S&P 500® Futures: A Look at the Basics

For some investors and traders, taking a position in the biggest stocks may not always be feasible. Futures contracts based on benchmark indexes, such as S&P 500 futures, can help investors and traders gain exposure. 

The S&P 500 index (SPX) measures the performance of 500 of the largest publicly traded companies in the United States. The SPX is the ultimate measuring stick for thousands of funds and fund managers due to its broad exposure, but direct trading may be close to impossible for all except the very largest asset managers.

Futures contracts based on equity indexes like the SPX have historically been used by some traders looking for a way to gain exposure to the broader market, potentially to help protect against market turmoil, and add portfolio flexibility during earnings season. Still, investors need to remember futures are different from stocks. Futures trading involves substantial risk and is not appropriate for everyone, so it's critical to understand how futures work and be aware of the opportunities—and risks—before trading.

Ahead, we’ll cover the basics S&P 500 futures, including how they work and why you may want to might want to consider them.

Traders have access to an array of index futures contracts. Two S&P futures contracts are among the most actively traded in the world: the E-mini S&P 500 futures and Micro E-mini S&P 500 futures contracts closely track the U.S. benchmark from day to day and trade on the Chicago-based CME Group exchange. That active trading means that, historically, there's been liquidity for buyers and sellers to find each other and quickly and efficiently execute trades. That's one reason many professional portfolio managers and traders use SPX-based futures in an attempt to hedge against potential market downturns or insulate their portfolios against different types of surprise events.

Traditional E-mini S&P 500 futures, along with the newer Micro E-mini futures, are based on the underlying SPX and closely track the U.S. benchmark from day to day. Both the E-mini and Micro E-mini SPX futures trade on the Chicago-based CME Group exchange and are among the most actively traded futures in the world. So, historically, there's been liquidity for buyers and sellers to find each other and quickly and efficiently execute trades. That's one reason many professional portfolio managers and traders use SPX-based futures in an attempt to hedge against potential market downturns or insulate their portfolios against different types of surprise events.

What's the difference between E-mini and Micro E-mini SPX futures? "Smaller bite" micros require less money up front and can require less equity to maintain compared with traditional e-minis. For example, the maintenance margin—the minimum amount of money a trader must maintain after opening a position— currently (or as of February 2023), for one Micro E-mini S&P 500 futures contract (/MES) is $1,200. For the E-mini S&P 500 contract (/ES), the maintenance margin is $12,000 per contract.

The "multiplier" used to determine the notional value for Micro E-mini SPX contracts, at $5, is also one-tenth the size of the E-mini SPX contract. If the SPX is trading at 3,000, one Micro E-mini SPX contract would be 3,000 times the $5 multiplier, for a notional value of $15,000. The notional value of the E-mini SPX contract would be $150,000 (3,000 x the $50 multiplier).

How can trading SPX futures potentially help hedge a portfolio and maximize portfolio efficiency? S&P 500 index futures and other equity index-based futures may offer a way to help boost capital efficiency and hedge against market volatility.

One futures-based hedging approach involves calculating beta and beta weighting (beta measures the volatility of an individual asset, or an entire portfolio, in comparison to a benchmark like the SPX). Through beta weighting (available on many trading platforms), you can gauge your portfolio's theoretical risk relative to the S&P 500 or to a single asset. (To beta weight, you first determine delta, a measure of sensitivity to a dollar change in the underlying asset.)

If the broader market falls or rises X number of points, you can gain a theoretical sense of what such moves might mean for your portfolio balance. You can beta weight your entire portfolio, which could help give you a window into how your portfolio might be affected if there's an increase or decrease in the overall stock market.

Here's a simplified futures-based hedge example (Note: The following is an example of one strategy, but there are many strategies that exist.):

• Suppose you hold a stock position or a portfolio of stocks with a value of $50,000, and you're concerned about the prospect of negative surprises in upcoming economic reports or earnings season.
• You could hedge about 30% of that portfolio value by selling (or shorting) one Micro E-mini SPX futures contract by putting up the initial $1,200 maintenance margin, or about 8% of the $15,000 notional value of one Micro E-mini SPX futures contract ($5 x 3,000, using the numbers from the previous example).
• If the SPX drops 50 points (about 1.7%), and you then buy back, or close out (if possible), that futures position and pocket a gain of more than $200 that could help offset any paper losses in your stock portfolio. By taking a position in the futures contract, you gain similar notional exposure while tying up a lot less capital.

It's important to remember the risks involved in hedging strategies, like the example provided here. There is unlimited risk on a short position, as well as daily mark-to-market adjustments, and you may be required to add additional funds immediately or face liquidation. Leverage can be a double-edged sword where losses can be accelerated. Additionally, it's possible to lose more than the initial amount used to purchase the investment, so traders should consider these risk factors before selecting their strategy.