Welcome to Alpha’s Futures Education Centre. Whether you are just beginning to trade or you are a seasoned investor looking for new trading strategies, this Centre provides a wealth of information on the most relevant topics.

What is a Futures Contract?

A futures contract is a legally binding agreement to deliver or receive a given quantity and quality of a commodity at an agreed price on a specific date or dates in the future.

Where are Futures Contracts Traded?

All Futures are traded on an exchange in a controlled, regulated environment where the underlying specifications related to the trades, called the Contract Specifications, are set. For a list of ‘Contract Specifications’, please refer to the relevant exchanges where the futures contract trades.

Types of Products Traded

A futures contract can be any physical commodity, such as corn, wheat or meat products. It can also be a financial instrument, such as government bonds, equity indices and currencies. There are also futures contracts based on energy commodities, such as oil, natural gas and heating oil.

Elements of a Futures Contract

The extent and number of futures contracts tradable globally is significant so understanding the nature of a futures contract is important when entering the arena.

Below we will outline the following aspects of a futures contract on the ASX200 Index in the Australia:

  • Contract name is SPI200
  • Contract Size is AUD$25 multiplied by the Index
  • Value of 1.0 point is AUD$25
  • Minimum Tick Size is 1
  • Margin AUD$6000 per contract (Refer to Exchange for current margin requirement)
  • Australian Securities Exchange ( ASX )
  • Trading Hours (EST) 9:50-16:30 and 17:10-8:00

Contract Size

The size of one SPI200 futures contract is AUD$25 per point so 10 points is worth AUD$250.

Value of 1.0 point

Each point in the contract is worth AUD$25, meaning that a SPI200 contract with a Bid price of 4700 has an underlying value of AUD$117,500

Tick Size/Value: A tick is the smallest allowable increment by which a futures contract can move or, in this instance, in increments of 1.0.

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 SPI200 contract, the initial margin is AUD$6000per contract.

Futures contracts also have what is called a maintenance margin in some cases, i.e. the amount required to hold the open Futures position. For the SPI200 there is no maintenance margin but for a contract on Crude Oil which has an initial margin of USD$5400, there is a maintenance margin of USD$4000. If the margin on the trader’s account falls below the maintenance margin, additional funds must be transferred to hold the position or the number of open contracts on the account must be reduced. The margin associated with a particular contract is subject to change and for more information, please refer to the relevant exchange.

Exchange

The SPI200 futures contract is traded on the Australian Securities Exchange or ASX.

Trading Hours

The SPI200 can be traded during the day between 9:50 am and 4:30pm then after hours between 5:10pm and 8:00am. There is a pre-open market 10 minutes prior to the open of both sessions.

How do I understand Futures – ESU0, ZGZ0, YMM0 – 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 0 stands for the year 2010. Each Futures product has a particular series of tradable months and each month has a specific letter of the alphabet assigned to it, as follows:

Understanding Futures 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

Settlement

The date when the trade month expires is called the delivery date or final settlement date for a futures contract. The official price of the futures contract at the end of a day’s trading session on the exchange is called the settlement price for that day of business on the exchange. A futures contract gives the holder the obligation to make or take delivery under the terms of the contract. Both parties of a contract must fulfill the contract on the settlement date. The seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures contract, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset his/her position by either selling a long position or buying back (covering) a short position, effectively closing out the futures position and its contract obligations.

Who Trades Futures?

There are two types of futures investors, the speculator and the hedger.

The speculator looks to take advantage of directional price movements in the market. The speculative investor is typically risk-willing, taking positions in which there is a potential for large gains relative to the capital outlay. They in turn also carry the risk of large losses.

The hedger trades futures to neutralize the risk associated with other investments, and takes positions to reduce or avoid market exposure and vulnerability to future price movements in the underlying assets. The aim of a Hedger can be to lock in a current price for a future delivery; such as a farmer.

Why Trade Futures

For the investor looking to diversify his/her portfolio, futures offer an exciting option, giving the opportunity-seeking investor access to a variety of alternative markets.

Futures are highly liquid financial instruments, meaning that you can trade on tight spreads. The transaction costs for trading futures are generally low, the pricing is very transparent due the level of specificity found in the futures contract and the regulations imposed by the various exchanges.

Online trading of futures offers swift order and trade execution and low counterparty risk as all transactions are handled through the exchange and the clearinghouses have a daily responsibility to ensure that all transactions and margins are conducted in an orderly manner.

Online Futures

Alpha offers futures contracts, traded online through our Alpha IB TWS trading platform on live streaming prices. Alpha IB TWS supports over 200 futures contracts including:

  • Precious Metals: Gold and Silver
  • Energies: Crude Oil and Natural Gas
  • Stock indices including Dow Jones, NASDAQ, S&P 500, FTSE 100 and many others
  • Long and Short-term Interest rates
  • Foreign currencies
  • Agricultural

Futures contracts are traded through many of the word’s major futures exchanges including ECBOT (Electronic CBOT), CME, LIFFE, EUREX.

Margin

Futures contracts are traded on margin enabling you to leverage a small margin deposit for a much greater market effect.

You must maintain the Maintenance Margins listed per contract, where required, in your account at all times. If the funds in your account fall below this margin, you will be subject to a margin call to either deposit more funds to cover your positions or close positions — normally you will be notified through our trading platform and via email. If your margin situation is not remedied, we may close positions on your behalf.

Expiry of Futures Contracts

Please note that JB Alpha does not support physical delivery of the underlying security upon expiry of a futures contract. We therefore advise you to be aware of the expiry and first notice dates of any futures contracts you invest in and ensure that you close your position before this date. If you do not close a futures position before its expiry or first notice date, JB Alpha will close your position for you at the first available opportunity at the prevailing market rate. Any resulting costs, gains or losses will be passed on to you.

If you require any assistance or clarification regarding the expiry of futures contracts, please contact JB Alpha.

Further Education 

If you would like more information and learn about futures please contact 03 8662 4000 to speak with one of our Financial Advisers