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Index Futures

Now this is a surprise. Didn't we cover futures already? Yes we did, but in this section I want to cover stock index futures, as they are very relevant to the stock market. Just to quickly brush up, futures, which are a type of derivative, are promissory notes or contracts of deliveries of commodities at a certain time in future, and they are traded in the futures markets.We also talked about the products (or commodities) as the underlying instruments for the futures. One type of these instruments is financial instruments such as currencies and stocks. While individual stocks are not used as underlying instruments, many stock indices are. Out of those indices relevant to our topic of stocks, three futures are perhaps the most significant. They are S&P 500 (also referred to as plain S&P), Dow Jones Industrial Average (also referred to as plain Dow Jones), and NASDAQ 100 (also referred to as plain NASDAQ) futures, with the S&P futures being the oldest trading from all the three. S&P and NASDAQ futures (more correctly NASDAQ 100, which is the index of 100 top-tier stocks listed on NASDAQ) are traded in Chicago Mercantile Exchange (CME), while the DJIA futures are traded in Chicago Board of Trade (CBOT).

All of these futures have four expiration dates during each year, each separated from the next by three months. Their expiration dates are on March, June, September, and December. The next expiration month from a point in time is known as the front month. For example, in July the front month would be September, in February the front month would be March, and so on. I will cover the relevance of these index futures, specifically S&P 500 futures, to the stock market. For the most part the following discussion also applies the same way for Dow Jones and NASDAQ futures. …