Introduction to US Stock Futures: A Beginner's Guide to Understanding US Futures Trading

Many investors have grasped the basics of US stocks but still feel unfamiliar with the US futures market. In fact, US futures are gradually becoming an essential tool for traders worldwide. This article will delve into the core mechanisms, trading rules, and practical points of US futures.

Core Concepts of US Futures

A futures contract is an agreement between two parties to buy or sell an asset at a predetermined price at a specific future date. This design originated in the commodity markets.

For example, an investor agrees to buy crude oil futures at $80 per barrel, expiring in three months, committing to purchase a certain amount of oil (e.g., 1000 barrels). If the oil price rises to $90 during those three months, the buyer profits because they purchased below the market price.

US stock futures are futures products based on US stock indices. When trading US stock futures, you are essentially buying or selling a virtual investment portfolio composed of the index’s component stocks. The calculation formula is:

Index points × Multiplier (USD) = Nominal value of the stock portfolio

For example, with Micro Nasdaq 100 futures (code MNQ), if bought at 12,800 points, the nominal value is:

12,800 points × $2/point = $25,600

Settlement Mechanism of US Futures

At expiration, futures contracts face settlement issues, mainly divided into two methods. Physical delivery involves actual exchange of assets (such as goods or currencies), whereas cash settlement involves settling gains or losses based on price changes.

For US stock futures, physical delivery of hundreds of stocks is impractical (the S&P 500 requires delivery of 500 stocks), so the market generally adopts cash settlement. Traders do not need to deliver stocks; gains and losses are calculated based on contract price movements.

Main US Futures Products

The most actively traded US stock futures, sorted by trading volume, are: S&P 500 futures, Nasdaq 100 futures, Russell 2000 futures, and Dow Jones Industrial Average futures.

Each index offers two contract sizes. Mini contracts (E-mini) are suitable for medium-capital investors, while Micro E-mini contracts require only one-tenth of the margin of mini contracts, making them more suitable for beginners.

Comparison of main products:

S&P 500 Futures includes about 500 stocks representing the overall US economy. Mini contract code is ES, with a multiplier of $50/point; Micro contract code is MES, with a multiplier of $5/point.

Nasdaq 100 Futures focuses on tech stocks, with about 100 component stocks. Mini contract code NQ, multiplier $20/point; Micro contract code MNQ, multiplier $2/point. It tends to be more volatile than the S&P 500.

Russell 2000 Futures covers small-cap stocks, with about 2,000 stocks. Mini contract RTY, multiplier $50/point; Micro contract M2K, multiplier $5/point.

Dow Jones Industrial Average Futures includes 30 blue-chip stocks, representing a narrow but concentrated segment. Mini contract YM, multiplier $5/point; Micro contract MYM, multiplier $0.5/point.

Key Specifications for Trading US Futures

Before starting trading, investors should understand the following key specifications. All US stock futures are traded on the Chicago Mercantile Exchange (CME).

Margin Requirements: For example, S&P 500 mini futures (ES) require an initial margin of $12,320 and a maintenance margin of $11,200. Micro E-mini (MES) requires $1,232 initial margin and $1,120 maintenance margin. If the account balance falls below the maintenance margin, investors must add funds or positions will be forcibly closed.

Trading Hours: US stock futures markets are open nearly 24 hours. From Sunday 6 p.m. ET to Friday 5 p.m., with a trading halt from 5 p.m. to 6 p.m. Monday to Thursday. This overlaps with Asian market hours, facilitating global participation.

Contract Cycles and Expiry Dates: All US stock futures are quarterly contracts, expiring on the third Friday of March, June, September, and December. Expiring contracts that are not rolled over are settled at the opening price at 9:30 a.m. ET on expiry day, realizing gains or losses.

Circuit Breakers: Market drops of 7% outside trading hours trigger circuit breakers; during trading hours, levels are set at 7%, 13%, and 20%.

Strategies for Choosing Appropriate US Futures

Investors should select based on the following logic:

First, clarify market outlook. Bullish on the overall market → choose S&P 500 futures; bullish on tech stocks → choose Nasdaq 100; bullish on small caps → choose Russell 2000.

Second, determine contract size. If planning to invest about $20,000, the standard S&P 500 mini contract (with a nominal value of $200,000) may be too large, so opt for Micro E-mini MES. Nasdaq 100 has higher volatility, usually requiring smaller contracts.

Third, consider liquidity. Select contracts with high participation and trading activity to ensure smooth entry and exit.

Three Main Uses of US Stock Futures

Hedging Risks: Investors can use US futures to hedge by taking short positions. When their stock portfolio declines, futures gains offset losses, reducing overall risk.

Speculative Profits: Traders buy or sell futures based on their market outlook. For example, a trader expecting tech stocks to rise buys Nasdaq 100 futures, profiting as the index increases. The leverage inherent in futures amplifies gains.

Locking in Prices in Advance: Investors can lock in entry prices before fully deploying funds by purchasing futures with equivalent nominal value. For instance, expecting to receive funds in three months, they can buy equivalent futures now to secure an advantageous entry point.

Profit and Loss Calculation & Practical Example

Profit/loss for US stock futures is straightforward:

(Exit Price - Entry Price) × Multiplier = Profit/Loss

For example, with S&P 500 futures (ES), if bought at 4000 points and sold at 4050 points, the points gained are 50. The profit is 50 × $50/point = $2,500 net profit.

Risk Management Tips for US Stock Futures

Rolling Over Contracts: As expiration approaches, traders should close the near-expiry contract and open a position in a later month. Since US futures are cash-settled, failure to rollover does not result in stock delivery but realizes gains or losses at settlement.

Factors Affecting Prices: US futures reflect the value of a basket of stocks, so factors influencing stocks—corporate earnings, economic growth, monetary policy, geopolitical events, and overall valuation—drive futures prices.

Leverage Ratio: For S&P 500 futures, leverage can be estimated as (Index level × Multiplier) ÷ Initial margin. At 4,000 points: 4000 × $50 / $12,320 ≈ 16.2x leverage. A 1% move in the index results in approximately 16.2% profit or loss.

Stop-Loss Discipline: Due to high leverage and unlimited shorting risk, traders must set and strictly adhere to stop-loss levels before opening positions, avoiding gambling mentality.

US Stock Futures vs. CFDs

US stock futures are suitable for hedging and speculation but have limitations: larger contract sizes, higher initial margin requirements, and periodic rollover obligations, posing barriers for small investors.

Contracts for Difference (CFDs) offer an alternative. Similar profit/loss calculation methods, but with lower minimum investments and deposits. Since CFDs have no expiration date, traders can close positions at any time without rollover.

Main differences:

Leverage: Futures are moderate (up to about 1:20), CFDs can reach up to 1:400.

Contract Size: Futures are large, CFDs are smaller.

Trading Venue: Futures are exchange-traded; CFDs are over-the-counter.

Expiration: Futures have fixed expiry dates requiring settlement or rollover; CFDs have no expiration.

Target Audience: Futures suit large institutions and experienced traders; CFDs are more friendly to small investors.

Summary

Trading US stock futures is primarily used for hedging portfolio risks and speculative gains. Due to high leverage, both profits and losses are magnified. Traders should carefully select target indices, reasonably allocate contracts, and strictly follow risk management principles.

Comparing futures and CFDs, choose the most suitable tool based on your capital, risk tolerance, and trading habits—key to participating steadily in the US futures market for the long term.