Trading Dow Jones Futures, Risks and Working Examples
Dow futures are great way of speculation and hedging the Dow Jones. The Dow Jones Industrial average is an index made up of the “big players” across nine industries. As the Dow Jones chart shows, the performance has been very good in recent years. The index has in fact increased around 50% in two years.
The size of a standard futures contract is valued at $10 X Dow. For example if the Dow is currently priced at 13,000 points, the nominal value of a contract will be $130,000. Each tick movement will be worth $10. This may be too much for small traders. There are emini Dow futures which are half this amount.
This futures contract is traded on the CBOT exchange. The initial margin requirement is currently $7,005. The maintained margin requirement is $5604.(Always subject to change).
Let’s look at an example:
Let’s say the Dow is priced at 13,000 points and you wish to speculate a move to 14,000 points in the next three months. You would need to buy a contract with an expiry date longer than three months away. Whilst you could use any contract more than three months away, it is generally best to use the nearest one possible as they are often more liquid. This results in lower spreads.
If three months later the Dow is priced at 14,000, your contract will be $10,000 in profit. This is around 142% of your initial margin requirement.
However, if the Dow moved down to 12,000, your contract would be in the opposite situation at -$10,000. As the maintenance margin requirement is $5604, you may need to deposit additional funds before the three month period is over to keep the position open. Clearly this demonstrates that Dow Jones trading can yield great returns, but can also lead to huge losses.
Dow Jones futures are no different to trading other instruments. Trading this index involves considerable risk and it important that you are fully aware how they work before trading. Also see our previous article on FTSE Futures trading..