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Something fantastic happens almost everyday at the same time to the same stock index that can make you rich. If you can know one hidden secret that is repeated daily for years , you will make an incredible profit. One single stock index futures trade within 15 minutes of the market opening is all you need! At the end of this post, you can find the Stock Index Futures trading secret!
Stock index futures contracts are really the outgrowth of one of the most important trading innovations in the last fifty years. Trading of stock index futures contracts began in the early part of 1980 when S&P Stock Index futures contracts based on the famous S&P 500 Stock index were introduced in the Chicago Mercantile Exchange (CME).
Most traders regard stock index futures as esoteric securities that has little to do with the market in which stocks are bough or sold. Now many investors do very well trading stocks without having ever traded these stock index futures or acquiring any understanding how these contracts trade. But you cannot comprehend the short term stock market movements without an understanding of stock index futures and ETFs.
Futures trading has been done for hundreds of years. The term futures derives from the promise to buy or deliver a commodity at some future date at a specified price. Futures trading first started with the agricultural crops where the farmers wanted a guaranteed price for the crops they would harvest at some future date. Markets soon developed where the buyers and sellers could come to an agreement on the price for the future delivery. However stock index futures contracts were launched in the early part of 1980s when the S&P Stock Index Futures Contract was launched. All stock index futures contracts are constructed similarly. In the case of the seller, the S&P Stock Index Futures Contract is a promise to deliver a fixed multiple of the value of S&P Stock Index at a specified future date known as the Settlement Date. In the case of the buyer, the S&P Stock Index Futures Contract is a promise to receive a fixed multiple of the value of the S&P Stock Index at the settlement date.
The multiple for the S&P Stock Index Futures Contract is 250. So if the value of the S&P Stock Index is at 1200 points, the value of the S&P Stock Index Futures Contract would be $300,000. In 1998, a mini version of this contract known as the S&P E-Mini Futures contract having a multiple of only 50 was introduced and it soon became highly popular with the day traders. The dollar volume of S&P E-Mini Futures contracts now far exceeds that of the standard sized contracts. There are four evenly spaced settlement dates for these stock index contracts each year. They fall on the third Friday of March, June, September and December.
So day traders trade these stock index futures contracts and measure their profits or loss in terms of ticks. Suppose you had purchased the S&P Futures contract at 1200 points and on the third Friday of September that is the settlement date for the contract, the value of the S&P Index is at 1220 points. You made 20 points which means a profit of $5000. Not bad huh! And in case, the S&P Index was at 1180 points, you lost 20 point and $5000. Really bad! In this case, you must stop live trading and start paper trading again until you start making winning trades paper trading!
In other words, stock index futures trading is a zero sum game. If the buyer makes money, the seller loses and vice versa. So unlike commodity futures contracts, stock index futures contracts are settled in cash. In case of commodity futures contracts, if you forget to close your contract before the settlement date, you may find a bushels of wheat, corn or pork bellies dumped in front of your house on the settlement date. However, you don’t have to worry in case of Stock Index Futures as the settlement is in cash, this type of delivery is not possible.
So how do stock index futures affect the stock prices in the short term? To understand how much important stock index futures are to the stock prices, we only need to take a look at what happened on April 13th 1992. On that day there were massive leaks from the Chicago River into the tunnels under the financial district that triggered massive power outages. Both the Chicago Mercantile Exchange and the Chicago Board of Trade had to be closed down. As soon as the stock index futures trading was halted in these exchanges, the volatility in the stock market declined significantly. The volume in the New York Stock Exchange (NYSE) declined by 25% on that fateful day. There were severe liquidity problems and difficulty in executing some trades in NYSE on that day.
Who is responsible for such volatility in the stocks? You might have heard about the Program Traders. What do these program traders do? Program traders rely on the differences between the prices of stock index futures traded on the Chicago Exchanges and the component stocks traded on the NYSE. So there is a lot of interrelationship between the stock index futures trading and the stock prices in the short run. Don’t forget, stock index futures came of age on October 19th, 1987 when a major stock market crash was caused by the something known as portfolio insurance. Portfolio insurance is the sale of the futures contracts to protect losses in individual stock positions. So today we live in the era of one market in which stock index futures and the stock market have become a single entity. So you don’t need to learn how to trade every major stock index futures contract in the market. Only master trading one stock index futures contract and you can become rich. Currently more than 70 stock index futures contracts are being traded in roughly 20 exchanges in the world. Stock index futures contracts are by far the largest category of futures contract traded. Know the Stock Index Futures Trading Secret Now!
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