A Measure of the Market.
• Since 1966, the New York Stock Exchange (NYSE®) has measured the performance of all of its listed common stocks with the NYSE Composite Index®. • Since 1982, the New York Futures Exchange (NYFE®) subsidiary of the New York Board of Trade (NYBOT)® has provided futures and options markets based on the NYSE Composite.
NYSE Composite Index® Futures and Options Buy or Sell the stock market in a single trade
The NYSE Composite Index® provides the broadest measurement of the entire equities market. It represents 82% of the total market capitalization of all publicly traded companies in the United States; it encompasses 57% of the total market capitalization of all publicly traded companies around the world. The NYSE Composite Index futures and options contracts allow investors to buy and sell the broad market as a single entity. In these uncertain times, investors can turn to the New York Board of Trade and use NYSE Composite futures and options to enter or exit the global equities market with one decision, one instrument, one trade. Furthermore, investors can take a position on either the long or short side of the market with equal ease and seek opportunities in a rising or declining equity market. And with the power of leverage, investors can pursue their investment goals without the sizeable capital commitment involved with full equity exposure.
• In January 2003, the New York Stock Exchange modernized and revised its comprehensive Index with a new methodology that is fully transparent and rule based. • In March 2003, NYBOT introduced new futures and options contracts based on the revised Index.
The NYSE revision of its flagship index provides a measurement of the world’s most liquid and prominent companies that meet NYSE’s substantial listing standards for company size, income and cash flow.
The NYSE Composite includes 2,083 common stocks, including 1,698 U.S. (71% of the Index) and 385 non-U.S. (29%) stocks, reflecting a total market capitalization of over $12 trillion (as of 11/7/02). Component companies are from 52 countries. The NYSE Composite provides a well-diversified and comprehensive benchmark for global market performance. The investor who chooses to utilize NYSE Composite futures and options can therefore take a diversified position in the broad U.S. Equity market, while gaining significant exposure to important non-U.S. based companies (with an accompanying foreign exchange component) – all in one trade.
NYSE Composite futures and options provide the opportunity to pursue greater returns (compared to other broad-based index products) with reduced volatility. Investors who utilize NYSE composite futures and options can take advantage of potential investment opportunities in the equities market without the increased risk that may come with exposure to a single sector or stock.
The NYSE Composite has historically outperformed nearly all broad-based U.S. indexes on a one-, three-, five- and ten-year basis (Table 1), while demonstrating the least volatility (based on weekly returns over three-, five- and ten-year periods). (Table 2)
The revised NYSE Composite has been recalculated to reflect a new base value of 5,000 as of December 31, 2002. The NYSE measures the performance of all common stocks listed on the NYSE including ADRs, REITs and tracking stocks. It measures the changes in aggregate market value of all NYSE-listed common stocks, adjusted to eliminate the effects of capitalization changes, new listings and delistings. The Index weightings use free-float market capitalization. The Index is calculated on both price and total return basis. The NYSE Composite relies on an ongoing reconstitution to accommodate extraordinary events such as new listings, delistings, mergers and acquisitions. Adjustments for small changes in outstanding shares (less than 10%) take place once a quarter. The Index is calculated and maintained by Dow Jones Indexes.
The introduction of NYSE Composite Index futures (1982) and options (1983) gave market participants the opportunity to buy or sell “the stock market” based on the benchmark of the world’s leading equity market. The listing of the revised Index futures and options allows hedgers and investors to take advantage of the redefined index methodology and trade the trends in world’s most liquid equities marketplace. An investor with a view on general market direction can take an active position with a single trade. For example, an investor expecting rising stock prices could buy a futures contract on the NYSE Composite. If the market moves upward, the buyer will then gain from the daily increase in the price of the NYSE Composite Index. Conversely, the trader can just as easily take a bearish position and sell the contract, thereby realizing gains, should the price fall. Investors with a diversified portfolio can also use futures to hedge their overall equities exposure.
The NYBOT Index Markets now list two futures contracts based on the "revised" NYSE Composite Index: a NYSE regular futures contract (YU) and a NYSE small futures contract (MU). An option on the regular contract (YU) is also available.
The New York Stock Exchange began to provide data for the revised Index on January 9, 2003, with a base number of 5,000. The revised NYSE regular is valued at $50 times the “revised" index contract with a minimum tick size of 0.50 ($25.00). As of January 27, 2003, the regular contract on the "revised" was valued at $239,348. The revised NYSE small contract has a value of $5 times the “revised" index with a minimum tick size of 0.50 ($2.50). On January 27, 2003 the small contract on the revised Index was valued at $23,935. The NYSE futures contracts list four months (March, June, September, December), and last trading day is the Thursday preceding the third Friday of the contract month. The contract is cash settled against a special calculation of the third Friday's opening prices of all the stocks listed in the NYSE Composite Index. With two contract sizes, the opportunities and risks of a leveraged instrument (margin commitment) can be balanced according to investment goals and risk tolerance. For example, on May 9, 2003, the exchange minimum margin commitment for a NYSE regular contract was $10,000 and the initial margin for the small contract was $1,000. On that day, with equities markets gaining, the price of the nearby contract moved up 50 index points. Demonstrating the risks/rewards of a leveraged instrument, that move would be worth $2,500 on the regular contract and $250 for the small contract. Such a move demonstrates the function of margin – to ensure contract performance each day (each margin account is “marked-to-market”every trading day). For those who were short that day, the losses would have reduced their initial margin account by 25%. Traders that were long, however, would immediately have access to the corresponding gain in their account balance.* *Minimum margin levels are determined by the exchange and are subject to change. For current margin levels, consult a licenced broker.
Options on Futures
Options on NYSE Composite Index regular futures contracts are listed for the three nearest calendar months plus the next three months in the regular futures contract quarterly cycle. The minimum price fluctuation is .50 index points or $25.00 (the same as the NYSE Index regular futures). Option strike price intervals are offered in integers that are evenly divisible by twenty (e.g., 5020.00, 5040.00, 5060.00); for the most deferred contract only, integers that are evenly divisible by two hundred (e.g., 5000, 5200, 5400). Options on NYSE Composite regular futures offer enormous flexibility with limited risk. An investor can use NYSE options to protect against sudden unfavorable market moves without limiting the benefits of a favorable market position. In a bear market, for example, the investor who is experiencing losses in the value of a portfolio’s equity holdings can reduce some of that downside by buying NYSE put options. These futures options may produce gains in a declining stock market without compromising longer term equity holdings. Stock index futures and options provide an alternative to the outright purchase or sale of stocks. An investor who has a view on the overall direction of the stock market can buy or sell NYSE Composite futures and take advantage of the movement of the broad market. The NYSE futures can serve as a more reliable proxy for the broad market than contracts based on other more narrowly based indexes. When trading contracts based on the NYSE Composite, the investor can focus strategy on the overall movement of the equities market and not be limited by the risks associated with specific stocks or sectors. And unlike equities, stock index futures provide ease of access on both the long and the short side of the market, making it possible for a hedger or speculator to shift strategies and positions with relative ease as their market view changes. This advantage becomes particularly important in an uncertain market that requires trading flexibility. “Going short” in NYSE Composite futures represents a simpler transaction than “shorting” a basket of stocks. In addition, the leverage of futures contracts means less capital commitment to execute a strategy.
Trading Example One: Bullish Market Sentiment
Scenario: In October, and investor believes that a couple of economic reports due near the end of the month will provide positive news that will lead to a rise in the overall equities market. The investor already has a well-diversified stock portfolio and wants to equitize his cash position to take advantage of the market rise without adding to his equity holdings. December futures are trading at 4217.50 on October 9. Strategy: The investor buys a December regular futures contract at 4217.50. One December NYSE Composite @ 4217.50 Result: The economic reports are positive and by November 5 the NYSE Composite Index contract has risen to 4815.00. The investor closes out the position by selling a December contract at 4815.00. The gain of 597.50 generates a profit of $29,875.00 (597.50 x $50). The profit does not reflect commissions/brokerage fees or transaction charges. 4815.00 (Nov. sell price) – 4217.50 (Oct. buy price) = 597.50 (gain) 597.50 Index Points x $50 = $29,875.00 (profit)*
Trading Example Two: Bearish Market View
Scenario: The same investor might choose to short the market, Options Alternative: When a trader is less sure about market reflecting an overall pessimistic view about the direction of direction, the trader can turn to Options on futures for greater the stock market in the near term. flexibility while limiting risk. Strategy: On July 9, September futures are selling at 5127.50. Scenario: In the same bearish scenario, if the investor had The investor sells five NYSE Composite small contracts at only wished to hedge some of the value of his equity portfolio 5127.50. he could have done so by purchasing a 5000 put on a NYSE Sell five NYSE Composite small @ 5127.50 Composite September regular futures contract. Result: On July 18, September futures are selling for 4700.00. The investor closes out his position by buying five small con- Strategy: The investor purchases a 5000 put on a regular tracts ($5 x Index) at 4700.00. The transaction produces a futures contract for a premium of 55.50 or $2775.00. $10,687.50 profit* (427.50 index points x $5 x 5 contracts). Buy One 5000 NYSE Composite Sep Put @ $2,775.00 5127.50 (sell price) – 4700.00 (buy price) = 427.50 (gain) 427.50 index points x $5 (small contract) x 5 contracts Result: With the market falling to 4700.00, the investor would = $10,687.50 either sell the 5000 put or exercise the option and realize a gain of $12,225.00 ($15,000 – the premium of 2775) by Potential Losses: Gains can disappear just as quickly as they selling the option or exercising it. appear in a volatile market. For example, if the trader had held onto the position for another two weeks until July 31 5000 (Sep Put) – 4700 (July price of Sep futures) = 300 (gain) and the market had climbed back to 4911.00, nearly one 300 index points x $50 (one regular futures contract) half of the initial gain would have been lost ($5275). And = $15,000 conversely, if the market had risen during the initial two$15,000 – $2,775 (premium) = $12,225.00 (profit)* week period, the loss could easily equal the amount of the gain from the declining market. Trading stock index futures If the market had risen, the trader’s loss would have been requires careful monitoring of the market, adjusting strategies entirely limited to the premium of $2775 plus fees and and executing decisions based upon an informed evaluation commissions. In addition there would be no margin of market information. commitment on the option purchase. *Before commissions and fees
Spread Trading Strategies
Futures spreads involve taking opposite positions in two different futures contracts with the objective of profiting from changes in their price relationship. NYSE Composite Index futures offer a number of spreading possibilities.
An intra-market spread seeks gain from differences in the price movements of two different expiration months of the same contract, such as the price movement of the June and September NYSE Composite futures contracts. Underlying market activity can affect each contract month to different degrees. Strategy: On February 20, a trader sells one NYSE Composite regular June futures contract at 5705.50. At the same time he buys one NYSE Composite regular Sep futures contract at 5707.50. Sell one June NYSE Composite @ 5705.50 Buy one Sep NYSE Composite @ 5707.50
Result: On March 18, the trader closes out the June futures at w 6020 and a 314.50 ($15,725) loss and the Sep futures at 6030 and a 322.50 ($16,125) gain. The net gain from both positions is 8 points or $400 (8 x $50).
Because the NYSE Composite represents the broad market, futures on the NYSE Index can be spread against futures on a sector index such as the Russell 1000 Index of large cap U.S. equities to capture divergent price moves between the broad market and the large cap stocks. Because both contracts are traded at the NYBOT, favorable spread margin rates are available. Spread strategies can also be implemented using index futures traded on other exchanges such as the S&P 500.
Trading the NYBOT Index Markets
Liquidity: The NYBOT Market Maker Program Two contract sizes: Small & Regular Futures Contracts
allow investors to choose their level of market participation based on their risk tolerance and investment goals.
places a specific market specialist in each index futures market. The Market Specialist (approved by the Exchange) is required to continuously maintain a competitive two-sided market consisting of a current bid and offer no wider than the bid-ask spread specified by the Exchange. The continuous presence of the Market Specialist provides reliable pricing and necessary liquidity to support the business goals and trading strategies of money managers, plan sponsors and individual investors.
Direct Data: NYBOT real time streaming market data
is now available directly from the NYBOT trading floor and delivered via the Internet through NYBOTLive.com. Market users should visit www.nybotlive.com and sample the many features of NYBOT’s direct data service.
Order Processing: Electronic Order Routing (EOR)
allows market users who have internet access to EOR to send order electronically to the trading floor, where they are filled in open outcry, and then matched, cleared and confirmed electronically in real time. All EOR users can enter, change or cancel all types of orders (including complex). Users have real time trade reconciliation in the pit and/or in the booth. Contact a licensed broker to inquire about EOR availability.
Investors can use NYSE Composite Futures and Options to satisfy a number of investment goals including: to hedge portfolio exposure; to equitize cash holdings with the leverage of the futures market; to “trade the market” through one instrument; or to pursue a strategy based on a short-term market view.
The New York Board of Trade® is the parent company of the Coffee, Sugar & Cocoa Exchange, Inc.
(CSCE) and the New York Cotton Exchange (NYCE®). Through its two historic exchanges, the NYBOT® provides a global marketplace for a wide variety of traditional and innovative agricultural, currency and index products including futures and options markets for cocoa, coffee, cotton, orange juice, sugar, currencies and equity, currency and commodity indexes. Beginning in 1870 with the founding of the original New York Cotton Exchange, the NYBOT exchanges have built and sustained crucial futures and options markets through dangerous and difficult times. The exchanges of the New York Board of Trade have a long history of providing effective risk management tools for major international industries. Risk management is the foundation of our business. While surviving the shocks of a changing world, the NYBOT has provided leadership in product development. In addition to its traditional commodities, the NYBOT exchange markets have introduced innovative financial and index products including the Russell 1000® Indexes, US Dollar Index® (USDX®) and the NYSE Composite Index® NYBOT’s traditional markets provide liquidity, transparency, financial guarantees and many trading capabilities. The New York Clearing Corporation (NYCC) – the designated clearinghouse for all NYBOT markets – represents over a century of continuous financial integrity. The New York Board of Trade disseminates a wide range of educational and informational resources through its website at www.nybot.com including current and historical market data, research reports, exchange and product information, as well as a variety of educational tools to assist potential market users in learning more about the trading of futures and options.
This brochure serves as an overview of NYSE Composite Index futures and options offered through the exchange markets of the New York Board of Trade (NYBOT). Examples and descriptions are designed to foster a better understanding of the NYSE Composite futures and options market. The examples and descriptions are not intended to serve as investment advice and cannot be the basis for any claim. While every effort has been made to ensure accuracy of the content, neither the New York Board of Trade, nor any of its subsidiary or affiliate exchanges guarantee its accuracy, or completeness or that any particular trading result can be achieved. Neither the New York Board of Trade, nor any of its subsidiary or affiliate exchanges can be held liable for errors or omissions in the content of this brochure. Futures and options trading involves risk of loss and is not suitable for everyone. Trading on the NYBOT subsidiary and affiliate exchanges is governed by specific rules and regulations set forth by each exchange. These rules are subject to change. Contact a licensed futures broker for additional information. For more detailed information and specifications on any of the products traded on the NYBOT exchanges, contact NYBOT or your broker.
The NYSE Composite Index® is a registered trademark of the New York Stock Exchange, Inc. which is not a market for futures or options on futures and is not affiliated with NYFE or NYBOT. Russell 1000® Index is a trademark/service mark of Frank Russell Company. “The New York Board of Trade” , “NYBOT”, and USDX are registered trademarks of the Board of Trade of the City of New York, Inc.