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A Brief Guide to Trading Dow Jones Futures

Dow Jones Index Futures Trading Guide
F T L
7 minute read

If you’ve ever listened to a financial market news broadcast, you’ve probably heard a reference to ‘futures trading’. Many traders keep track of the futures market. That’s because it provides a reliable indication of the direction of the stock market at the opening bell for the day. One of the most popular futures markets is the Dow Jones Futures. The underlying value of these futures is derived from the Dow Jones Industrial Average (DJIA). It’s an index of 30 large publicly traded companies in the United States. In this guide, we take a look at the basics of trading Dow Jones Futures.

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What Are Dow Jones Futures?

The DJIA is the second oldest U.S. stock index available today. It’s viewed as one of the best metrics or proxies for the U.S. stock market and the overall economy. It is known as a “blue chip” index because of the types of companies that are included. Some of the companies include Coca-Cola, AT&T, ExxonMobil, Wal-Mar, Hewlett-Packard, and Microsoft. These days investors are able to gain exposure to the DJIA through various instruments, including Options, CFDs, ETFs, and Futures. 

A futures contract is a legally binding agreement between two parties to exchange money or assets at a future date based on the price of an underlying index. The Dow Jones futures contract, for example, tracks the spot price of the DJIA. The two parties in a futures contract are basically betting on where the DJIA will trade on a specified day in the future. This is known as the “final settlement date.” As such, if you are looking to speculate on the DJIA, then trading Dow Jones futures is a good place to start.

How Dow Jones Futures Trading Works

When two parties agree to trade a Dow Futures contract, one party is betting that the market value of the underlying index (i.e. DJIA) will decrease. Whereas, the counterparty is betting that the underlying index value will increase. When the final settlement date arrives, whoever made the wrong bet is obligated to pay the other party based on the value of the Dow.

Simply put, the person buying the futures contract makes money if the index value increases. Whereas, the party selling the futures contract makes money when the index decreases in value. Hence, the trade is settled in cash. Other futures contracts may be settled with physical delivery, such as agricultural goods, oil, gold and other commodities.

Dow Jones Index Stock market chart English

For example, let’s say you short sell a Dow Jones futures contract. This contract has a DJIA value of 20,000 and a standard contract size of $10x the DJIA. Let’s say that on the final settlement date, the DJIA is trading at 20,400. Therefore, its value has appreciated by 400. Using a multiplier of 10, you owe the counterparty $4,000 (400 x$10).

On the other hand, if the DJIA was valued at 19,300 on the settlement date, then the counterparty would owe you $7,000 (700 x $10). Keep in mind that you’ll need an account with a futures broker if you want to buy or sell Dow Jones futures.

Dow Jones Futures Contract Sizes and Specs

There are four main futures contracts for the Dow Jones Index listed on the Chicago Mercantile Exchange (CME). All of them include different multipliers, which will impact the potential gains or losses after each trade.

  1. THE E-MINI DOW FUTURES CONTRACT (PRODUCT CODE: YM)

    This contract offers the lowest amount of leverage and has a contract size of $5 multiplied by the closing value of the DJIA. This means that each point is worth $5 per contract. Let’s say the Dow Jones closes at 25,000, the contract value will amount to $125,000 (25,000 x $5). The E-mini Dow Futures Contract has quarterly expirations or settlement dates (March/June/September/December).

    Contract Specifications

    Symbol CME Globex: YM
    CME ClearPort: YM
    Clearing: YM
    BTIC: YMT
    Contract Size $5 x DJIA
    Minimum Tick 1.00 index point
    Tick Value $5.00
    Trading Hours Monday – Friday: 5:00 p.m. previous day – 4:15 p.m.; trading halt from 3:15 p.m. – 3:30 p.m.
    Listed Contracts Four months in the March Quarterly Cycle (Mar, Jun, Sep, Dec)
    Settlement Methods Financially Settled
    Termination of Trading Trading can occur up to 9:30 a.m. ET on the 3rd Friday of the contract month

    BTIC trading terminates at 4:00 p.m. ET on the Thursday before the 3rd Friday of the contract month

    Data Source:CME

  2. THE DJIA FUTURES CONTRACT (PRODUCT CODE: ZD)

    This contract has a size of $10 multiplied by the closing value of the DJIA. As such, if the Dow Jones closes at 25,000, the contract value will then amount to $250,000 (25,000 x $10). Like the E-mini Dow Futures, the DJIA Futures Contract has a quarterly expiration.

    Contract Specifications

    Symbol Electronic: ZD
    Open Outcry: DJ
    Contract Size $10 x DJIA
    Minimum Tick 1.00 index point
    Tick Value $10.00
    Trading Hours CME Globex: Monday – Friday: 5:00 p.m. previous day – 4:15 p.m. CT, trading halt from 8:15 a.m. – 3:30 p.m. Open outcry: Monday – Friday: 8:30 a.m. – 3:15 p.m.
    Listed Contracts Four months in the March Quarterly cycle listed at all times
    Settlement Methods Cash settlement to the Special Opening Quotation of the index on Final Settlement Day, which is generally the third Friday of the contract month
    Termination of Trading Open outcry: Trading can occur up to 3:15 p.m. CT on the day prior to third Friday of the contract month Electronically traded: Trading can occur up to 8:15 a.m. CT on the third Friday of the contract month

    Data Source:CME

  3. THE BIG DOW DJIA FUTURES CONTRACT (PRODUCT CODE: DD)

    This contract offers the highest leverage with a contract size of $25 multiplied by the closing value of the DJIA. So if the Dow Jones closes at 25,000, the contract value will be $625,000 (25,000 x 25).

    Contract Specifications

    Symbol DD
    Contract Size $10 x DJIA
    Minimum Tick 1.00 index point
    Tick Value $25.00
    Daily Price Limits Successive 10%, 20% and 30% downside limits from 8:30 a.m. to 3:00 p.m. CT (MON-FRI); 5% up-and-down limits from 5:00 p.m. to 8:30 a.m. (SUN-THURS) and 3:00 p.m. to 4:15 p.m. (MON-FRI).
    Trading Hours Monday – Friday: 5:00 p.m. previous day – 4:15 p.m.; trading halt from 3:15 p.m. – 3:30 p.m
    Listed Contracts Four months in the March Quarterly cycle
    Settlement Methods Cash settlement to the Special Opening Quotation of the index on Final Settlement Day, which is generally the third Friday of the contract month
    Termination of Trading Trading can occur up to 8:30 a.m. CT on the third Friday of the contract month

    Data Source:CME

  4. THE MICRO E-MINI DJIA FUTURES CONTRACT (PRODUCT CODE: MYM)

    On May 6, 2019, the CME launched the Micro E-mini Dow Jones Futures (MYM). It comes with a contract size of 50 cents ($0.50) multiplied by the closing value of the DJIA. So if the Dow Jones closes at 25,000, the contract value will be $12,500 (25,000 x 0.5).

    Contract Specifications

    Symbol MYM
    Contract Size $0.50 x DJIA Index
    Minimum Tick 1.00 index point
    Tick Value $0.50
    Trading Hours CME Globex: Sunday – Friday 6:00 p.m. – 5:00 p.m. Eastern Time (ET) with  trading halt 4:15 p.m. – 4:30 p.m.

    CME ClearPort: Sunday – Friday 6:00 p.m. – 5:00 p.m. ET

    Listed Contracts Quarterly contracts (Mar, Jun, Sep, Dec) listed for 4 consecutive quarters.
    Settlement Methods Financially Settled
    Termination of Trading Trading terminates at 9:30 a.m. ET on the 3rd Friday of the contract month.

    Data Source:CME

    It appears that only the E-Mini and Micro E-Mini Dow Jones Futures contracts are actively traded these days, so we’ll focus on them for the rest of the article.

Trading Dow Futures

It’s relatively easy to get started with trading futures. This is especially the case if you’ve practiced with a virtual account to test your trading strategy. Open a trading account with a broker and begin live trading with real money only after your trading strategy has been consistently profitable in simulated trading.

The process is similar to regular trading — buy long or sell short, both of which you can do with equal ease. If you expect the value of the DJIA to rise, buy a futures contract. If you think it’s headed down, sell the contract short. Take note of the trading month before taking a position in the futures contract—the one with the nearest expiration date will likely have the most trading volume. 

CLOSING A POSITION

Closing a position simply means entering an opposite trade to close an existing position. Let’s say you opened the trade by buying 10 E-mini Dow futures contracts. To close the position you would need to sell these contracts before the expiration date. In the same vein, if you opened your position by selling five contracts short, then you would need to buy five contracts to close the position. It is also possible to partially close out a position. For example, if you bought 10 contracts, you could close 7 of them by selling 7 contracts. This means you would have 3 contracts still open.

The Bottom Line

Trading Dow Jones Futures can certainly be a useful tool for an investor. Although it’s probably best for experienced traders who fully understand market fluctuations. They are also better able to absorb potentially big losses if DJIA’s value doesn’t go as expected by the final settlement date. That’s why it’s important to first learn how to read the market and have a good grasp of how the DJIA will likely perform in the months ahead. This due diligence should be done before opening any position.

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