The Definition of Dow Futures

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The value of the Dow futures is often quoted before the stock market opens as an indicator of how the market will react during the trading day. Trading Dow futures is one way traders attempt to profit from the value changes of the Dow Jones Industrial Average. Even investors who don't trade futures can use the Dow futures as a forecasting tool.

Identification

Dow futures are futures contracts in the class of equity index futures. Futures are standardized contracts allowing two parties to agree to buy or sell specific commodities or financial instruments with delivery at a date in the future. Stock index futures are contracts for the delivery of cash equal to the value of a specific stock index, such as the Dow Jones Industrial Average DJIA) or the S&P 500. Dow futures are for the delivery of the value of a specific multiple of the DJIA.

Function

Dow futures contracts are traded on the futures exchanges. A trader can elect to open a trade by buying contracts or open with sold contracts. Traders who buy expect the DJIA to increase in value, and their futures positions will be profitable if the index rises. Traders who sell contracts expect the DJIA to fall in value. When a contract expires, the traders either pay or receive the difference in the value of the contract compared to the price of the contract when they opened the position.

Size

Dow futures contracts are available in three sizes. The standard Dow futures contract has a value of 10 times the DJIA. The mini-Dow futures contract is worth five times the value of the index, and the Big Dow futures contract is 25 times the DJIA. The way this translates for traders is that each one point move in the DJIA is worth the futures multiplier in dollars. For the three contract sizes, a one point Dow index change is worth $10, $5 or $25 in profit or loss.

Potential

Futures traders can take positions in Dow futures contracts by putting up a margin deposit amount for each contract they trade. The margin requirement is a fraction of the contract value. For example, with the DJIA at 10,000, the standard Dow futures contract is worth $100,000. A trader can control one of these contracts with a deposit of $13,000. A 100 point move in the DJIA would provide a $1,000 gain or loss per contract.

Significance

Dow futures contracts trade on the electronic futures exchanges 24 hours a day, five-and-a-half days a week. This feature allows traders to react to market and economic events in Asia and Europe while the U.S. stock market is closed. Dow futures trading allows traders a leveraged way to make trades based on expected stock market direction. They also allow portfolio managers to hedge their stock market portfolios when the stock market is closed or open.

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