This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Five Things Every Investor Should Know About Index Futures

Dividends: The current dividend yield on the SPX is around 2%. For this basic example, here are a few simple assumptions:

  • Dividends are distributed on a continuing amortized basis. That is to say that the 2% dividend will be earned evenly each and every day over the next 365 days.
  • Dividend rates are fixed, and companies will not increase or cut dividends at any time.
With this in mind, you can expect to earn $8 (2% of $1,600 times 25%) in dividends at the end of the three-month period that would coincide with the futures contract you are considering. So if you bought the SPX today, you would earn $8 in dividends over the next three months. On the other hand, if you bought the futures contract, you would forgo any dividends on the index.

In these simple terms, you can now calculate the fair value of the SPX index futures contract. If you bought the SPX today, you would pay $1,600 for the purchase, incur $24 in interest charges and earn $8 of dividends. Your net cost would be $1,616 ($1,600 plus $24 minus $8). Again, it probably wouldn't make much difference to you whether you bought the SPX at $1,600 today or bought a futures contract to buy the index at $1,616 in three months.

Of course, things are not that simple in the real world. Consider these points:

  • Interest rates vary from individual to individual and institution to institution.
  • Dividends are not constant. Companies will pay dividends on any day they choose. Some companies pay quarterly, while others pay on an annual basis.
  • Dividends are not certain. Companies can raise, lower or omit dividends.

The above shifts are factored in by market participants to arrive at a fair value for the index futures. Understanding this, you can now determine whether the futures are priced for a market move, and if so, the direction of the move, as well as the extent to which the futures are mispriced relative to the underlying cash index.

3 of 5

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $128.95 0.00%
FB $78.99 0.00%
GOOG $537.90 0.00%
TSLA $226.03 0.00%
YHOO $42.51 0.00%

Markets

DOW 18,024.06 +183.54 1.03%
S&P 500 2,108.29 +22.78 1.09%
NASDAQ 5,005.3910 +63.9670 1.29%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs