Basic Points

• A futures contract can be traded on an exchange and is the standardized forward contract for the future delivery of a physical commodity/bond/other or the cash equivalent. 
• When futures are on index products, they are settled in cash since there is nothing to deliver. 
• While futures generally trade at small values, they each have unique multipliers which determine how much actual cash each contract is worth (the notional value). The CME Website specifies the multiplier and delivery type in their Specs tab. This information must be known before futures can be traded safely.
• The price of a futures contract is actively determined by the open market as traders attempt to price in the forward (future) price. This forward price is what the market is speculating the underlying asset to be worth. 
• Futures have designated letters and numbers after them to signify what month and year they represent. 

All Levels - Risk Alert

In general, a futures contract is a “forward contract for the future delivery of a financial instrument (ex. Treasury bond) or physical commodities (corn), traded on a futures exchange” (Cottle, 2006, p. 381). However, never assume that you know the value based on the traded price because there are unique multipliers involved for each product which can translate to very large trading sizes, sometimes in excess of the trading account, which can quickly lead to losses greater than the value of a trading account. This would turn the account value into a debt and generate a margin call, requiring the deposit of more capital. 

If unsure of the details, always check the CME page to verify the contract multiplier. For example, HO (heating oil contracts) have a 42,000x multiplier. 

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This means that if each is trading at a $2.00 then it is like trading $84,000 worth of a position. 

Intermediate Use Cases

Many traders prefer to watch ES and NQ futures over their popular ETF counterparts, SPY and QQQ, because they show more continuity by also displaying overnight price action. This is because futures can be traded day and night (except from Friday evening to Sunday evening). The main index futures open at 6pm EST on Sunday. 

As another use case, futures can be used to control deltas (directional risk) by shorting against long positions, such as covered calls on SPY or a basket of stocks. This way, the original positions in the basket can be held without interference when adjusting the total directional risk of a portfolio. 

Trading futures on the equity indices is a way for traders to extend their intraday strategies and trade into an overnight session, such as with ES for the S&P 500 or its micro equivalent at 1/10 the size: MES. Also common is NQ and its micro equivalent, MNQ. The other major equity index product is RTY, and its micro equivalent, M2K. These index futures get a jump in activity right at 8pm EST since that is when the retail postmarket closes for alternatives like SPY. They are open all night except for Friday and Saturday nights.

Another key point to know about futures is how they are divided into months by a naming convention. These are letters used both alphabetically and chronologically:

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Advanced: Volatility Futures

If trading a volatility index, then it works the same as an equity index: “They both are listed and both settle against the value of the index on the expiry date” (Bennett, 2014, p. 102). It follows that volatility futures settle on the value of the closing VIX price (Philip Capital, 2018). The main volatility futures are for the S&P 500 and are listed as VX (x1000 multiplier) or as VXM (x100 multiplier. 

Advanced Discussion: Margin and Interest

The margin system works differently with futures, using SPAN margin instead of Reg-T margin. Reg-T has less leverage and is also rules-based rather than risk based, meaning that it does not benefit from dynamic hedging but instead assesses each position individually based on margin rules. What SPAN margin is the closest to is portfolio margin, which has similarly powerful leverage and is also a rules-based margining system. 

One benefit of futures is that they do not have short borrowing costs or margin loan interest costs. For example, if an investor was long SPY shares, then there would be a daily margin loan interest payment each time it is held overnight. And if short SPY, then there would be a short interest payment each time it is held overnight, which would generally cost more. These short-selling interest rates are based on the availability of shares for borrowing; they are not always available to borrow, and that short interest gets more expensive when they are in low supply. 

Something useful to be aware of here is that retail traders are generally not awarded cross-margining privileges between portfolio margin and SPAN margin, which means that cross-margin system positions are not rewarded for hedging each other (such as being long ES futures to hedge a naked short call from SPX). Instead, portfolio or Reg-T margin would penalize buying power for having a naked short call, and SPAN margin would penalize buying power for having a naked short hard futures contract!

Expert: Options on Futures

Index futures do have options, but traders generally are cautioned to the fact that, liquidity wise, options on futures are riskier with M/NQ (NASDAQ futures options) or anything other than M/ES (S&P 500 futures options). Some of those might seem liquid at times but then the bid or ask might later disappear. The way assignment works on futures options is that only one contract gets assigned if assignment goes into effect. 

You can also trade options on SPX all night as a way to interact with static ES positions, but this is from the CBOE and not the CME, and it is not a futures product. However, if trading SPX, make sure you understand the leverage and how it has a 1000x contract multiplier.

The bid/ask spread on options (especially futures options) is not always reliable during major economic events because they will get too wide as market makers brace for the burst of risk right at an economic announcement. At those times in the off hours, usually the only bid/ask spread on an index-related derivative is reliable for a hard futures contract. However, if the retail premarket or postmarket is open, then you will usually also have tight bid/ask spreads on the big 3 ETFs: SPY, QQQ, and IWM.