S&P Futures are financial futures which allow an investor to hedge with or speculate on the future value of various components of the S&P 500 Index market index. The futures instruments are derived from the S&P 500 Index is E-mini S&P Futures. S&P 500 futures contracts were first introduced by the CME in 1982. The CME added the e-mini option in 1997. The bundle of stocks in the S&P 500 is, per the name, composed of stocks of 500 large companies.
All of the S&P derived future contracts are a product of the Chicago Mercantile Exchange (CME). They expire quarterly (March, June, September, and December), and are traded on the CME Globex exchange nearly 24 hours a day, from Sunday afternoon to Friday afternoon.
- S&P 500 Futures (ticker: SP) contract’s minimum tick is 0.25 index points = $62.50 While the performance bond requirements vary from broker to broker, the CME requires $21,000 to maintain the position.
S&P Futures contracts are commonly used for hedge or speculative financial goals. S&P Futures contracts are used to hedge, or offset investment risk by commodity owners (i.e., farmers), or portfolios with undesirable risk exposure offset by the futures position.
S&P Futures trade with a multiplier that inflates the value of the contract to add leverage to the trade. The multiplier for the S&P 500 is 250, essentially meaning that S&P Futures are working on 250-1 leverage, or 25,000%. If the S&P Futures are trading at 2,000, a single futures contract would have a market value of $500,000. For every 1 point the S&P 500 Index fluctuates, the S&P Futures contract will increase or decrease $250. The result is that a trader who believed the market would rally huge could simply acquire S&P Futures and make a huge amount of profit as a result of the leverage factor; if the market were to return to 2,100, for instance, from the current 2,000, each S&P Futures contract would gain $25,000 in value (100 point rise x 250 leverage factor = $25,000).
US Tax Advantages
In the United States broad-based index futures receive special tax treatment under the IRS 60/40 rule. Stocks held longer than one year qualify for favorable capital gains tax treatment, while stocks held one year or less are taxed at ordinary income. However, proceeds from index futures contracts traded in the short term are taxed 60 percent at the favorable capital gains rate, and only 40 percent as ordinary income. Also, losses on NASDAQ futures can be carried back up to 3 years, and tax reporting is significantly simpler, as they qualify as Section 1256 Contracts.