the S&P 500 low and sell it high. Trading is trading.

Futures are simply another tool in your toolbox that might work better for you under certain circumstances. Next time we’ll look at some other popular products.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them apprised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.