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.