Can someone explain Dow Futures?

Question

Dow Futures are always listed on the Bloomberg before trading opens for the day. What exactly does that mean?

Answer 1

First, a futures contract is not an option contract, contrary to 2 out of three respondents here. An option can expire worthless, but if you hold a futures contract to expiration, it expires at the index value it tracks, and is cash settled. Futures expire quarterly, most options monthly. With options you can only lose the amount invested. Both are leveraged, but with futures, both gains and losses are open-ended.

All futures trade at a premium or discount to the underlying, depending on market direction and expectations, usually a premium. The fair value of the premium on the Dow can be calculated here:
http://www.cbot.com/cbot/pub/cont_detail/0,3206,1008+20413,00.html#determinants_of

Generally, fair value is at a premium, except towards expiration when the effective rate of interest might be low enough to be offset by dividends in the fair value calculation.

So if you see on Bloomberg that the premium of the Dow Future is below fair value, it is giving an indication of market direction to the downside. If the premium is above fair value, the market will tend to go higher.

The value of Dow futures contract is simply the index value of the Dow times $10, or roughly $116,000 (Dow at 11590 now). You can buy this contract with $5,000 margin, so the leverage on the futures contract is about 20:1

It is considered risky to trade stocks on margin of 2:1 so how much trouble do you think we can get into at 20:1? Dissaster can strike very quickly with futures, and you could even wind up owing them your house. This cannot happen with options, but with options the likelihood of losing everything you invested is much more likely.

Answer 2

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RE:
Can someone explain Dow Futures?
Dow Futures are always listed on the Bloomberg before trading opens for the day. What exactly does that mean?

Answer 3

A futures contract is a lot like a forward contract.

In a forward contract, one party agrees to buy a good from the other at a fixed price at some date in the future. The original contracts were for commodities -- for example someone agrees to buy 10K bushels of corn at a fixed price at a point in the future.

Here, people are agreeing to "buy" the Dow Jones averages at a point in the future. The way it works is that you agree on a level of the Dow -- let's say 11,700. On a fixed date in the future, if the Dow is above that level, they you pay me the difference (times a multiplier). If it is below that level, then I pay you the difference (times a multiplier).

SO -- here is how a futures contract differs from a forward contract. The forward contract is an over-the-counter agreement betwen two parties. No money changes hands until the expiration date.

Futures contracts are traded on an exchange. The counterparty is always the exchange (lessening the risk of default). In addition, you are required to have a margin account. Everyday, the contract is rewritten (so that they are standard) and your daily profits or losses are added to or subtracted from your account.

In short -- Dow futures are bets on the future value of the DJIA.

Contrary to what some say here -- they are not options.

Answer 4

Futures based on the Dow Jones Industrial average trade at the Chicago Board of Trade. They're open for pit trading from 7:20 a.m. till 3:15 p.m. (Chicago time) and trade electronically for approximately 23 hours each day.

Answer 5

It's trading on options before the Market opens

Answer 6

its basically an option on where the markets will be down the road.