Buy Low/Sell High, or Vice Versa

For those willing to incur risk, you can incur profit from trading stock index futures the same way as any other investment - by buying low and selling high. One difference with futures, however, is that it's just as common to sell short - to sell first - and then buy back later as it is to buy first, or go long. With futures trading, if you think prices are going up, you simply establish a “long ” (buy) position, and if you think prices are going down, you initiate a “short ” (sell) position.

Getting In and Out

Futures in general lend themselves to a variety of different timeframes: short-, medium-, or long-term. Electronically traded stock index futures however, can be particularly attractive to shorter-term or day-traders, because the fluctuations in the index markets make it possible to take advantage of short-term price movements.

Once you have established your position, you have three alternatives:

Offset your position by taking an equal but opposite position.

You can exit from any futures position before expiration by taking an equal but opposite futures position (selling if you have bought; buying if you have sold). Most futures are offset in this way. You don't have to wait until the expiration date to complete your trade - in fact, few investors do.

Wait until your contract expires, and then make or take cash settlement.

Cash settlement is made according to a “Special Opening Quotation ” (SOQ), a price calculated for each domestic stock index product. This means your account will be debited or credited, in cash, the difference between your purchase/sale price and the final settlement as determined by the SOQ. Of course, if you offset your position, this process doesn't apply.

“Roll ” the position over from one contract expiration into the next.

If you hold a long position in an expiration month, you can simultaneously sell that expiration month and buy the next expiration month (known as a “calendar spread ”) for an agreed-upon price differential. By transferring or “rolling ” a position forward this way you are able to hold it for a longer period of time. For example, if a trader is holding a March E-mini futures contract, he or she can sell the March futures before expiration and buy a June futures, thereby expanding the timeframe of his trade.