Equity index futures are one of the most widely traded futures contracts in the market, not just because it is cash-settled but also due to the fact that they offer institutional investors a viable way to hedge their exposure in the Japanese stock market.

The NIKKEI 225 futures are very popular among equity index futures traders as it offers international investors access to the Japanese stock market without really owning the stocks.

Nikkei 225 Futures Contract Specifications
Symbol
NK
Exchange
CME
Tick Size
¥2,500 or 5 index points
Contract Size
¥500 x Nikkei Stock Average
Contract Months
Mar, Jun, Sep, Dec
Trading Hours
Sun - Fri 6:00 p.m - 5:00 p.m CT
Settlement
Financially settled
Last Trading Day
Thursday before the second Friday of the contract month.

 

 

What Is Nikkei 225?

Commonly called the Nikkei Index or the Nikkei Stock Average, the Nikkei 225 is a stock market index for the Tokyo Stock Exchange (TSE). It is the premier index of Japanese stocks. Calculated in Japanese yen, the index is a price-weighted stock index that includes the top 225 blue-chip companies listed on the Tokyo Stock Exchange.

Since 1950, the index has been calculated on a daily basis by the Nihon Keizai Shinbun (the Nikkei) newspaper, and the components are reviewed once each year. Companies from various industry sectors make up the index, and some of them are Canon Inc., Toyota Motor Corp, Panasonic Corp., Nissan Motor Co., and Sony Corp. The technology sector accounts for over 40% of the companies in the index.

The index is popularly used as an indicator of the direction of the Japanese stock market. Owing to the popularity of the index, many financial products that are based on the Nikkei 225 are created and traded worldwide, including Nikkei 225 futures.

What Are Nikkei 225 Futures?

The Nikkei 225 futures is an equity index futures in which the underlying asset is the Nikkei 225 Index. It is a tradable contract to receive or deliver the specified value of the underlying index on a future date, at an already agreed price.

In almost all cases, the cash value, rather than the component stocks, of the traded units of the index is delivered at expiration, but on a few occasions, the component stocks may be required. The Nikkei 225 futures, has been around for more than three decades. It was first introduced at Singapore Exchange (SGX) in 1986, and in 1988, it was launched on the Osaka Securities Exchange (OSE). Since the Chicago Mercantile Exchange (CME) introduced it on its marketplace in 1990, it has become an internationally recognized futures index.

Being a leveraged instrument, a trader only needs to deposit a portion of the total worth of the contract to be able to trade the contract. The minimum amount a trader needs to deposit to be able to trade the contract is known as the margin.

The contract is marked to market. What this means is that at the end of every trading day, the clearinghouse of the exchange credit/debit the traders’ accounts with the profits or losses made on that day. Traders whose accounts are falling below the maintenance margin are required to top up their accounts to be able to keep their contracts.

Anyone can trade Nikkei 225 futures. All that is needed is to create an account with the exchange through a futures broker and deposit the required margin. Be cautious about futures trading though — while you can easily make money, you can also lose more than you invested.

Why Trade Nikkei 225 Futures?

Why Trade Nikkei 225 Futures Market

Why Trade Nikkei 225 Futures Market

There are many reasons traders play the Nikkei 225 futures market, and they include the following:

Portfolio diversification: Fund managers and some big investors do invest in Nikkei 225 futures as a way to gain access to the Japanese market and diversify their stock portfolio.

Speculation: The majority of the traders in the futures market are there for speculative reasons, and the Nikkei 225 futures has the type of liquidity and volatility that speculators want.

Hedging: Institutional investors and fund managers do play the Nikkei 225 futures market to hedge their exposure in the stock market.

Arbitrage trading: Arbitrage traders may simultaneously buy and sell the Nikkei 225 futures contracts on different platforms just to benefit from any imbalance in prices.

How Does the Nikkei 225 Future Trade?

The Nikkei 225 futures contracts trade on the Singapore Exchange, Japan Exchange Group (JPX), and the Chicago Mercantile Exchange (CME) Group. Through the CME Globex electronic trading platforms, Nikkei 225 futures contract can be traded from any part of the world.

On the CME, one contract unit of Nikkei 225 futures is equivalent to ¥500 multiplied by the Nikkei Stock Average. The price quotation is in Japanese yen, and the minimum price fluctuation is 5.00 index points or ¥2500 per contract. On the JPX, the contract unit is Nikkei 225 × ¥1,000, while the tick size is 10 index points or ¥10,000 per contract.

The CME’s contracts are listed for 12 months in the March Quarterly Cycle (March, June, September, and December), three serial (non-quarterly), and three December expirations. The JPX listed quarterly contract months (available for a period up to 8 years) as follows:

  • June and December: Nearest 16 contract months
  • March and September: Nearest 3 contract months

At expiration, the contract is settled with cash on both platforms. The last trading day is the business day preceding the second Friday of each contract month. If the second Friday is a non-business day, it shall be the preceding business day. On the CME, trading terminates at 5:00 p.m. ET. Trading in a new contract month begins on the business day following the last trading day.

Nikkei 225 Futures Trading Strategies

Futures Trading Strategy

Futures Trading Strategy

A trading strategy for the Nikkei 225 futures market, could become a nice addition to a portfolio of trading strategies that are mostly exposed to the American markets. Generally, the more diversified you are, the better prepared you get for the big storms on the market. And trading a trading strategy on the nikkei 225 futures market is one way of diversifying across several markets, to achieve better results in the long run.

If you want to get trading edges for a variety of futures markets and ETFs, we highly recommend that you take a look at our edge membership. As a member, you get new edges sent right to your inbox, each month!

Nikkei 225 Futures Seasonality

Here is a seasonal chart of the Nikkei 225 futures market:

Nikkei 225 seasonality

Nikkei 225 seasonality

The Factors that Affect Nikkei 225 Futures

There are many factors that can directly or indirectly affect the Nikkei 225 Index and thus influence the Nikkei 225 futures. The main ones are these:

Movement of the component stocks: The Nikkei 225 futures is calculated based on the market capitalization of its component stocks, so any movement in the prices of the major stocks significantly affects the index futures. Some sectors are more represented in the index than others. For example, the technology sector makes up about 40 percent of the index. Whatever affects the tech sector will affect the index.

Value of the Japanese yen: The Japanese economy is export-dependent. When the yen is falling, Japanese stock prices rise and the index does too. The opposite happens when the yen is rising.

Conclusion

The Nikkei 225 futures offers investors and fund managers a means to diversify their portfolio, as well as hedge their exposure in Japanese stocks. It also provides traders an opportunity to speculate on the Japanese stock market. The contract can be traded on the CME, JPX, and SGX.

 

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