April 20, 2021

What are Dow Futures?

What are Dow Futures?

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What are Dow futures?

Dow futures are contracts that trade with commodities on futures exchanges. Dow futures contracts have set prices along with dates for delivery to buyers. They are tools with leverage that give traders and investors the right to buy or sell depending on whether they are long of short the Dow Jones Industrial Index contract at a price in the future based on the contract delivery price. 

With the Dow Jones Industrial Average futures contract (DJIA) you can trade the index like a commodity, commodity future contracts on the index can be traded in place of equities. 

Futures were created originally as a commodities derivative market for producers and buyers. When producers wanted to lock in a future price for their product then would sell a futures contract and then make delivery at that price when it was due. The buyer wanted to lock in the price of the commodity they needed in the future so they would buy a futures contract for delivery at the date needed. 

Futures contracts are interchangeable on the market and can be traded between buyers and sellers. The contracts are legally binding agreements between the two parties between the contract writers and the contract buyers. The futures market is used by individuals, businesses, corporations, and traders for many purposes like buying, selling, and hedging. 

A futures contract is an agreement to exchange money for cash settled markets or to deliver or receive assets for physical delivery. In many cases with futures contracts, delivery will take place as a cash settlement to an account. When a futures contract is cash-settled, settlement happens in a credit or debit made for the value of the contract at expiration. Equity index futures like the Dow are usually cash-settled, however precious metals, and many agricultural commodities may also be settled in cash at expiration. 

Traders rarely hold contracts to the delivery date, selling or buying back to close positions before the settlement date arrives. 

Dow futures are not the same as Dow futures options. Options are contracts that are further derivatives of the futures market. Dow futures options are a different market and are traded on their own exchange. Options contracts that are bought give the owner the right but no obligation to exercise to purchase the futures by the option expiration date. Dow futures contracts are not the same as options as the parties do have the obligation to execute the futures contract, with the seller of the contract delivering and the buyer of the contract taking delivery, this can be done as a cash settlement with most index futures. 

Dow futures trade on their own futures exchanges not the major stock market exchanges. They trade on the CME Globex exchange nearly 24 hours a day, from Sunday afternoon to Friday afternoon. They can give a trader or investor an overnight view of stock market sentiment. Dow futures start trading each day on the Chicago Board of Trade (CBOT) at 8:20 a.m. Eastern Time, which is an hour and ten minutes before the stock market opens as the futures premarket. Dow futures expire quarterly in March, June, September, and December.

Dow futures contracts have built-in leverage, traders can use less money to trade futures and get exponential returns or losses quickly. This can increase returns dramatically versus trading stocks but can also lead to losing all your capital if position sizing is too big or losses are allowed to run. 

The Dow futures ticker symbol is YM. There are two Dow futures contract sizes available that trade on the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME). The Dow e-mini contract, represents $5 per tick of the DJIA. The micro e-mini is one-tenth the size of the E-mini, and represents only 50 cents per DJIA. 

Contract E-Mini Dow Jones Industrial Average  trade on the CBOT exchange. The tick size of 1 point equals $5.00 per contract. This futures contract is worth $5 for every point on the DJIA.

Dow futures set prices and dates for delivery of the index in the future. They allow traders and investors to buy and sell the DJIA index with leverage outside normal stock market hours. The contracts are legally binding for the sellers and buyers to settle their side at expiration in cash or delivery.