The Newest Crapshoot

Thomas Hicks has abandoned his commercial photography business in Portland, Ore., to devote himself to trading them. Webb Williams, Exxon Corp.'s trust fund manager, spends an increasing portion of his time investing in them for his company. So does Charles Stevenson, who operates his own New York-based money management firm. Venturesome traders across the U.S. are turning an esoteric-sounding new way of investing money into one of the hottest and fastest-growing ways to cash in on the bull market: stock index futures contracts. They are akin to commodities contracts, but on nothing so tangible as pork bellies or bushels of wheat. More than 1 million of the contracts changed hands in July, and their daily value at times reached $5 billion. Stock index futures, introduced in February 1982 and now traded on exchanges in Chicago, Kansas City and New York, are basically bets on whether the entire stock market will rise or fall. Each of the contracts covers a measure of market performance such as Standard & Poor's index of 500 stocks, the New York Stock Exchange composite and the Value Line survey of 1,700 issues. The security's price is typically determined by multiplying the level of an index by $500. A contract based on a Standard & Poor's index that stands at 160, for example, would be worth $80,000 ($500 times 160). To invest, a buyer would have to put down something less than 10% of that amount, or about $6,000. The investor would then stand to make or lose $500 on every point the index rose or fell. If it were to jump to, say, 165, the purchaser would have a profit of $2,500 ($500 times 5). If the index dropped to 155, he would lose $2,500. Trading in the contracts can therefore be expensive and risky. "These instruments are not for the small investor," says Louis Margolis, vice president of the Salomon Bros, investment banking firm.

"It's the doctors, dentists and big institutions that have been dealing in them." Exchanges, meanwhile, have been moving to make index trading more affordable. They offer a rapidly growing array of relatively inexpensive options to buy or sell contracts, for example, and thus let investors limit their risks to what an option costs. Some can be bought for less than $1,000. In addition, the Chicago Mercantile Exchange last month launched a contract based on a Standard & Poor's roundup of 100 stocks that can be invested in for about $3,000. It is already a brisk seller. This file is automatically generated by a robot program, so viewer discretion is required.