If 2020 taught us anything, it’s that the unexpected can create chaos in the capital markets. For astute market participants, the COVID-19-inspired volatility presented a wide range of profitable opportunities. Unfortunately, those who focused their efforts solely upon equity trading missed out on the benefits of stock index futures.
Let’s take a look at a few areas where equity futures outpace conventional stock offerings.
According to Nasdaq’s financial dictionary, diversification is the dividing of “funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk.” As it relates to equity trading, diversification plays a key role in mitigating risk as well as capitalizing on aggregate market performance.
However, truly diversifying your stock holdings is much easier said than done. To gain broad market exposure, you must invest in a professionally managed mutual fund or index-based ETF—or select and purchase a variety of stocks. Each of these approaches comes with unique drawbacks, including management fees, tracking errors, and extensive research.
Any trades are educational examples only. They do not include commissions and fees.
Stock index futures take much of the guesswork out of equities market diversification. In fact, they take it to the next level. With index futures, you can easily open leveraged long or short positions in the U.S. stock indices. You do not have to assume ownership of individual stocks, and you don’t need to invest in inverse ETFs or make special brokerage arrangements to short the market.
By buying or selling the following products, a futures trader can secure bullish or bearish exposure to the leading U.S. stock indices:
| Product | Base Index | Classification |
|---|---|---|
| E-mini DOW | Dow Jones Industrial Average | Large Caps |
| E-mini S&P 500 | Standard & Poor’s 500 | Large Caps |
| E-mini NASDAQ | NASDAQ-100 | Tech and Growth |
| E-mini Russell 2000 | Russell 2000 | Small Caps |
When compared to conventional equity trading, index futures offer vastly enhanced purchasing power. Like all futures, stock index products are traded on margin, within 3-12 percent of each contract’s notional value. By comparison, Regulation T allows for only 50 percent of a security’s value to be borrowed, with 25 percent to be held in the trader’s account at all times. Because of the reduced margin requirements, equities index futures offer the trader far greater capital efficiency than do stocks.
A premier benefit of equity index futures is that they let the trader choose how much leverage is suitable. The CME’s lineup of E-minis and Micro E-minis, as well as the Small stocks, give you the ability to customize your risk exposure:
| Product | Tick Value | Intraday/Overnight Margins* |
|---|---|---|
| E-mini DOW | $5.00 | $750/$9,900 |
| Micro E-mini DOW | $0.50 | $100/$990 |
| E-mini S&P 500 | $12.50 | $750/$12,100 |
| Micro E-mini S&P 500 | $1.25 | $100/$1,210 |
| E-mini NASDAQ | $5.00 | $1,000/$17,600 |
| Micro E-mini NASDAQ | $0.50 | $125/$1,760 |
| E-mini Russell 2000 | $5.00 | $750/$7,150 |
| Micro E-mini Russell 2000 | $0.50 | $100/$715 |
| Small Stocks 75 | $1.00 | $500/$550 |
| Small Technology 60 | $1.00 | $500/$550 |
*Margin requirements are subject to change
Aside from the enhanced capital efficiency of stock index futures, you’re free to trade them as frequently as you deem fit. In traditional equity trading, you can place a maximum of three intraday trades within a rolling five-day period before being labeled a “pattern day trader.” After that, pattern day trader rules apply, and an account balance of at least $20,000 must be maintained to conduct operations.
Stock index futures have no such rule. As long as you meet contract margin requirements, you can execute as many round-turn trades as you want. This is a key advantage for short-term strategies such as scalping, momentum, or breakout trading.