Futures trading goes back hundreds of years. The term futureswas
derived from the promise to buy or deliver a commodity at some future
date at some specified price. Futures trading first flourished in agricul-
tural crops, where farmers wanted to have a guaranteed price for the
crops they would harvest at a later date. Markets developed where buy-
ers and sellers who wanted to avoid uncertainty could come to an agree-
ment on the price for future delivery. The commitments to honor these
agreements, called futures contracts, were freely transferable, and mar-
kets developed where they were actively traded.
Stock index futures were launched in February 1982 by the Kansas
City Board of Trade using the Value Line Index of about 1,700 stocks. But
two months later, at the Mercantile Exchange in Chicago, the world’s
most successful stock index future, based on the S&P 500 Index, was in-
troduced. By 1984, the value of the contracts traded on this index future
surpassed the dollar volume on the New York Stock Exchange for all
stocks. Today, the value of stocks represented by S&P 500 futures trading
exceeds $100 billion per day.
All stock index futures are constructed similarly. In the case of the
seller, the S&P Index future is a promise to deliver a fixed multiple of the
value of the S&P 500 Index at some date in the future, called a settlement
date. In the case of the buyer, the S&P Index future is a promise to receive
a fixed multiple of the S&P 500 Index’s value. The multiple for the S&P
Index future is 250, so if the S&P 500 Index is 1,400, the value of one con-
tract is $350,000. In 1998, a miniversion of the contract (called an e-mini),
with a multiple of 50 times the index, was offered, and it trades on the
electronic markets. The dollar volume of these minis now far exceeds
that of the standard-sized contracts.
There are four evenly spaced settlement dates each year. They fall
on the third Friday of March, June, September, and December. Each set-
tlement date corresponds to a contract. If you buy a futures contract, you
are entitled to receive (if positive) or obligated to pay (if negative) 250
times the difference between the value of the S&P 500 Index on the set-
tlement date and the price at which you purchased the contract.
For example, if you buy one September S&P futures contract at
1,400, and on that third Friday of September the S&P 500 Index is at
1,410, you have made 10 points, which translates into $2,500 profit ($250
times 10 points). Of course, if the index has fallen to 1,390 on the settle-
ment date, you will lose $2,500. For every point the S&P 500 Index goes
up or down, you make or lose $250 per contract.
On the other hand, the returns to the seller of an S&P 500 futures
contract are the mirror image of the returns to the buyer. The seller
256 PART 4 Stock Fluctuations in the Short Run