Dow E-mini Futures Trading

The Dow E-mini futures closely follow the price movement of the Dow Jones Index. If you expect the Dow to move up then you would buy a contract of Dow E-mini futures. Inversely, if you expect the Dow to move down then you would sell a contract of Dow E-mini futures. The Dow E-mini futures contract is an ideal means to swing trade.

A futures contract is a standardized contract to make or take delivery of a financial instrument or commodity at a pre-determined time.  Because a contract is made for a future date, it is called ‘Futures’.

The Dow E-mini futures trade in March, June, September, and December contracts.

For every buyer of a contract there is a seller. Inversely, for every seller of a contract there is a buyer. If the Dow Jones Index moves up, then there will be more buyers than sellers in the Futures and the price of the Dow E-mini will go up.

The CME offers three sizes of futures contracts on the Dow E-mini as well as options. The contract value of each futures contract determines your market exposure. To determine contract value, simply multiply the contract value by the contract’s multiplier. The three Dow E-mini futures multipliers are $5, $10, and $25 respectively. For example, if the Dow E-mini futures is trading at 12,000, the $5 multiplier makes the value of a contract $60,000. (12,000 x $5)

Futures contracts move in ticks (the minimum price fluctuation specified by the exchange). The minimum tick size for the Dow E-mini is $5; therefore, if the price moves up 100 points (ticks) the value of the contract will appreciate $500 (100 x $5).  If the Dow E-mini is trading at 12,000 the value of the contract will be $60,000 (12,000 x $5), and if Dow E-mini moves up by 100 points to 12,100 the value of the contract will increase to $60,500 (12,100 x $5).  

The front month of E-mini contracts are liquid, so it is easy to get in and out of them within seconds. At last check, the average daily volume was about 150,000 contracts. Based on Dow trading at 12,000 and based on each contract value of $60,000, the average value of all the contracts trades is 9-billion dollars ($60,000 x 150,000 avg. volume).

Since each contract has an expiration date, they expire. The Dow E-mini contracts expire the third Friday of the contract month. March contract expires the third Friday of March, and the June contract expires the third Friday of June...etc.

The Dow E-mini futures contracts are traded by both open auction on the exchange floor, and electronically. The larger Dow contract is traded via open auction during the day and electronically at night. The Dow E-mini trades fully electronically, virtually all day except for 45 minutes between 4:15 p.m. and 4:30 p.m est. and 5:30 p.m. to 6:00 p.m. est.

Like stocks, futures are traded through a brokerage firm. Commissions depend on the amount of assistance you want from a broker. The Dow E-mini can be electronically traded via internet for as little as $2.50 per side including exchange fees.

Futures contracts are highly leveraged trading vehicles. They allow you to gain maximum exposure in the market at minimum cost. You can buy or sell a Dow E-mini futures contract of a deposit of approximately 4 to 7 percent of the value of that contract. When you first place a futures order, the amount you must deposit in your account is called initial margin. After you have posted initial margin and have started trading, you must maintain a minimum margin balance in your futures account called maintenance margin. If the margin balance in your futures account falls beneath the maintenance level, you will receive a margin call that requires you to add additional money to your account to bring it back up to the initial margin level. If you are unable to fulfill a margin call, your position will be liquidated, and the margin money will be collected. To learn more about futures, you can visit the following site: http://www.investopedia.com/university/futures

Tax Advantage

For stocks held less than one year (short-term capital gains) an investor would have to pay based on his/her tax bracket, ordinary income rate. With futures, an individual would most likely have to pay a lower tax rate because of the IRS 60/40 rule. Under this rule, 60 percent of any gains on futures positions would be taxed at a more favorable rate while 40 percent would be taxed at ordinary income rate. For information on the tax treatment afforded different trading strategies, please consult a tax advisor.