What are index futures and how do you trade them?

What are index futures?

Index futures are derivative products used to trade stock indices at a specific date and price in the future. Traditionally, index futures were only for institutional traders buying and selling futures contracts directly by accessing the market via a broker. Now, you too can access and discover this form of trading in the following ways with us:

1. US-listed futures: trade pure-form futures contracts directly on exchanges
2. Spread bets and CFDs (OTC): speculate on the price movements of index futures without owning the underlying contract

All major indices have corresponding futures contracts traded in the futures market. The FTSE 100, Dow Jones, S&P 500 and DAX all have futures markets.

When trading US-listed futures with us, you can hold financially settled futures to expiration. While some futures are physically deliverable, all index futures are cash settled (ie not deliverable).

For spread bets and CFDs, you'll be speculating on whether the price of an index futures contract will rise (going long) or fall (going short).

Like other futures markets, index futures are leveraged products, enabling you to open your trading position with a deposit that’s only a fraction of the contract value. This gives you increased market exposure, but it also means that any potential profits or losses will be magnified, as they’re based on the full position size and not just the deposit.

Index futures vs cash indices

While both index futures and cash indices trades make use of derivatives like spread bets or CFDs, there are some key differences between the two. Comparing index futures and cash indices will help determine which method of trading is right for you.

Index futures example

US-listed futures example

Let's say you're bullish on gold and decide to trade using US-listed futures. The current price of gold is $1,700 per troy ounce, and you believe it will rise over the next month. You decide to take a long position on one gold futures contract, which represents 100 troy ounces of gold. The total value of your contract is $170,000 (100 ounces × $1,700 per ounce).

For gold futures, the tick size is $0.10, and each tick is worth $10. These figures will be important for calculating your profit or loss.

Now, let's consider two scenarios:

Scenario 1: your prediction is correct A month later, before the contract expires, the price of gold has risen to $1,750 per ounce. You decide to close your position. To calculate your profit, you first determine the price difference ($1,750 - $1,700 = $50), then calculate the total tick movement ($50 ÷ $0.10 = 500 ticks). Your profit is then calculated by multiplying the tick movement by the tick value (500 ticks × $10 per tick = $5,000). In this scenario, you've made a profit of $5,000.

Scenario 2: your prediction is incorrect Instead, the price of gold falls to $1,650 per ounce when you close your position. Using the same calculation method as above, the price difference is -$50, which equates to 500 ticks. This results in a loss of $5,000 (500 ticks × $10 per tick).

Spread betting futures example

Let's say you want to trade the FTSE 100 December futures contract using spread betting. The current price of the December FTSE 100 futures is 7350.00. You believe this will rise to 7955.50 by the expiration date in three months. You decide to place a buy (go long) spread bet of £5 per point on the FTSE 100 December futures.

With spread betting on futures, you're betting a certain amount per point movement of the futures contract. In this case, your £5 per point bet means you'll gain or lose £5 for every point the FTSE 100 futures contract moves.

Spread betting is leveraged, so you'll only need to put up a deposit (margin) to open your position. Let's assume the margin requirement for FTSE 100 futures spread bets is 5%. The total notional value of your position would be £36,750 (7350 points x £5 per point), so your required margin would be £1,837.50 (5% of £36,750).

If your prediction is correct and the FTSE 100 futures rise to 7955.50 at expiration, your profit would be calculated as follows: Profit = (7955.50 - 7350.00) x £5 per point = 605.5 points x £5 = £3,027.50

However, if your prediction is incorrect and the FTSE 100 futures fall to 7150.00 at expiration, you'd incur a loss: Loss = (7150.00 - 7350.00) x £5 per point = -200 points x £5 = -£1,000

Remember that both profits and losses are calculated based on the full point movement of the futures contract, not just your margin amount. This means you could potentially lose more than your initial deposit if the market moves significantly against your position.

CFD futures example

Let’s say you wanted to trade the FTSE 100 index using CFDs. If you think that the FTSE 100 is going to increase from 7300.00 to 7905.50 in the next three months, you could decide to buy (go long) two FTSE 100 futures contracts, valued at £5 each. The total value of your position would be £73,000 (a buy price of 7300 x 2 contracts x £5).

CFDs are leveraged, so you’ll put up a deposit (called margin) to open a position. The margin rate for trading index futures with CFDs is 5%, so you would only need to put up a margin worth 5% of total value of your futures position – this equals £3,650 (5% x £73,000).

If your prediction is correct, and the price increases to 7905.50, your profit will be calculated as the difference between 7905.50 and 7300.00 multiplied by the two FTSE futures at £5 each. However, if your prediction was incorrect and the price of the FTSE 100 falls to 7100.00 by the end of the three-month period, you’d incur a loss of £2,000 (7100 - 7300 x 2 FTSE futures at £5 each).

Remember that both profits and losses are calculated based on 100% of your position value, not your margin amount.

How to trade index futures

1. Know the difference between OTC and listed futures

2. Understand leverage

Both US-listed futures and our OTC products (spread bets and CFDs) are leveraged, meaning you can gain exposure to index future contracts without needing to pay the full value of the trade upfront. With leveraged trading, you use a deposit to open a larger position, and profits and losses are calculated based on the full position size.

For US-listed futures, the margin requirements are set by the exchange and may vary depending on the specific contract and market conditions.

With spread bets and CFDs, we set the margin requirements, which start from 5% of the notional value for index futures trading.

In both cases, leverage enables you to potentially magnify your profits, but it also means that losses can exceed your initial deposit. It's crucial to understand that your profit or loss will be based on the full value of the position, not just your margin amount. This means any gains or losses incurred can be much greater than your initial deposit.

When trading leveraged products, it's essential to have a solid risk management strategy in place. This includes using stop-loss orders and only risking an amount you can afford to lose. Remember, with US-listed futures, you may be required to deposit additional funds if the market moves against your position.

3. Choose your index

There are various futures markets available to you. We offer all the world’s major indices for futures trading, including the FTSE 100, Wall Street (based on the price of the Dow Jones), the Germany 40 (based on the price of the DAX) and more.

If you prefer listed products, popular index futures include those based on major US stock indices like the S&P 500, Nasdaq 100, Dow 30, and Russell 2000. Each of these is available in standard E-mini contracts and smaller Micro E-mini versions, offering flexibility in position sizing and capital requirements.

If you choose to trade futures with spread bets or CFDs, you have access to over 80 global indices. We also offer competitive spreads – for instance, you can trade the FTSE 100 for as little as 1 point.

Some indices – like the Germany 40 for example – experience higher volatility than others, and could be better suited to short-term traders, often using spot trading.

4. Decide whether to go long or short

Trading futures with us means that you can go long or short on an index price. Going long means that you are speculating on the value of a future increasing, and going short means that you are speculating on its value decreasing.

If you think that the underlying price of an index will increase, you’ll open a long position. If you think the underlying index price will fall, you’ll open a short position.

5. Place your first trade and start trading

To place your first trade, log into your US-listed options and futures account, or your spread betting and CFD trading account and select an index. Next, find the futures market and asset you want to trade and decide whether you’ll go long or short.

Remember to set your stops and limits before placing your trade.

Find out more about stops and limits

6. Monitor and close your position

After you’ve placed your trade, you’ll need to monitor it to see whether the markets are behaving in the way that you expected.

You can close the trade to lock in potential profits, or to limit losses if the trade isn’t going as you predicted.

Remember, you can close a futures contract trade before its expiry date.

Why do people trade index futures and cash indices?

1. Take your capital further with leverage: index futures provide exposure to a market or sector as a whole, for a much lower amount, and without having to buy individual shares
2. Capitalise on rising and falling prices: you can make a profit (or a loss) even if an index's price drops by going short
3. Get better execution with our deep liquidity: our futures markets are particularly liquid, meaning you're more likely to have your order filled at your desired price
4. Access a huge range of markets: trade all the top global indices, as well as bond futures and commodity futures
5. Hedge existing exposure: use index futures to offset potential losses in one or more existing trades
6. Choose your preferred trading method: whether you prefer exchange-traded futures or OTC products, we offer products to suit your trading style

Footnotes:

¹ Based on revenue excluding FX (published financial statements, June 2023)
² This excludes the 10 hours from 10pm Friday until 8am Saturday (UK time). Only selected indices and the GBP/USD forex pair are available for weekend trading.