Pricing mechanisms in the futures market can appear daunting at first – if an index moves by one point, that doesn’t directly correspond to a monetary value like a dollar or a euro. That is why techniques which analyse index point values (IPVs) are used to calculate the value of your futures.
Venturing into the futures market can seem complex, especially when trying to work out potential profits or losses. Unlike shares, the value of a futures contract isn’t always straightforward. This is where understanding the “index point value” becomes essential.
This IPV multiplier is the key to demystifying futures P&L, allowing you to translate index point movements into real monetary terms. That can help you to make better-informed trading decisions when trading indices and this guide will break down the concept in a simple, easy-to-understand way.
What Is an Index Point Value?
An index point value (or point value) is a unit of measurement used to track the performance of a group of securities, such as stocks or bonds which are part of an index. The IPV tells you how much money you make or lose for every point the index moves.
Think of it as a “contract multiplier.” For example, if an index futures contract has a point value of $10, a two-point move in the index would result in a $20 change in the contract’s value.
How Are Index Point Values Calculated?
The index point value is set by the exchange which is offering a futures contract and each futures contract has a specific IPV.
While the specific calculation can vary, the IPV is fixed for each type of futures contract. For the trader, the key isn’t to calculate it from scratch, but to know the value for the contract they are trading.
Key Index Point Values on eToro
It is important to familiarise yourself with the IPVs of the futures contracts you intend to trade, as they vary across different indices. The table below provides details of the IPVs of some of the popular futures markets available on eToro.
How Do Index Point Values Affect Futures Trading?
Index point values are crucial for calculating potential profit and loss, which helps you to manage risk effectively.
Without knowing the point value, it’s impossible to accurately determine the risk return of a trade; It’s the bridge between abstract market points and the money in your account.
How To Calculate P&L for Futures
Calculating your profit or loss (P&L) on a futures trade starts by establishing the index point value.
The P&L Formula: A Step-by-Step Guide
Formula: P&L = (Exit Price – Entry Price) x Index Point Value
If you buy an SPX500 future at $4,500 and sell it at $4,510. The point value is $50. The calculation would be (4,510 – 4,500) x $50 = $500 profit.
Tip: Knowing your index point value is like knowing the language of the market.
P&L Calculation Examples
The P&L calculations on trades in different indices provide further illustrations on how to calculate P&L for both long and short positions:
Tick Sizes and Movements in the Futures Markets
A “tick” is the minimum price change possible for a futures contract. This smallest incremental change is also associated with a specific dollar value, known as the “tick value.”
Understanding Tick Value
The tick value represents the monetary value of a single tick. The relationship is simple:
Tick Value = Tick Size x Index Point Value
For example, if the SPX500 has a tick size of 0.25 and a point value of $50, the tick value is 0.25 x $50 = $12.50. This means every minimum price move changes the contract value by $12.50.
Tip: You can practise these calculations on a demo account to build confidence before trading with real capital.
How To Use Index Point Value to Manage Risk
Index Point Value analysis can form part of a risk management strategy because it enables investors to convert moves in an index into cash terms. Knowing the material risk-return on a potential trade allows for other risk management techniques and tools to be introduced.
Setting Precise Stop-Loss and Take-Profit Orders
For instance, a trader might decide they are willing to risk $100 on a trade. By knowing the point value, they can calculate the exact number of points the market can move against them before their stop-loss is triggered.
The same technique can be used to establish the price level at which a winning trade would be closed out using a take-profit order.
Improving Position Sizing
The benefits of understanding the value of each point of an index extend to before trades are put on. Knowing the impact of a point move in cash terms can help traders decide on an appropriate position size relative to their account balance and risk tolerance.
Tip: Keep a trading journal which tracks your P&L and analyse the impact of IPVs on your trading performance.
Final Thoughts
Index point value is a multiplier that simplifies P&L calculations for futures. Knowing it is crucial for effective risk management, allowing for precise stop-loss placement and better position sizing.
Knowing how IPVs work will improve your understanding of how futures work, but won’t remove or reduce the risks associated with trading them, and as with all instruments, caution should be applied when entering into trades.
Visit the eToro Academy to learn more about different ways to trade futures.
FAQs
- What is P&L in futures trading?
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P&L stands for Profit and Loss. It’s the amount of money you’ve made or lost on a trade. Index point value analysis is useful as it converts price moves in an index into monetary terms.
- Are index point values the same for all index futures?
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No, index point values are specific to each futures contract and are set by the exchange.
- How is an index point value different from a tick value?
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The index point value is the monetary value of a one-point move in the index. The tick value is the monetary value of the smallest possible price movement (a tick). The tick value is calculated by multiplying the tick size by the index point value.
- How can I calculate the tick value of an Index?
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The tick value of any index can be calculated by establishing the point value of the index and then factoring in the minimum tick size. The Nasdaq 100 Index (NSDQ100), for example, has a point value of $2 and a minimum tick size of 0.25, which means that that index has a tick value of $0.50. Another way to find out the point and tick values for different instruments is to visit the product specification area of the exchange on which they are listed.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.