What is an index future?
An index future is a type of futures contract that’s used to trade stock indices. When you buy an index future, you are agreeing to trade a specific stock index at a specific price on a specific date. Because there’s no physical underlying asset to deliver, index futures are always settled in cash.
Stock index future example
One popular index future is the E-mini S&P 500, which is based on the S&P 500. The S&P 500 is currently trading at 2595, and you use an E-mini S&P to buy the index at 2600 in two months’ time.
Two months down the line, imagine the S&P is now at 2610 – ten points above your contract’s settlement price. You settle the contract by buying the S&P 500 at 2600, and pocket the difference as profit.
If the index had fallen instead of rising, you would still have to buy at 2600 – and therefore make a loss.
Calculating profit or loss
To determine the size of your profit or loss, you need to take into account how many futures contracts you’d traded, and the value of each contract per point of movement in the index.
The E-mini S&P 500 contract is priced at $50 times its settlement price, which means that you make $50 for every point the index rises above 2600. 2610 – 2600 = 10 points, so you’ve made $500. If the S&P had settled at 5990, however, you would have lost $500 – even though the S&P has only moved down five points from when you opened the position.