Share Price Index (SPI) Futures

Share Index Futures trading, whilst attractive as a trading instrument, can be a little mind boggling at times given that it rarely trades at a consistent differential to the underlying contract. This can be seen by the day-to-day changes in price of the SPI Futures compared to the ASX 200, which rarely move by the same amount in their daily changes. Whilst it can pose as an opportunity for the arbitrageur, for the outright speculator it is worthy of monitoring when entering into an index futures trade. 

As an example, the Australian-based share price index futures is one of the most popular traded contracts on the Sydney Futures Exchange (SFE) amongst private clients due to its volatility. But let’s look at how basis risk can impact on the profitability of a trade. 

Hyperthetically, a trader may have a slightly bullish view on the Australian sharemarket and decides to purchase 2 SPI Futures contracts to hold for a few days in order to benefit from that expectation. Three days later the sharemarket has gone up slightly and the SPI Futures trader is still faced with an unrealised loss.

As can be seen in the above example, the SPI Futures has not managed to maintain its premium over the period which has resulted in a loss to the trader even though his expectations on the sharemarket generally has been realised.

What this emphasises is that the return for a futures index trade will depend on the behaviour of the “basis”. ie. The difference between the movement in the underlying index level and the index futures contract, in this case, the SPI. 

The opposite can also apply in which a trader may have bought a futures contract when the SPI Futures is trading at a low level (say at large discount to the ASX 200) and the market level of the index subsequently falls, but the holder of the SPI sees the value of the contract move higher.

Clearly what the above means is that traders on index futures should be mindful of all the relevant factors in operation on the market pricing at that point in time prior to entering into a Index futures trade. Some of the factors that impact on the difference; between the SPI and ASX S&P/200 include interest rate changes, sentiment changes and major stocks going ex-dividend during and subsequent to a reporting season.