If you have an opinion on the DJIA - and who doesn't? - you will find that these contracts open new doors for capitalizing on movements in the index. So whether you consider yourself a large or small investor, you'll want to learn more about how you can tap into the potential offered by CBOT, DJIA futures and futures options.

The Dow Jones industrial Average - The Barometer of the U.S. Stock Market

The Dow Jones Industrial Average is undoubtedly the world's most recognized and prestigious stock index. It represents a portfolio of 30 large capitalization, "blue-chip" stocks traded on the New York Stock Exchange - names like IBM, General Motors, AT&T, and Disney. These 30 stocks have a total market value of more than $2 trillion and represent roughly one fifth of the market value of all U.S. stocks.

The DJIA is the most widely quoted stock index, as worldwide newspaper, television, radio, and electronic media reports continuously update the index several times during the business day. This information flow makes the DJIA the easiest stock index to track in the entire world.

While the DJIA is the easiest stock index to track, it has not been easy to trade. Until now. The advent of the Chicago Board of Trade's futures and futures options contracts based on the DJIA has changed that. Now individual traders and investors have a new world of financial market opportunities wide open to them.

What Are the Benefits of CBOT Futures and Futures Options on the DJIA?

Using CBOT DJIA futures and futures options allows investors to inexpensively establish a level of the Dow Jones Industrial Average. For all investors, large or small, this means you can:

New Opportunities Available with CBOT DJIA Futures

Understanding the Futures Contract

The value of a CBOT DJIA Index futures contract is equal to $10 times the current index level. For example, if the index is trading at 7900, holding a futures contract is equivalent to investing $79,00 in the DJIA portfolio. When a CBOT DJIA futures contract is traded, the seller (short) is agreeing to sell $10 times the index and the buyer (long) is agreeing to buy $10 times the index on the expiration date of the contract.

On the settlement day the final settlement price is $10 times the Special Opening Quotation of the index. If the settlement price is higher than the price a futures contract was traded at earlier, the short will net a loss while the long will show a gain.

How Can I Trade My Opinion on the DJIA?

While the Dow Jones Industrial Average is widely followed, it has been difficult to trade since "buying the Dow" required buying shares in each of the 30 stocks. Further, it is even more difficult to "sell the Dow". With the advent of CBOT DJIA futures, however, you can participate in the broader market simply by buying or selling the futures contracts. Suddenly, your stock market opportunities are greatly enhanced and expanded. Here are just a few of the ways you can use these contracts for speculative or risk management purposes:

If you expect the stock market to decline and you own a portfolio of stocks, it's in your best interest to protect its value from a market downturn. To do this, you could sell CBOT DJIA futures and "hedge" the portfolio - meaning that any losses on the stocks would be offset by gains on the futures. A completely hedged portfolio "locks in" its current market value. But you don't have to use futures in conjunction with an underlying portfolio position. If you have a bearish opinion on the index, simply short the market by selling the futures contracts. Outright speculation on the DJIA is that easy.

If you expect the stock market to rally you'd want to enhance your exposure by adding long positions in CBOT DJIA futures. Again, this can be accomplished much more easily, and quickly, in the futures market than by actually purchasing each of the 30 stocks. And if you're wrong and the market turns downward, you can also liquidate your position and limit your losses much faster in futures.

Looking for Even More Opportunities? Try Options, Too!

While CBOT DJIA futures contracts offer you many new trading and risk management alternatives, options on these futures contracts multiply your opportunities many times over. Unlike futures, where you're absolutely committed to a long or short position for as long as you hold the contract, options on futures (if purchased) give you the right, but not the obligation, to assume a futures position at a predetermined price. Buying a put option gives you the right to go short futures, while a call purchase allows you to go long. The price you pay for the rights conferred by an option is called the option premium.

The CBOT lists options on the DJIA futures in 100-point strike intervals following the same March, June, September and December trading cycle. For example, if you buy a June call option struck at 7900, you have the right to enter a long futures position at a price of $79,000 at any time up to the option's expiration in June.

On the other hand, if you sell the 7900 June call option, you are obligated to enter a short futures position at $79,000 if the option is exercised against you. Selling options creates a potential obligation in exchange for receipt of the premium. Of course, it's always possible to terminate your option position if you buy or sell an offsetting option prior to expiration or exercise.

Options on futures are highly attractive because they offer more choices and flexibility for designing market positions. Following are just a few of the ways you can use these contracts:

Protecting Against Falling Prices

If you own a portfolio of stocks, you have likely experienced sizable gains in recent years. If you believe, however, that the market is ready for a downturn, you can protect your current investment while retaining the opportunity to participate in a continuing bull market. Buying put options allows you to accomplish both of these goals. Long put options profit when stocks decrease in value. If stocks increase in value, the gains on the underlying portfolio cover the put premium lost and allow you to further participate in the market rally.

Enhancing Returns

Sometimes the stock market enters periods when it simply oscillates within a relatively narrow trading range. During these times, your portfolio returns may stagnate. If you expect this pattern to continue, you could enhance your returns by writing call options on the portfolio. Since the call is covered by the portfolio, this strategy has no down-side risk. The upside risk, however, is that your opportunity to participate in an unexpected rally is limited.

Trading Volatility

At other times the stock market exhibits a very volatile pattern. There may be too much "news" and not enough real information to indicate a clear direction for stock prices. In this case, you could create an option position that combines the puts and calls. Your position would become profitable as soon as the market moves sufficiently, regardless of its direction.

Tailoring Positions

CBOT DJIA futures options offer a broad range of strike prices and delivery months, allowing you to create positions that match your preferred market exposure. For example, if you want to buy a lot of protection for your portfolio, you'd purchase a put option with a strike price that's close to the current market price. On the other hand, you could spend much less for "distant insurance" - a put with a much lower strike price. A wide range of strike prices allows you to pick an option that matches your cost/benefit preferences. Different delivery months can be used similarly to tailoring the timing of your positions.

Why Trade at the CBOT?

Unparalleled Market Integrity

Counterparty risk is a major concern in today's marketplace. But trading at the CBOT is structured to protect all parties involved from such risk. The buyer and the seller each must put up a small percentage of the value of the contract as margin. A key feature of a futures contract is that payment in full is not due on the date of the transaction. Margin money is held in an account by the long's and the short's respective brokerage firm and serves as a performance bond, guaranteeing that each party will honor its commitment. So while futures do offer you the opportunity to enter into higher leveraged transactions, you can be certain that the CBOT's margin system prevents any losses due to nonperformance by a counterparty.

At the CBOT, the disbursement and collection of all margin funds is ultimately managed and monitored by the Board of Trade Clearing Corporation - an independent clearinghouse with an impeccable record for protecting market participants. The Board of Trade Clearing Corporation is rated as a triple A credit risk by the Standard and Poor's Corporation. It is the only clearinghouse in the world with such high rating.

Superior Trading Environment

The CBOT DJIA contracts trade on the exchange's new high-tech financial floor. Here, state -of-the-art electronic systems support the best in open outcry pit trading, which remains the world's most efficient method of trading. Further, the CBOT DJIA futures and options contracts trade adjacent to the exchange's U.S. Treasury bond futures - one of the world's most active futures contracts - which greatly facilitates trading the relationships between interests and equities.

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