Trading the Global Markets: Dow Jones DAX and EURO STOXX 50

Trading the Global Markets: Dow Jones DAX and EURO STOXX 50

You may have heard of the DJ DAX and EURO STOXX and you’re wondering what these are. Contrary to what you might expect, they’re not stores in SoHo or slim geeks dueling on the wheels of steel. These are both equity futures contracts traded at Eurex, which is the second largest derivatives exchange in the world by volume according to the Futures Industry Association. For futures traders interested in additional liquid markets to trade in that compliment trading US equity indices and a wider range of times to trade, these contracts are ideal. Here are some of the features and benefits of trading these contracts.

The Dow Jones DAX contract is a capitalization weighted index of 30 of the largest German companies. [For your information: The Dow Jones Industrial Average (DJIA) is, in contrast, a price-weighted index. A price-weighted index treats price changes in both higher and lower-priced stocks equally for calculating the average. Since a dollar increase is more significant to achieve for a lower-priced stocks, some say this gives undue weight to the higher-priced stocks. A capitalization weighted index like the S&P 500, in contrast, considers the size of the firm for changes in the average. See the Dow Jones website for more information] The Dow Jones EURO STOXX 50 index covers 50 European blue-chip companies.

The DAX futures contract is EUR 25 x the value of the DAX index, as of March 15th, 2007 roughly EUR 165,000 contract. You have to bear in mind trading is denominated in euros, and this may be a bit confusing when you first look at your statement. As of the same date, this is roughly half of the size of the standard CME S&P 500 futures contract, making this a hefty contract to trade. The minimum tick size is EUR 12.5 . The Dow Jones EURO STOXX 50 futures have a contract size of EUR 10 x the value of the EURO STOXX 50 index. As of March 15th this is roughly a EUR 40,000 contract. The minimum tick size is EUR 10.

Both contracts are traded in high volume, making these ideal for traders in the never ending quest for liquidity and volatility. The average volume in 2006 for the DAX was 158,000 contracts per day and EURO STOXX 50 averaged 835,000 contracts per day. Margin requirements are comparable to the US equity futures like the S&P 500, the DAX has a initial margin of EUR 12,900 and EURO STOXX has a margin of EUR 3,150. Note that your broker may offer you lower margins for intraday trading.

What are the principal benefits? More hours for trading, global equity and currency exposure, and the volatility that makes for trading opportunities. By trading these markets, you get global exposure not only to the European equities markets, but since the contracts are denominated in euros you get exposure to another currency as well. One of the best reasons to trade these markets? Availability. The markets are open from 12:50 AM – 3:00 PM GMT-6. For those of you looking for markets that accommodate your schedule, these contracts are ideal. There may also be relationships between movements in the European markets and the US markets the following day. According to Eurex and Bloomberg, these contracts also experience more volatility than the S&P 500. This is welcomed by traders familiar with contracts such as the Russell 2000 which are also sought out for active price changes.

These markets can be risky to trade. The DAX in particular is known for its volatility and does not have the liquidity the E-mini S&P 500 offers. Not everyone is up for trading in the wee-hours. Overall these markets provide an excellent compliment to trading US futures indices and traders and investors would do well to seek them out.

Trading Futures and Options on Futures involves substantial risk of loss and may not be suitable for all investors. Each investor must consider whether this is a suitable investment.

Khurram Naik is a derivatives broker at Infinity Futures in Chicago. He is a graduate of Carnegie-Mellon and has worked in research in cognitive science and education at Princeton, Harvard and Carnegie-Mellon University. He is also a former field director for a political campaign. He maintains a blog on literature and cognitive science. He can be reached at k.naik@infinitybrokerage.com


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