Stock Index Futures & Tendencies in Stock Index Futures Expiration

Around 70 stock index futures contracts are traded on various stock exchanges around the world. Every day, something extraordinary happens to the stock index at nearly the same time, and if you know the secret, you can become wealthy by trading stock index futures for only 15 minutes each day when the market opens.

What Is Stock Index Futures?

what are stock index futures

Stock index futures are the most intriguing financial innovation to emerge in the last five decades. Many people nowadays make a living by day trading stock index futures. The S&P E-Mini Futures, which are traded electronically, are the most popular US stock index futures.

Futures trading has been around for hundreds of years, stemming from farmers’ desire to guarantee a fixed price for their future crops. As a result, the term “futures” was coined. Soon after, futures markets arose in which buyers and sellers of these agricultural commodities could meet and make a contract based on the delivery of the crop at a specified price on a future date known as the settlement date.

Stock Index Futures, on the other hand, have only been around for the last three decades. In 1981, the well-known S&P Futures contract was introduced. Within a few years, the volume of dollars traded in these futures contracts surpassed the total volume of stock investment on the New York Stock Exchange.

Stock Futures

how to check stock market index futures

Many investors now make a fortune solely by trading stocks and never attempt to trade futures contracts. You don’t need to trade these contracts because trading futures contracts is very different from investing in stocks. However, if you want to understand short-term stock market movements, you must first learn how these contracts are traded.

The October 1987 stock market crash was precipitated by these futures contracts as a result of something known as portfolio insurance. Portfolio insurance attempts to hedge against stock price declines by purchasing futures contracts. Today, we can say that we live in a single market in which stocks and futures contracts are intertwined. As previously stated, many people now make a living by day trading the S&P futures.

S&P Futures

dow futures- future stock market

The value of S&P futures is now calculated by multiplying the S&P 500 Index points by 250. Assume the S& P 500 is at 1300 points. This means that the S&P futures contract will be worth $325,000. If the S&P Index rises to 1350 points, you gain 50 points or $12,500; if it falls to 1250 points, you lose 50 points or $12,500. So be cautious when trading US stock index futures.

Tendencies in Stock Index Futures Expiration

dow jones

Commercial traders in US stock index futures act very differently than index traders or small speculators who act as their counterparts. This is perfectly logical when taken as a whole. Positive feedback traders are index traders. Positive feedback traders increase their bullish positions as the market rises and decrease their bullish positions as the market falls.

This keeps their portfolio balanced with their cash resources. This also puts them on the side that is most likely to buy highs and sell lows.

Typical Trend-Following Behaviour

indexdjx: .dji

Small speculators are a wild card in terms of sentiment. Their stance is driven more by price and sentiment than anything else. Their positions are too flimsy to rely on due to the randomness of their sentiment.

Negative feedback traders, on the other hand, are commercial traders. Their strategy is based on mean reversion and value. Their models collectively tell them what price is “fair.” The more they sell, the higher the market rises above their fair value.

In contrast, as the market falls below its fair value, they buy more. Their direct actions typically trace the meanderings of a wandering market. With sell signals placed atop intermediate rallies and buy signals placed below intermediate lows.

Before we get into the current outlook, we need to look at two other aspects of commercial traders’ habits. Stock futures indexes are used by commercial traders to hedge their equity portfolios. Their ability to sell short stock futures index contracts provides them with simple downside protection against a decline in their equity portfolio.

Furthermore, direct short sales in stock market index futures avoid the uptick short sale rules inequities, as well as accounting for capital, gains or losses, and any changes in basis. The varied but consistent, slightly negative correlation between the commercial net position and the underlying market reflects this aspect of their behavior.

The Second Aspect

Future Stock Market

Secondly, their implementation of options and the corresponding transactions which force them to run at stock index futures is the commercial use of stock index futures. Commercial traders sell upside calls in the options market to collect the premium and lock in some short-term gains, just as they maintain a slight short bias in futures to protect against equity declines.

Selling call options generates an immediate credit in the trader’s account, but this cash is actually a liability whose profit is realized over time, similar to unearned income. In the future stock market, the short call option creates a net short position. Commercial traders take advantage of market declines to buy enough futures to offset the upside liability created by the short call options, thereby locking in the additional alpha gained upon initiation of the short call option position.

Now that we’ve covered the fundamentals, let’s take a look at how this relates to the current market situation. Commercial traders have displayed very specific trading behavior in three of the last four quarterly futures and options expirations.

Even better, it’s been easily traceable, as evidenced by this S& P 500 futures chart. Around a month before expiration, the market begins to act erratically. That puts us about a week away from the start of what I expect from the June expiration, and the June pattern has been the most consistent over the last five years.

Commercial traders press the market lower about 20-30 days before expiration, causing the pattern to play out. This decline accomplishes several goals. First and foremost, it washes out the flimsy small speculative long position.


new york stock index futures

It’s far enough to compel index sellers to sell a portion of their holdings. Finally, it is far enough away for commercial traders to cover their direct short hedges while also allowing them to get New York stock index futures purchased at a discount against their short call option positions.

This buying has pushed the market back up to the highs, establishing a new churning pattern of consolidation at the highs leading up to expiration.

This leaves the stock index futures market sitting near the highs again and creates the same scenario of index buying and small spec buying that helps grind the market higher, yet again. As has become evident in recent years, traders are actually the only recipients of these late trimester cycle gyrations.

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