Financial Futures Contracts -- Dow Jones Industrial Average

Aug 17 10:58 2010 Richard Stooker Print This Article


All the financial futures contracts expire quarterly,Guest Posting in March, June, September and December.

The front month is the expiration date that's coming up. If this is July, that would be September. You can buy futures contracts for later months, but they are much less liquid, creating large bid/ask spreads. If you wish to hold a position a long time, it's probably better to get the front month contract and roll over your position before that expiration date.

The Dow not only has its regular contract size and the e-mini version, it also has a larger sized contract called the Big Dow, started March 2006 by the Chicago Board of Trade. Trading in the Big Dow is entirely electronic. That is valued as $25 times the amount of the DJIA. However, this has not proven a popular product, and volume is relatively low.

The e-mini contracts for the financial futures are popular, however, probably because their smaller size makes them accessible to small traders. They're all traded electronically, not at all by open outcry, making fill quality good, with little slippage. Plus, because they're popular they're very liquid, again contributing to their popularity.

And the electronic trading platform allows you to see the Depth Of Market (DOM). That is, you can see the price ladders of the number of limit orders that are active, for both buy limit and sell limit orders, so you can see where other traders are placing their orders for.

The regular Dow contract is $10 X the index. That is, if the DJIA is at 10,655, the contract is valued at $106,550. It is quoted in dollars, $10 per point is one tick.

The e-mini Dow contracts are half that. They're $5 X the index. It is quoted in dollars. And a tick is $5 per point. They're sometimes called the nickel Dow, and have lower margin requirements. Day trading margins can be as low as $500.

So in effect trading two e-mini Dow contracts is identical to trading one regular Dow contract. Except, if you wish to modify your position, perhaps talk some profits off the table while maintaining some possibility of profit, with two e-mini Dows you could close one out and leave the other one working.

The Dow Jones Industrial Average is made up of thirty blue chip stocks -- very large and important companies -- chosen by the Dow Jones company, publishing of the Wall Street Journal and Barron's. It was started by Charles Dow many years ago. The composition of the index changes occasionally based on changes in the fortunes of the companies on it.

Because of the changing nature of the economy of the United States, the Dow is no longer very "industrial," as it was in the beginning.

It's the most commonly recognized stock market index. Although it's only thirty stocks, it moves in rough sync with the S&P 500 Index. However, it's not used as a benchmark for financial professionals, so the futures is not used as much as a hedge.


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Richard Stooker
Richard Stooker

You can accumulate a large portfolio of income-producing investments. Discover how investing for income can help you retire with financial security. Learn more about investing for income and how Exchange Traded Funds are different than mutual funds.

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