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Elements of a Futures Contract
Welcome to the second article in the Futures educational series. In this article we will take a closer look at a futures contract.
As mentioned in the previous article, the elements of a futures contract are determined by the exchange on which the future is traded. As seen in the example below, the futures contract specifies the size, exchange, trading hours, etc. Here is a sample contract specification for a S&P E-mini contract (ES).
| Contract Size | 50x index (1/5 S&P Index) |
| Value of 1.0 point | USD 50 |
| Tick Size | .25 |
| Tick Value | USD 12.50 |
| Margin | USD 4,000 |
| Exchange | Chicago Mercantile Exchange (CME) |
| Trading Hours (CET) | 22:30-22:15 |
Contract Size: The size of one S&P E-mini contract is 1/5 the size of the standard S&P index.
Value of 1.0 point: Each point in the contract is worth USD 50, meaning that a S&P E-mini contract with a Bid price of 1,281.25 is actually worth USD 64,062.50 (64,075.00).
Tick Size/Value: A tick is the smallest allowable increment by which a futures contract can move or, in this instance, in increments of .25. Given the fact that 1 point is equal to USD 50, the value of 1 tick (.25 of a point) would be USD 12.50.
Margin: Futures contract margins are set by the exchange on which the contract is traded. Exchanges use a system called SPAN (Standard Portfolio Analysis of Risk) to determine the margin level for each contract. SPAN is a computer model that calculates the range of possible changes in price for a particular contract. The "worst case scenario," i.e. the most adverse change in price with the position a trader holds, is then used to calculate the initial margin. For this S&P E-mini contract, the initial margin is USD 4,000/contract.
Futures contracts also have what is called a maintenance margin, i.e. the amount required to hold the open Futures position. For the S&P E-mini contract, the maintenance margin is USD 3,150. If the margin on the trader's account falls below the maintenance margin, additional funds must be transferred or the number of open contracts on the account must be reduced. The margin associated with a particular contract is subject to change.
Exchange: The S&P E-mini is traded on the Chicago Mercantile Exchange.
Trading Hours: S&P E-mini contracts can be traded between these hours.
ESU6, ZGZ6, YMM7 – What's It All Mean?
Futures contracts are named according to the type of contract that is traded, plus the month and year in which the contract will be delivered. For example, in the contract name ESU6, ES stands for E-mini S&P 500. U is for September and 6 stands for the year 2006. Each month has a specific letter of the alphabet assigned to it, as follows:
| Contract Months: | |
|---|---|
| F | January |
| G | February |
| H | March |
| J | April |
| K | May |
| M | June |
| N | July |
| Q | August |
| U | September |
| V | October |
| X | November |
| Z | December |
In the next article we will discuss the specific participants in the futures markets.