Trade the overall Share Market
Introduction to SPI 200 trading
SPI 200 stands for Share Price Index Futures. SPI 200 Futures and Options contracts provide investors with an easy and effective way to trade the overall share market with one trade. Trading the SPI 200 is equivalent to trading a balanced share portfolio that tracks the S&P/ASX 200 index. The S&P/ASX 200 index has replaced the All Ordinaries Index as Australia’s benchmark share market index.
SPI 200 trading provides you with instant exposure to approximately 88% of the total Australian Share market with no specific company risk. It requires just one transaction, which can be filled in a matter of seconds. With SPI 200 trading, large or small investors are able to:
Participate in the broad market by using futures and options as an efficient alternative to share ownership.
Profit* by taking a position based on future movements in the Australian share market.
Gain exposure to the Australian share market with one easy trade.
Protect their portfolio against adverse changes in the share market.
Establish a price level today for a portfolio of shares that will be bought or sold in the future.
* Losses can be made.
Relationship between the ASX and the SFE
There are two major Australian financial exchanges:
1. The Australian Stock Exchange (ASX)
The (ASX) is the 12th largest share market in the world, and the second largest in the Asia Pacific region on the basis of market capitalisation. It continues to be rated as one of the top three markets in the world for equities settlement services, operational risk and value for money. With more than 52% of Australia’s adult population owning shares, directly or indirectly, interest in Australia’s share market has reached unprecedented levels.
2. The Sydney Futures Exchange (SFE)
The SFE is the second largest financial futures and options exchange in the Asia Pacific. It offers around the clock trading access to a diverse range of equity, interest rate and commodity products.
In 1983 the SFE became the first exchange outside the USA to list a share index futures contract when it created the SPI. The SFE has since become the first Exchange in the World to introduce Share Futures.
Relationship between the S&P/ASX 200 and SPI 200 Futures
The S&P/ASX 200 index reflects the prices of Australia’s leading 200 shares as judged by market capitalisation and liquidity. This index represents around 90% of the entire share market. The S&P/ASX 200 index fluctuates as a result of the physical buying and selling of shares, it is referred to as “the physical” or “cash” index.
Share Price Index 200(SPI 200) Futures
The SPI 200 is an index futures contract that tracks the physical index. The SPI 200’s fluctuations depend upon movements in the S&P/ASX 200 and general market sentiment.
Near the end of each financial quarter, the SPI 200 settles against the physical S&P/ASX 200. Until then, the SPI 200 value (price) may be trading above or below the physical market at any one time, however the two indexes are always highly correlated. If the difference between the two index prices stretches too far, arbitrage opportunities may exist, which in turn, act to reduce this difference.
When the outlook for the share market is bullish in the near term, the SPI 200 will generally be higher than the S&P/ASX 200 price. Here, the futures market has already factored in some rises. The S&P/ASX 200 and the individual shares within this index are referred to as “physicals”, as apart from futures, which are sometimes known as “synthetics”. When futures are trading above the physical, a premium is said to prevail. Similarly, when a futures market is trading below the physical price, a discount is said to exist.
Generally, if the S&P/ASX 200 Index closed 30 points higher than the previous day’s close, the SPI 200 would also have shown a rise of around 30 points. If the SPI 200’s opening price (first trade) at the beginning of the day is 40 points higher than the previous day’s closing price, then the SPI 200 has predicted that the “physical” will also end the day with a rise of 40 points.
Advantages of trading the SPI 200
Trading the SPI 200 offers immediate and total exposure to the overall share market, low transaction costs, the ability to short sell and the reduction of risk associated with holding individual stocks. As well as trading in our day time, SPI 200 trading takes place when the ASX is closed, thereby offering private investors and hedgers trading opportunities or portfolio protection when European and American markets are trading overnight. Many investors use the overnight SPI 200 market to apply stop losses in order to protect their existing open SPI 200 positions. American share market’s can affect Australia’s share market the next day. It is for this reason that many traders place stop loss orders for the overnight SPI 200 session well before it opens.
SPI 200 trading hours (Sydney Time)
Day: 0950 until 1630
Night: 1710 until 0800 (0700 during day light saving period)
How do I determine the cash value of a SPI 200 contract?
The value of a SPI 200 futures contract is equal to A$25 times the prevailing index level. For example, if the index were trading at a price of 3200, the contract would represent an equivalent share exposure worth A$80 000 (A$25 x 3200). If you had bought (or sold) a SPI 200 futures contract and the index rose 50 points to 3250, the contract would then be worth A$81 250, representing a gain (or loss) of A$1 250 (A$25 x 50 points). That is how it works. The index price of the SPI 200 contract at any particular time will reflect the underlying physical share market plus the market’s expectations of future movements in the S&P/ASX 200.
What does it cost to trade a SPI 200 contract?
In order to trade SPI 200 futures and options, a cash deposit (“initial margin”) for each contract is required to be maintained in your trading account. Speak to your friendly advisor at CK Locke & Partners to get current Margin Requirements for the SPI futures. Any positions that are exited (or closed out) before the close of the day are not subject to initial margins. You also agree to pay additional daily margins on all open contracts that show unrealised losses through unfavourable price movements. “By the same token”, you will receive credits for positions that show unrealised profits. These payments are called variation margins and are debited and /or credited to your trading account on a daily basis. These payments ensure that exposures are covered on a daily basis.
Applications of SPI 200 Futures
SPI 200 futures and options are used primarily by institutional investors to hedge Australian share market risk. The SPI 200 is also actively traded by investors who attempt to make profits by correctly anticipating market movements, that is profit from selling high or buying low. Traders actively trade the SPI 200 for short-term trading, long-term trend following, hedging stock portfolios, portfolio substitution, cash flow management and anticipatory hedging, arbitrage, spread-trading and directional trading.
Cash Settlement
Any remaining open positions are cash settled near the end of every quarter. Cash settled contracts are settled on expiry by either receipt or payment of cash. The amount paid or received represents the difference between the price at which the contract was traded in relation to the final settlement price. The method of calculating the settlement price is determined by the Futures Exchange and is set out in the contract specifications. The SPI 200 contract is cash settled with the settlement price set as the closing quotation for the S&P/ASX 200 Index on the last day of trading for the quarter.
It should be noted that the profit or loss made in a cash settled contract does not all occur on the final day of trading because variation margins are applied daily so that profits and losses would have accrued daily and progressively.
SPI 200 Trading Example
An individual investor is concerned in March that sometime during the next three months the Australian share market will fall, reducing the value of their A$150 000 share portfolio which closely tracks the S&P/ASX 200 index. The investor decides to sell two June SPI 200 futures contracts at an index level of 3140 to protect the underlying share portfolio.
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Physical Market |
Futures Action Taken |
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March |
An investor is concerned about the market falling and wants to protect the A$155 000 shareholding. |
Investor contacts us and sells two June SPI 200 futures contracts @ 3140. Exposure = 3140 x A$25 x 2 = A$157 000 Cost = 2 x initial margins*
*Initial margins are adjusted from time to time according to volatility. |
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June |
Three months later the investor’s concerns are realised. The share market has fallen causing a decrease in the value of the portfolio to A$150 000. When the futures profit is added (A$6 500 + A$150 000) the value of the portfolio increases slightly to A$156 500. |
The futures market has fallen to a level of 3010. The investor closes out the futures contract by buying two June SPI 200 futures contracts. Initial margin is returned.
Exposure = 3010 x A$25 x 2 = A$150 500.
Futures profit = 3140 - 3010 = 130 points.
130 points x 2 contracts x A$25 = A$6 500
Hence a gross profit of A$6,500 is realised. |
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Result |
The gross profit made in the futures market offsets the loss made in the physical market. |
How can I make money in a falling market?
Selling SPI 200 futures is just as easy as buying them. Unlike the share market, there are no restrictions on short selling which means that investors trading opportunities are effectively doubled. An investor can sell a SPI 200 contract and then, if the market should fall as expected, a profit can be gained by buying back a SPI 200 contract at the new lower price - selling high and buying low. The process of short selling is a fundamental characteristic of the futures markets and is one of the reasons behind the high liquidity in the market.
Explanation of short selling concept
If you believe that a share price is too high, and you can find a buyer that agrees to pay that high price, good! Agree to sell it at that price. Now all you have to do later is find someone who agrees to sell for less. You have now sold to a buyer at a high price and bought that same thing from a seller at a lower price. The difference is collected in cash. Nothing physical needs to change hands because the deal is done on an agreement. You profit in one of two ways. Buying low and selling high or selling high and buying low. The point here is that money changed hands on the agreement to buy and sell and nothing tangible changed hands. You still bought that something for say $15 000 and sold it for $20 000, you just sold it first. When you sell a futures contract to open a position, you are contractually agreeing to buy it back at some time in the future. The price you buy at (to close the position) determines the amount of profit or loss.
As we are sure you know, risk exists with any investment. Shares have opened substantially lower in the morning in Australia after big overnight falls in the American share Indexes. In 1987, some shares could not be sold at any price. More recently, some technology-based shares have declined in value by thousands of percent. Property investments are subject to risks that may arise from interest rates, taxation, the general economy etc. Even holding cash is not immune to risks associated with inflation, currency movements and government intervention. With this in mind, astute investors usually diversify into different types of investments and asset classes to avoid being over exposed in one area. Diversifying into futures trading is generally accepted as a high risk –high reward class of investment.
The potential for loss exists as well as profit when trading speculative investments such as futures contracts. This is why CK Locke & Partners recommend using risk capital.
How do I trade the SPI 200?
To trade SPI 200 futures, you are required to sign client agreement forms. These forms are similar in nature to opening an option trading Account with your share broker. Please contact us if you have any problems filling out these forms.
SPI 200 Options
Options offer another cost effective alternative to trading the share market. SPI 200 options allow investors to participate in the market at a known and predetermined level of risk. Buyers of SPI 200 options can never lose more than the premium paid for the option, yet still have unlimited profit potential.
Options on futures contracts share the same mechanics as ASX equity options. Prices (premiums) for SPI 200 options are quoted in the same manner as the underlying futures contract. For example, if an option on the SPI 200 contract is quoted as having a premium of 50.5 points, this will equate to a dollar value of A$1 262.50 (ie. A$25 x 50.5 points). Six contract expiry months are available with strike prices set at 25 index point intervals. SPI 200 options expire at the same time as the underlying futures contract and are cash settled against the futures settlement price. SPI 200 options are quoted in intervals of 0.1 index points, equivalent to A$2.50.
Options are used by speculative traders, banks, fund managers and other investment institutions to protect the value of their share portfolios. Speculative traders use options in conjunction with SPI 200 futures as part of their overall strategy. Options can also be used on their own and commonly used strategies include the buying of basic put and call options and more advanced strategies such as straddles, spreads, collars and butterflies.
Summary of the SPI200
SPI 200 futures are the premier equity derivatives contract in Australia
SPI 200 futures are based on the S&P/ASX 200 Index.
Contract value = A$25 x the prevailing Index point figure.
Every one point movement in the SPI 200 = A$25 (tick value) to investors.
Available for trading nearly 24 hours per day.
All trading done on SFE’s advanced screen dealing system, SYCOM IV
One trade enables broad exposure to the Australian share market.
SFE is the second largest financial futures market in the Asia Pacific.
Hedging and portfolio protection.
Reduction of risk associated with holding individual stocks.
Ability to short sell – double your trading opportunities.
Flexible order instructions – profit objectives, loss limitations, and conditional orders.
Trade options over the index with leverage.