NASDAQ futures are investment instruments which allow an investor to hedge with or speculate on the future value of various components of the NASDAQ market index.
Several futures instruments are derived from the NASDAQ composite index: the E-mini NASDAQ composite futures, the E-mini NASDAQ biology futures, the NASDAQ-100 futures, and the E-mini NASDAQ-100 futures.
The NASDAQ is the largest electronically traded stock exchange in the world. The NASDAQ composite is a composite index of all securities traded on the NASDAQ exchange which has been continuously calculated since 1971. Futures contracts oblige the parties to buy and sell the derivative at a predetermined price at a predetermined time.
Futures contracts are beneficial to investors because of the leverage involved. While 100% of the cost is required to purchase stocks and their indexes (without borrowing on margin), only a fraction of five to fifteen percent the value of a futures contract is required to be deposited to gain control of the futures contract (called a performance bond). Therefore, increases and decreases in the value of the futures contracts are a much greater percentage of the capital required to control futures than stocks either bought outright or on margin. Risk of loss and potential for profit are equally amplified through this leveraging.
NASDAQ derived futuresEdit
All of the NASDAQ derived future contracts are a product of the Chicago Mercantile Exchange (CME). They expire quarterly (March, June, September, and December), and are traded on the CME Globex exchange nearly 24 hours a day, from Sunday afternoon to Friday afternoon.
E-mini NASDAQ futures (ticker: QCN) contract's minimum tick is .50 index points = $10.00 While the performance bond requirements vary from broker to broker, the CME requires $4,000, and continuing equity of $3,200 to maintain the position.
E-mini NASAQ biotechnology futures (ticker: BIO) contract's minimum tick is .10 index points = $5.00 While the performance bond requirements vary from broker to broker, the CME requires $3,750, and continuing equity of $3000 to maintain the position.
NASDAQ-100 futures (ticker: ND) contract's minimum tick is .25 index points = $25.00 While the performance bond requirements vary from broker to broker, the CME requires $17,500, and continuing equity of $14,000 to maintain the position.
E-mini NASDAQ-100 futures (ticker: NQ) contract's minimum tick is .25 index points = $5.00 While the performance bond requirements vary from broker to broker, the CME requires $3,500, and continuing equity of $2,800 to maintain the position.
Futures contracts are commonly used for hedge or speculative financial goals. Futures contracts are used to hedge, or offset investment risk by commodity owners (i.e., farmers), or portfolios with undesirable risk exposure offset by the futures position.
Futures are also widely used to speculate trading profits. Futures trading is skyrocketing – CME's E-mini contracts averaged 3.5 million contracts a day in 2008, a 37 percent yearly increase in volume, while equity volume increased only 2 percent for the same period of time. However studies reveal that hedging strategies still dominate speculation trade activity in every futures market studied.
Investment in trading algorithms research (a mathematical rule set for futures trading entry, exit, and stop loss points often calculated and executed by computer) is phenomenal. Investment banking firm Goldman Sachs devotes more of its resources, tens of millions annually, to developing trading algorithms than it does on trade desk staffing. Trading algorithms may be as exotic as biology theorems like neural network applied to financial market trading by Gang Dong of Rutgers University, or completely based on current market time/price analysis.
US tax advantagesEdit
In the United States broad-based index futures receive special tax treatment under the IRS 60/40 rule. Stocks held longer than one year qualify for favorable capital gains tax treatment, while stocks held one year or less are taxed at ordinary income. However, proceeds from index futures contracts traded in the short term are taxed 60 percent at the favorable capital gains rate, and only 40 percent as ordinary income. Also, losses on NASDAQ futures can be carried back up to 3 years, and tax reporting is significantly simpler, as they qualify as Section 1256 Contracts.
- ↑ http://www.nasdaq.com/about/overview.stm
- ↑ http://www.nyse.tv/nasdaq-composite-history-chart.htm
- ↑ http://dictionary.reference.com/browse/futures
- ↑ http://commodities.about.com/od/understandingthebasics/a/futures_margin.htm
- ↑ 5.0 5.1 5.2 http://www.cmegroup.com/trading/equity-index/us-index/e-mini-nasdaq-composite_contract_specifications.html
- ↑ 6.0 6.1 6.2 6.3 http://www.cmegroup.com/wrappedpages/clearing/pbrates/performancebond.html?group=CME%20INDEX%20FUTURES&type=OutrightRates&h=2&reporttype=marginrate
- ↑ http://www.cmegroup.com/trading/equity-index/us-index/e-mini-nasdaq-biotechnology_contract_specifications.html
- ↑ http://www.cmegroup.com/trading/equity-index/us-index/nasdaq-100_contract_specifications.html
- ↑ http://www.cmegroup.com/trading/equity-index/us-index/e-mini-nasdaq-100_contract_specifications.html
- ↑ http://www.econ.iastate.edu/faculty/wisner/Basic%20Options%20&%20Hedging%20Principles/NCH47PrincipalsofHedging4cp.pdf
- ↑ PRNewswire-First Call, January 5, 2009.
- ↑ Ciner, Cetin, Hedging or Speculation in Derivative Markets: The Case of Energy Futures Contracts, Applied Economics Letters, University of North Carolina (2009), http://www.informaworld.com/smpp/content~content=a747839200~db=all~order=page/
- ↑ The Associate Press, July 2, 2007.
- ↑ Empirical Test of Forecasting VIX Index an Probability in Trading Derivatives, Gang Nathan Dong, (Rutgers University 2007), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=956148
- ↑ IRS Code, Section 1256(a)&(b) http://www4.law.cornell.edu/uscode/uscode26/usc_sec_26_00001256----000-.html/ .
- ↑ http://www.irs.gov/taxtopics/tc409.html
- ↑ Id., Section 1256(a)&(b)(1), http://www4.law.cornell.edu/uscode/uscode26/usc_sec_26_00001256----000-.html/.