An index futures contract is a legally binding agreement between a buyer and a seller, and it tracks the prices of stocks in the underlying index.
It allows traders to buy or sell a contract on a financial index and settle it at a future date.
The $S&P 500(.SPX)$ , $DJIA(.DJI)$ , and $NASDAQ(.IXIC)$ contracts trade on the CME Globex system and are called E-mini contracts.
The contract multiplier determines the dollar value of each point of price movement.
Index Futures Contracts
Like a regular futures contract, an index futures contract is a legally binding agreement between a buyer and a seller. It allows traders to buy or sell a contract on a financial index and settle it at a future date. An index futures contract provides a way to speculate on price movements for indexes like the Nasdaq 100.
As futures contracts track the price of the underlying asset, index futures track the prices of stocks in the underlying index. Nasdaq 100 contracts track the stock prices of the 100 largest companies listed on the Nasdaq stock exchange. Similarly, Dow and S&P 500 futures contracts track the prices of their respective stocks. All of these index futures trade on exchanges.
The index futures contract mirrors the underlying cash index and acts as a precursor for price action on the stock exchange where the index is used. Index futures contracts trade continuously throughout the market week, except for brief breaks for settlement and maintenance.
E-Mini Contracts
The S&P 500, Dow, and Nasdaq 100 futures contracts trade on the CME Globex system and are called E-mini contracts. Contracts are updated four times per year, with expiration taking place during the third month of each quarter.
What happens if the E-mini Nasdaq 100 futures contract trades higher before the opening of U.S. stock markets?
It means the Nasdaq 100 cash index will trade higher following the opening bell. Contracts track U.S. indexes closely during regular stock market trading hours. However, futures contracts will be priced higher or lower because they represent expected future prices rather than current prices.
Contract Multipliers
The contract multiplier determines the dollar value of each point of price movement. The E-mini Dow multiplier is 5, meaning each Dow point is worth $5 per contract. The E-mini Nasdaq multiplier is 20, worth $20 per point, while the E-mini S&P 500 carries a 50 multiplier that's worth $50 per point. If the Dow falls 100 points, then the buyer will lose about $500 while a short seller will gain around $500.
It is essential to realize that a higher contract multiple does not necessarily imply more risk because indexes have different values. For example, the Dow closed at 25,383.11 on May 29. At the same time, the Nasdaq 100 ended at 9,555.52, while the S&P 500 closed at 3,044.31. Suppose an amazing coincidence took place, and all three indexes went up precisely 1%. Then, an E-mini Dow contract would go up by about $1,269, an E-mini Nasdaq 100 contract would rise by around $1,911, and an E-mini S&P 500 contract would increase in value by approximately $1,522. The volatility of the underlying index also has an impact on risk.
$E-mini Nasdaq 100 - main 2309(NQmain)$ $Micro E-mini Nasdaq 100 - Sep 2023(MNQ2309)$ $Micro E-Mini Nasdaq 100 - main 2309(MNQmain)$
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