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Hey guys, I’m brand new here and I’m learning emini futures trading. I haven’t traded yet, just at the moment searching the internet tutorials and getting my questions answered.
On one question I googled I found this wonderful post that was posted here about 2 years ago that was the only thing that came close to answering my questions about the difference between the emini and the underlying (S&P 500).
https://nexusfi.com/emini-index-futures-trading/36097-contract-price-not-matching-underlying-index-price.html#post501016
So that's what brought me here and well done to bobwest.
However, I’m still confused and I want to clear up another question or 2 coming from that post...
My questions are...
1. What exactly have I bought when I go long in the ES? I did a lot of google searching and the only thing that I found is one or two places that tell me that the value of my contract is $50 times the underlying index price, let’s call it Vl. This wasn’t very helpful, but I work out some theories for myself. So I thought I bought the right and obligation to sell that Vl at expiry for $50 times the underlying index price at expiration, let’s call it Vf. But correct me if I’m wrong, I’m just feeling my way at the moment. BTW I do know I can close before expiry or rollover, but what if I choose not to. Maybe I don’t like what’s being offered compared to going to expiry.
2. If I don’t rollover, will I settle at $50 times the underlying price at the clock tick that my futures contract expires at. If so, then the ES will surely get closer and closer to the underlying near expiry. This means that intrinsically there is some relationship between the two prices; in fact they will be identical at expiry clock tick. How would there be volatility near expiry if you’re going to get the value of the underlying index at expiry, unless of course the underlying is volatile too. Or is there volatility in the underlying because the ES is going to expire soon?
3. Do I pay extra brokerage for letting my ES contract expire? I think I should be getting the underlying’s bid price, but this goes back again to question 1...EXACTLY WHAT DID I BUY?
Sorry if the questions sound dumb, as I said, I’m just trying to understand what I would be owning when I go long in the ES.
ad 1.:
You own a standardized, exchange-traded contract. That's why the number of futures is called "contracts".
The time is fixed. Either you close the trade or it will be closed at expiry by the exchange. Rollover == closing
the old contract (eg. June 17) + opening the new contract (e.g. Spt 17).
ad 2.:
At expiry the difference futures - cash is zero or close to zero. So the volatility close to that point in time
is basically the volatility of the underlying (i.e. the S&P 500 in your case).
the contract is waited to the stocks in the s.p 500 . so the larger the market cap the more of a % that stock makes up the index or basket. a short answer is one contract is about 70,000 to 100,000 in stock . depending on the price of the index. if the index sells of 300 points . the stocks in the basket are not worth as much. you get a lot more leverage and no day trading rules. the transaction cost are less. on the down side the people trading them are better traders, futures do not pay you any thing to hold them for 3 months . some stocks pay you 1% to hold them for 3 months. you can sell covered calls on stocks. that pays you more to hold them.
A future is ALWAYS limited by time.
Be it ES, forex futures, cattle future, oil future etc.
This instrument (with contracts as @choke35 has well explained) is normally
a HEDGE for business in that category - like an insurance when things are
not rolling as previewed.
For all futures of country indices (SP, ES, DAX etc.) the lifetime of a contract
is 3 months. You can get them in advance - means they are longer term than
3 months effectively.
But the CLOSING date is fix in any case. ALL contracts are closed at the
finishing moment - and the money is written back to your account with your
broker. Of course to the closing price. From there you are free to take another contract. There is NO rollover of a futures contract to the next contract!
If you like to have a contract that has no ending time then we speak of
continued contracts. These are to find in many derivative instruments like CFD's etc.
Then you are not forced to decide when to quit.
