Spot 1, Spot V or Just Spot the Dog?

1. Futures contracts expire. Therefore you need to be aware what contract months are available and when they expire. For the Dow Jones the contract months are March, June, September and December. The months that are listed are when the contracts will expire, so trading in a March contract will generally start building as the December contract expires.



2. Futures contracts can trade day and night. The futures markets around the world present a different perspective than ordinary share trading. The markets can trade both day and night. This effects how we view the data we receive. We can view the data for the day session (also known as the pit or floor session) as well as the night session known in Australia as SYCOM. To further this point we can also view the day and night session together, these are known as combined sessions.



3. Each month of the year has a specific letter to highlight the applicable contract. For example the Dow Jones day session data is DJ-2003.U where DJ is known as the futures root, that is what we are trading, 2003 is obviously the year that it is trading in and the U represents the September contract. All months and their individual letters are listed below

Understanding these building blocks of futures, help us to best utilise the data we receive from the Hubb Organisation. When viewing your futures data I often am asked to explain what are the different contracts that can be viewed. There are terms like Spot 1, Spot V, Gann and even Cash listed in your symbol tree. What do they all mean?

Well it's quite simple, looking at this segment of the chart in my Safety in the Market software you can see the terms we have used above.

The first contracts that are listed are the monthly contracts, showing that the Dow Jones contact trades in September, December, March and June. As the June 2003 contract has just expired it is not shown in the tree, the June 2004 contract is yet to be listed by the exchange as you can imagine all trade will be in the more current contracts.

These symbols will allow us to view all the trades that have occurred on these particular contracts but this can presents a problem for us though if we want to look at any meaningful historical analysis. This is where the continuous contracts play a significant part in our analysis. We use charts that join all the monthly charts together, however, they can vary as to how they are constructed. They are known as Spot 1, Spot V and Gann. The definitions are below.

Spot 1 - This data remains with the current contract until expiry, paying no attention to volume. When the current contract expires, the data downloaded will be that of the next contract in line for expiry.

So in short when the September contract expires, it will automatically add the December contract data to the chart keeping a continuous view on the market.

Spot V - This data is put together just as David describes in the Smarter Starter Pack, using the data for the current contract until the day when volume becomes higher in the nearby contract (or next in line). This always ensures that we are trading in the contract with the highest volume.

The Spot V is a slight variation on the Spot 1 theme, however, instead of rolling the chart over as the current month expires, we roll the chart over when the volume in the next month is greater than the current month. As an example, when the volume in December becomes greater than September we roll the chart over. This makes sense as it ensures we are looking at the most liquid contract. At Safety in the Market we mainly focus on the Spot V Charts.

Focusing now on Gann contracts, this presents another approach to combining and viewing data. Gann believed that when trading commodities you could focus on the particular month each year and trade them exclusively. The definition is below.

Gann - Gann databases represent the same contract linked to itself each year. By this I mean that the DJ-Gann.Z (Z standing for the December contract) only contains data for December contracts. This is why there are around six months of each year where the data is patchy, as all we have is settlement prices for those dates. For example December 2001 is joined to December 2002, then 2003 and so on.

These charts are generally an extension into most people's studies, so at this time I would recommend following the other continuous charts. It is nice to know though if and when you are ready to look into this style of analysis the data is already there in your software. Let's look finally at Cash charts

Cash - This is the physical or underlying Index - for the Dow Jones this is the top 30 most liquid stocks. You cannot actually trade the Index, however the futures and Index have an inextricable bond. You may watch the cash in relation to the futures to see if the contract is at Premium (above the cash) or Discount (below the cash). At Par is when they are equal.

There is a long held view that the futures market can lead the physical market around. So when the Futures market is trading at a discount this can be a bearish sign for the equities market, and vice versa when the futures are at a premium this can be a bullish sign.

In future articles I will expand on how we can start to use this information in your trading and especially looking at how to trade futures contracts when they are coming close to expiry.

Until next time, good trading

Aaron Lynch