How Do S&P 500 Futures Work?

S&P 500 futures are a type of derivative contract that provides buyers with an investment price based on the expectation of the S&P 500 Index’s future value. Investors and the financial media follow them closely because they act as an indicator of market movements. S&P 500 futures allow investors to speculate on the future value of the index by buying or selling futures contracts.

As of September 2021, investors can invest in these futures by buying and selling E-mini contracts through the Chicago Mercantile Exchange (CME) under the ticker symbol ES. It is now one of the only ways to trade S&P 500 futures as the exchange delisted the standard-sized contract for its futures and options that same month. Keep in mind that micro E-mini S&P 500 contracts are also still available for trade.

Key Takeaways

  • S&P 500 futures are among the most liquid and traded futures in the U.S.
  • These futures contracts track the benchmark index of the S&P 500.
  • S&P futures are cash-settled and listed by the Chicago Mercantile Exchange.
  • These index futures can be traded using E-mini and micro E-mini contracts that trade electronically.
  • The CME delisted the standard- or full-sized S&P 500 index futures contracts in September 2021.

What Are Index Futures?

An index futures contract works just like a regular futures contract. It is a legally binding agreement between a buyer and a seller that allows traders to buy or sell a contract on a financial index and settle it at a future date. An index futures contract speculates on where prices move for indexes like the S&P 500.

Since futures contracts track the price of the underlying asset, index futures track the prices of stocks in the underlying index. For instance, Nasdaq and Dow index futures contracts track the prices of their respective stocks, and the S&P 500 Index tracks the stock prices of 500 of the largest U.S. companies. 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 a 30-minute settlement period in the late afternoon U.S. central time, after stock markets close.  

E-mini S&P 500 futures are quarterly contracts that expire in March, June, September, and December. They are listed for nine quarters consecutively, along with three more December contract months.

S&P 500 Futures

The CME introduced the first standard-sized S&P 500 futures contract in 1982. It was the base market contract for S&P 500 futures trading and was priced by multiplying the S&P 500’s value by $250. So if the S&P 500 was at a level of 2,500, then the market value of a futures contract was $625,000 or 2,500 x $250. As noted above, the CME delisted standard S&P 500 futures and options at this price in September 2021.

The S&P 500 E-mini Futures were launched in 1997, opening the market up for smaller investments by a wider range of investors. The "E" in E-mini stands for electronic, which means it's traded electronically. As such, it is a fairly efficient method of trading—much more efficient than the open outcry system was for traders when it was fully operational. Many traders opted for the E-mini ES over the SP contracts (when they were offered) because of their smaller investment size and their liquidity.

E-mini contracts are one-fifth of the value of the now-defunct big S&P futures contract. So if the S&P 500 hits 2,500, then the market value of an E-mini futures contract is $125,000 or 2,500 x $50. Just like all futures, investors are only required to front a fraction of the contract value to take a position. This represents the margin on the futures contract. These margins are not the same as margins for stock trading. Futures margins show "skin in the game" which must be offset or settled.

E-Mini vs. Big S&P Futures

We already mentioned that the CME delisted the standard-sized contract for S&P 500 futures. But it's still a good idea to know how it differs from the E-mini, which is still offered.

First, there really is nothing a full-sized contract was able to do that an E-mini cannot. Investors and traders used both as tools for speculating and hedging. The only difference between the two was that the E-mini contract allows smaller players to participate with smaller commitments of money.

All futures strategies are possible with E-minis, including spread trading. And E-minis are now so popular that their trading volumes are significantly greater than the ones that were offered by standard futures contracts. E-mini volume is huge compared to the volume of the delisted regular contracts. This means that institutional investors generally use the E-mini because of its high liquidity and the ability to trade a substantial number of contracts.

Don't forget, though, that investors can also invest in the micro E-mini contracts. Micro E-minis are valued at one-tenth of the E-mini. So if the value of the S&P 500 hit 2,500, the contract would be worth $12,500 or 2,500 x $5.

Electronic trading in E-minis takes place between 6 p.m. Sunday and 5 p.m. Friday EST, with an hour for daily maintenance between 5 p.m. and 6 p.m.

Cash Settlement of S&P 500 Futures

Industry experts created the cash settlement mechanism to resolve the massive logistical challenges presented by delivering the actual 500 stocks associated with an S&P 500 futures contract. The stocks would have to be negotiated and transferred between holders and would have to be properly weighted to match their representation in the index.

Instead, an investor picks a long or short position, which is then subject to a mark-to-market. The investor pays any losses or receives profits each day in cash. Eventually, the contract expires or is offset, and becomes cash-settled based on the spot value of the S&P 500 Index.

One of the often-proclaimed benefits of trading S&P 500 futures is each contract represents an immediate, indirect investment in the performance of the 500 stocks in the S&P 500 Index. Investors can take long or short positions depending on their expectations for future prices.

Large institutions may use S&P 500 futures to hedge positions in the index. With this approach, futures are often used to offset downside risks. Many investors use S&P 500 futures for speculation the same way they do with other types of futures contracts. An investor who takes a long position hedges their risk against losses if the index value rises (profiting when the price drops) while a short position does the same if the value decreases (gaining when the price rises).

S&P 500 Options

In addition to basic futures contracts, the Cboe also offers derivatives in the form of options contracts on the S&P 500. Just like with futures, S&P 500 options have a full value product and a mini. The full value product has a ticker symbol of SPX with a multiplier of $100. The mini has a ticker symbol of XSP with a multiplier that is one-tenth the SPX. S&P 500 options contracts are also cash-settled.

What Is an E-mini S&P 500 Futures Contract?

The E-mini S&P 500 futures contract tracks the S&P 500 Index. It trades on the Chicago Mercantile Exchange under the ticker symbol ES. The contract tracks the stock prices of the largest U.S. companies listed on the S&P 500 Index. Investors can use contracts as a way to hedge or speculate on the future of the S&P 500 Index.

When Was the Standard-Sized Contract for S&P 500 Index Futures Delisted?

The Chicago Mercantile Exchange delisted the standard- or full-sized S&P 500 Index futures contracts in September 2021. But investors can still trade E-mini and micro E-mini S&P 500 Index futures.

What Is the Ticker Symbol for E-mini S&P 500 Futures?

The ticker symbol for the E-mini S&P 500 Index futures is ES. It trades on the Chicago Mercantile Exchange.

Article Sources
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  2. CME Group. "Micro E-mini S&P 500 Index."

  3. S&P Dow Jones Indices. "S&P 500: Overview."

  4. CME Group. "E-mini S&P 500: Contract Specs."

  5. CME Group. "Timeline of CME Achievements."

  6. CME Group. "Frequently Asked Questions: Micro E-Mini Equity Index Futures."

  7. Cboe. "S&P 500® Index Options," Page 2.

  8. Cboe. "Mini-SPX (XSP) Index Options," Page 2.

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