E-minis Futures Contracts

E-mini-contractsE-mini futures contracts are pint sized versions of  traditional futures contracts. Initially launched solely for the S&P 500 in 1997 they immediately became popular amongst smaller investors.

Over the next few years they went on to be offered in a wide array of markets from indices to commodities. As of April, 2012, the Chicago Mercantile Exchange (CME) lists 44 separate E-mini contracts.

E-mini futures are popular with private investors due to the fact they offer smaller contract sizes, this allows private investors to trade on the commodities markets without having to risk large amounts of capital.

What are The Benefits of Trading E-Mini Futures Contracts?

E-mini futures provide many other advantages over full-size contracts, including higher liquidity, greater affordability due to lower margin requirements, and round-the-clock trading. E-minis also qualify as 1256 Contracts under U.S. tax law, which brings added tax benefits.

  • E-mini contracts are 1/5 the size of standard futures contracts so requires less capital to trade.
  • E-mini contracts tend to be more volatile than standard contracts but offer similar liquidity.
  • E-minis qualify as 1256 Contracts under U.S. tax law.

The number one reason most traders fail is because they over leverage themselves. In other words they risk far too much of their available capital on a single trade.

For example, if you have $20,000 in your account you could only afford to trade a single S&P 500 futures contract, which is the equivalent to betting red or black at the casino. But you could afford to trade five or more E-mini contracts with the same amount. This allows you to spread the risk over a number of different markets and develop more sophisticated trading strategies.

S&P 500 E-mini Futures

The S&P 500 E-mini futures contract was the first E-mini contract made available. It enabled smaller investors to invest in the popular S&P 500 index for the first time. Five times smaller than a standard S&P 500 contract, it allows investors to participate with as little as $5,000.

With over 3 million contracts traded every single day, the S&P 500 E-mini is one of the most popular futures contracts anywhere in the world.  Traded on the Chicago Mercantile Exchanges electronic Globex platform, which enables a high volume of trades. That volume has a cost however, increased volatility; the price often goes beyond the range set by the main S&P 500 market. Generally though the price tends to follow that of its big sister within two or three points.

How to Trade E-mini Contracts?

E-mini and S&P 500 E-mini contracts are worth $50 for every $1.00 of the underlying futures price. So if the E-mini S&P 500 is trading at $760.00, the value of the contract is ($50 x $760.00) = $38,000 . This means that every point the futures price moves up or down is worth $50. So if the current price falls to $740.00, the contract is worth ($50 x $740.00) = $37,000.

As with all futures contracts, you’re only required to put up a fraction of the contract value to control the position. This is called trading on margin. The amount you have to deposit depends on your broker but it’s usually around $3000 – $5000 per contract.

If the market moves against you further funds may be required to maintain the required bond levels. Make sure you consult your brokers terms and conditions for posting bonds. If you fall below the threshold your trade may be closed without warning, this could cost a you a lot of money if you happen to be away from your computer at the time.

Points and Ticks

E-mini contract movements are determined by points and ticks. A tick is worth a quarter of one point which is equivalent to $12.50/contract.  For example if the S&P 500 E-mini moves 1.5 points, from 960.00 to 961.50, you’ve just made a profit of $75.00 the equivalent of 6 ticks ($12.50 x 6 = $75.00).

Contract Months

S&P 500 E-mini contracts expire quarterly and are cash-settled, in the same way as standard S&P 500 contracts. Each contract expires on the 3rd Friday of March (H), June (M), September (U) and December (Z). Each month is assigned a letter which is combined with the contract symbol and year to create the ticker.

Contract Symbols

Contract symbols  for E-mini contracts are different from standard contracts. For example, the symbol for a standard S&P 500 is “SP” vs “ES” for the E-mini. So the ticker for a June 2012 E-mini S&P 500 contract would be ESM12.

To Sum Up

E-mini futures are most suited to private investors with limited funds. They allow you to spread the risk over a number of different markets without overextending your leverage. Add to that increased volatility and there’s the potential to make a lot of money from E-minis. Just make sure you don’t get reckless with your trades and keep an eye on your margin requirements.

If you’d like to learn more about trading E-mini futures, sign-up for a free account at OptionsXpress. Here you’ll find a number of different tutorials that walk you through placing a trade. Then once you’re ready, you can use your very own virtual trading account to put into practice what you’ve just learned.