S&P 500 Futures: A Look at the Basics

A futures contract is a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month. Futures contracts are bought and sold mostly electronically on exchanges, such as the CME Group (formerly the Chicago Mercantile Exchange), and trade nearly 24 hours per day. 

Some of the most widely traded futures contracts are based on major commodities, such as crude oil, natural gas, corn, gold, and soybeans. Futures contracts can also be based on stock indexes, such as the S&P 500^® index, Nasdaq-100^® Index, and the Dow Jones Industrial Average^® or on interest rates—10-year note Treasuries, for example. Commodity futures based on products like grain or crude oil offer the potential for "physical delivery," where the buyer takes possession of the commodity (and the seller must deliver the commodity). In contrast, equity index futures contracts, such as those based on the SPX, are "cash settled," meaning a cash position is transferred between the buyer and seller.

Trading futures requires opening an account with a registered broker. Unlike shares of stock, theoretically can be held forever, futures contracts expire in a specified month.

Traders have access to an array of index futures contracts. Two S&P futures contracts are among the most actively traded in the world: the E-mini S&P 500 futures and Micro E-mini S&P 500 futures contracts closely track the U.S. benchmark from day to day and trade on the Chicago-based CME Group exchange. That active trading means that, historically, there's been liquidity for buyers and sellers to find each other and quickly and efficiently execute trades. That's one reason many professional portfolio managers and traders use SPX-based futures in an attempt to hedge against potential market downturns or insulate their portfolios against different types of surprise events.

E-mini S&P 500 futures have been traded for more than two decades and represent one-fifth of the value of the SPX. A "multiplier" is used to calculate the notional value of a contract, which is $50 times the price of the SPX for the e-mini contract. 

More recently, smaller Micro E-mini S&P 500 futures contracts have presented new potential opportunities for qualified retail investors and traders because they require less money up front and less equity to maintain compared with traditional e-minis. 

For example, the maintenance margin—the minimum amount of money a trader must maintain after opening a position—for one Micro E-mini S&P futures contract (/MES) was $1,500 as of November 2024. 

For the E-mini S&P 500 contract (/ES), the maintenance margin was $15,000 per contract.

The multiplier used to determine the notional value for Micro E-mini S&P 500 contracts, at $5, is also one-tenth the size of the E-mini S&P 500 contract. If the SPX is trading at 6,000, one Micro E-mini S&P 500 contract would be 6,000 times the $5 multiplier, for a notional value of $30,000. The notional value of the E-mini SPX contract would be $300,000 (6,000 x the $50 multiplier).

S&P 500 index futures and other equity-index-based futures may offer a way to help boost capital efficiency and hedge against market volatility.

One futures-based hedging approach involves calculating beta and beta weighting (beta measures the volatility of an individual asset, or an entire portfolio, in comparison to a benchmark like the S&P 500 index). Through beta weighting (available on many trading platforms), a trader can gauge their portfolio's theoretical risk relative to the S&P 500 or a single asset. (To beta weight, a trader first determines delta, a measure of sensitivity to a dollar change in the underlying asset.)

If the broader market falls or rises a number of points, a trader can gain a theoretical sense of what such moves might mean for their portfolio balance. Traders can beta weight their entire portfolio, which could help give them a window into how their portfolio might be affected if there's an increase or decrease in the overall stock market.

Here's a simplified futures-based hedge example. (Note: The following is an example of one strategy, but there are many strategies that exist.)  

Suppose a trader holds a stock position or a portfolio of stocks with a value of $50,000 that has a high correlation to the S&P 500 index, and they're concerned about the prospect of negative surprises in upcoming economic reports or earnings season. The trader could hedge about 60% of that portfolio value by selling (or shorting) one Micro E-mini S&P futures contract by putting up the initial $1,500 maintenance margin, or about 5% of the $30,000 notional value of one Micro E-mini S&P 500 futures contract ($5 x 6,000, using the numbers from the previous example).

If the S&P 500 drops 100 points (about 1.7%), and the trader then buys back, or closes out (if possible), that futures position and pockets a gain of more than $500, that could help offset any paper losses in their stock portfolio. By taking a position in the futures contract, the trader gains similar notional exposure while tying up a lot less capital.

It's important to remember the risks involved in hedging strategies, like the example provided here. There is unlimited risk on a short position as well as daily mark-to-market adjustments, and traders may be required to add additional funds immediately or face liquidation. Leverage can be a double-edged sword where losses can accelerate. Additionally, it's possible to lose more than the initial amount used to purchase the investment, so traders should consider these risk factors before selecting their strategy.