Analysis: Understanding US Stock Futures And Its Advantages

Analysis: Understanding US Stock Futures And Its Advantages

By Megha

US stock futures are financial derivative contracts that bind the entities to transact with a specific instrument at a fixed future price and date. The buyer of the instrument must buy, or the seller must sell the instrument at the price that has been decided upon. This is regardless of the current market price of the instrument at the date of expiry. The underlying assets include financial instruments and physical commodities. The futures contracts also underline the instrument's quantity and are standardized to initiate trading on a futures exchange. US stock futures can be utilized for trade speculation or hedging.


Understanding US Stock Futures


US stock futures are also known as futures contracts. This permits the traders to lock in the cost of the commodity or the asset. These contracts have set prices and expiration dates that are known beforehand. The US stock futures are found out by their month of expiration. For instance, July US stock futures expire in July. Investors and traders use the terminology of futures when they refer to this instrument. But there are several kinds of US stock futures that are present for investing and trading purposes. It is vital to find out the differences between futures and options. The options contracts give the holder of the instrument the right, without any obligation, to sell and purchase the associated asset any time before the expiry of the entire contract.

On the other hand, the person who purchases a US stock future has an obligation to take possession of the associated asset or its cash equivalent only when the expiry happens and not before that. The person who purchases the US stock future can sell it before the expiry date and become free from their obligation. In this manner, people who purchase both US stock futures and options take advantage of the position of a leverage holder and close the positions before the expiry date.


Using Stock Market Futures


The US stock futures usually have very high leverage. This means that the individual is not required to put up the entire value amount of the contract when entering into any trade. But the broker would need some margin amount. This is a small portion of the entire value of the contract. The financial markets where the US stock futures contract is listed will find out if the contract can be settled for cash or if it requires physical delivery. A firm may get into a physical delivery contract to hedge or lock in the cost of a commodity required for production. But several futures contracts are from people who speculate on the trade. These US stock futures are netted or closed out. The cash settlement happens through the closing trade price and the actual trade difference.


A US stock futures contract permits a trader to speculate on the direction of the movement of the commodity price. A person might have purchased a US stock futures contract. The associated asset price may have risen and was trading above the initial contract price during expiry. This means that the person would have gained a profit. Before the expiration, the buy position would be offset with a trade to sell the same amount at that current price. This will close the buy position. The difference between the cost of both the contracts would be settled in cash in the brokerage account of the individual. There will be no involvement of any physical product in the entire transaction. But the person can also lose if the price of the commodity is lower than the price during the purchase as specified in the futures contract.


There are several speculators in the financial markets who can also take a sell position if they think that the price of the associated asset is going to decrease. If the price goes as predicted, the person will take a contrary position to close the contract. The net difference will be settled after the expiry of the contract. A person would get a profit if the associated asset price were below the price of the US stock futures contract and vice versa. It is vital to know that trading on margin permits a person to go for a much bigger position than the amount held as security by the brokerage account. So, investing with margins can increase the profits as well as the losses. For instance, a person has an account balance with a broker of $1,000 and takes a trade for a position of $10,000 in a commodity. Suppose the price of the commodity moves against the overall trade. In that case, the trader will face losses that will be more than the initial margin amount. In such scenarios, the broker makes a margin call needing more funds to be deposited to cover the losses incurred in the market.

The US stock futures can be utilized to hedge the price movement of the associated asset. The aim is to avoid losses from unexpected price changes rather than speculating. Several firms that enter into such hedges use or produce the associated asset.


Advantages of US Stock Futures


The US stock futures give some ways to traders to diversify their investments that other instruments cannot. They give direct trade exposure to the associated commodity assets in the financial markets. Also, they permit the trader to access certain assets that are not present in the other financial markets. The futures might also be utilized if traders want strategies that have been created to assist in managing risk that surrounds the upcoming events than can lead to movements in the market. US stock futures can give some tax advantages compared to the other short-term trading markets. That is because futures trades that give profits are taxed on a different basis. More than half of the profits are treated as long-term capital gains and the rest as ordinary income. But in stock trading, the gains on stocks of less than a year are completely treated as ordinary income.

The margin requirement is the same for selling and buying positions with US stock futures. It helps to take a reverse position without any major margin requirements. Creating an equity position in any margin account needs the person to pay up more than half of the complete value. But with futures, the necessary initial margin amount is usually set in single-digit percent of the associated contract value. This leverage gives the trader the chance to get bigger returns than the amount of money invested. But it also puts the investor at risk of losing more than the initial investment.


Continuous US Stock Futures


The US stock futures contracts usually expire every quarter. So, there are only a few months of active trading data available. This restricted front month trading information can be restrictive for the broader time frames such as weekly and monthly charts. The shorter time frames also suffer at the start of the front-month contract cycle. This is because the indicators, such as the moving averages, need a minimum number of data periods to get the required data. For these very reasons, there are several continuous market futures contracts. As suggested, they are continuous and have smooth historical data that permits easy charting from wider to shorter time frames. The outcome gives more precise indicators. For instance, a daily multi-period moving average will have restricted information in the initial week of a front-month market contract.

But the continuous contract will have a more precise moving average line. It will also have a lot of information. The famous moving averages need continuous contract data. Investors have to check with their brokers for the special symbols for the continuous US stock futures contracts.




US stock futures contracts can be sold or purchased to achieve gains from one-directional financial market movement. There are no rules for you to tick. This means traders can short-sell on the inside bid processes instead of waiting for the uptick to be filled. Portfolio managers broadly utilize the instrument to hedge both the sell and buy positions. Many traders try to arbitrage the futures with the related index.