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Futures MeasuresEquity Index Futures Basics | Contract Specs | Jun 30, 2015
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    Futures MeasuresEquity Index Futures Basics | Contract SpecsJun 30, 2015

    Pete talks about riding the wave on the grain report and what is going on today from Greece. He also introduces other S&P 500 vehicles to introduce a new equity index pairs trade.

    Equity index futures offer investors a lot of leverage on the most popular indices. Trading index futures can be a little challenging if you do not understand the leverage that trading these products comes with.

    Equity Index Futures Contracts Specifications

    In this episode of Splash, Pete looks at the main index futures: E-mini S&P 500 futures (/ES), E-mini Dow Jones Industrial Average futures (/YM), E-mini Nasdaq Futures (/NQ), and E-mini S&P MidCap futures (/EMD). Each future has a contract specs that are a bit different. Some have different multipliers (amount of leverage), notional values, and tick sizes. That information can be found below:

    E-mini S&P 500 Futures (/ES):
    Index Multiplier (leverage) - $50
    Current Price - $2064.50
    Notional Value
    - $103,225* ($2,064.50 x $50)
    Tick Size - .25 ($12.50/tick)

    E-mini Dow Jones Industrial Average Futures (/YM):
    Index Multiplier (leverage) - $5
    Current Price - $17,631
    Notional Value
    - $88,155* ($17,631 x $5)
    Tick Size - 1 ($5.00/tick)

    E-mini Nasdaq Futures (/NQ):
    Index Multiplier (leverage) - $20
    Current Price - $4,404.75
    Notional Value
    - $88,095* ($4,404.75 x $20)
    Tick Size - .25 ($5.00/tick)

    E-mini S&P MidCap Futures (/EMD):
    Index Multiplier (leverage) - $100
    Current Price - $1,507.50
    Notional Value
    - $150,750* ($1,507.50 x $100)
    Tick Size - .1 ($10.00/tick)

    Equity Index Futures Correlations

    As you may have expected, these four indices are all highly correlated, meaning they typically move in the same direction.

    When looking at 6 month correlations (longer term), /EMD and /ES have a correlation of .92. The 1 month correlation (short term) between /EMD and /ES was .84, which represents a divergence of .08 between the 6 and 1 month correlation. Knowing this, can we take advantage of the short term divergence to find trading opportunity.

    Trading The Correlation Divergence

    To capitalize on the divergence between /EMD and /ES, Pete sells 2 /EMD futures and buys 3 /ES futures, effectively creating a futures spread. The reason he chose 2 and 3 contracts is because they both come out to about the same notional value (around $300k).

    Placing the trade takes a large chunk of buying power - around $30k. Is there a way to place a notionally equivalent trade using less buying power?

    As a matter of fact, there is. To do so, Pete uses /EMD futures and /ES options on futures. He sells 1 /EMD futures and buys 3 ATM calls (with an expiration near the same expiration as the futures contract). This reduces the necessary buying power to about $16k, which is about half of the original trade.

    Strategies:Futures Spread, and Futures w/ Options On Futures Spread

    Products Discussed In This Episode:/ES, /YM, /NQ, /EMD

    *Values subject to change based on where the market is at

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