SPI

If you want to trade the overall stock market with a single trade, then Share Price Index Futures or SPI futures and options and the options contracts might be the right choice. Trading the SPI 200 is similar to trading a balanced share portfolio that tracks the S&P/ASX index. Share Price Index Futures tracks the S&P/ASX 200 index and considered most popular among the future contracts. It is to be mentioned that in case of the SPI, the transaction can be filled within seconds.

Relation between SPI 200 and S&P/ASX 200

SPI 200 tracks the physical index and the fluctuations in SPI 200 happen in response to the changes in the S&P/ASX 200 and general market sentiment. The SPI 200 settles against the physical S&P/ASX 200 when a financial quarter closes towards the end. Until that period arrives, value of the SPI 200 will continue to trade either above or under the physical market at any given time. But, it is important to keep in mind that both markets are interrelated. In cases where the price of these indexes stretches too far, there can be the scope for arbitrage which reduces the gap between the prices.

In times when the share market comes with a bullish outlook during the near term, SPI 200 usually comes with a higher price in comparison with the S&P/ASX 200 price. In this case, the futures market has factored in some increases already. The individual shares along with the S&P/ASX 200 within this particular index are knows as “physicals” (apart from the futures that are termed as the “synthetics”). There is going to be a prevailing premium in times when the futures trade above the physical price while on the other hand a discount will exist in times when the future trades under the physical.

In general, SPI 200 will come up with a 40 point rise if S&P/ASX 200 closes 40 points higher in comparison with the close of the previous day. If the opening price (the first trade) of SPI 200 at the beginning of a day is 30 points more in comparison with the closing price of the previous day, it can be said that the SPI 200 has forecasted a 30 points rise that is to be gained by the “physical” that day.

SPI trading allows both large and small investors to use the futures along with options as efficient alternatives of share ownership in order to participate in the broad market. In addition to this, the investors will also have the opportunity to make profit by taking positions on the basis of future movements in the Australian share market. However in that case an investor can incur losses too, which means the investment is not going to be free of risk. So precautions are needed to be taken in order to make the best out of the investment. SPI trading also allows a trader to have necessary protections against the unfavorable changes in the share market. As a trader, you will be able to develop a price level today for a share portfolio which will be either bought or sold in the future.

The Cost of Trading SPI 200 Contracts

In order to purchase the SPI 200, you need to outlay a deposit for each SPI contract. This deposit is going to be a smaller percentage of the value of that contract. The positions that close out before the end of the day are not considered for the initial margins. You will need to pay additional daily margins over every open contract that comes up with losses that are unrealised through the adverse price movements. And you will get the credits for those positions that come up with unrealised profits (“by the same token”). Such payments (known as the variation margins) make sure that the exposures are being covered and are debited or credited to the traders account on an everyday basis.

Calculating the Cash Value for SPI 200 Contracts

The value of the SPI 200 futures contract is $25 times than the index level. Say for example, if the index trades at 4500, a correspondent ($25*4500) $112,500 worth of share exposure is going to be represented by the contract. Now if the index gains by 100 points taking it to 4600, then the contract will be valued as $115,000. Means there is going to be a profit of $2500.

Use of SPI

Usually the institutional investors are the main users of SPI 200 futures and options who rely on it to hedge the risks involved in the Australian stock market. Investors who looks for profits (generated through selling high and buying low) based on the accurate anticipation of the market are also known to be the active traders of SPI 200. In addition to this, SPI 200 can also be the option for arbitrage, cash flow management and anticipatory trading, directional trading, short term trading, long term trend following and so on.

Cash Settlement

The open positions are cash settled close to the end of each quarter. The contracts that are cash settled are settled by receipt or payment of the cash in expiry. The gap between the price of final settlement and the amount at which the contract was traded is represented by the amount received or paid. Future Exchange decides the process of measuring the price for the settlement which is set out in the specifications of the contract. As far as the SPI 200 cash settlement is taken under consideration, it is done with the settlement price being set as the closing quotation for the S&P/ASX 200 index during the last day of trading for that particular quarter.

It is important to keep in mind that the profit or loss generated by cash settled contract does not take place during the last day of trading as the variation margins are applied on a daily basis in order to make sure that the profits and losses are accrued progressively on a day to day basis.