The advantages of thinking small, especially for traders looking for market alternatives, cannot be emphasized enough. Trading in electronic index futures is one great way of venturing into the broader equities market, and it is now one of the largest and most fundamental trading vehicles around the globe.
Many people have dropped their traditional day trading strategies in regular stocks to focus on E-minis such as the ES, YM, NQ, and TF. These forms of electronic index futures allow traders to gradually leverage on price fluctuations in the broad indices.
Trading on E-minis involves buying their contracts, and since you are not buying physical items, what you are doing is buying virtual permissions to hold an index before selling it to another trader at a different price – normally with a profit. All E-mini contracts trail a major index, and the most popular is the E-Mini S&P 500.
What Is the E-Mini S&P 500?
E-Mini S&P 500, which usually carries the commodity ticker symbol ES, is a stock market index futures contract predominantly traded on the Chicago Mercantile Exchange (CME). Like the other E-Minis available on a wide range of indexes, the S&P 500 is also a fraction of the total contract price for a corresponding standard futures contract.
The S&P 500 futures contracts are referred to as “E-minis” typically because their sizes are only one-fifth of the normal S&P 500 contracts. They were first launched in 1998 by CME as a way of encouraging more traders in the stock index market futures because the larger S&P 500 contract was too large for entry players to trade in.
The inception of this futures trade introduced a far more affordable option for day traders and other investors, and it has, therefore, expanded S&P 500 E-Mini futures significantly. Today, the average daily implied volume for the E-mini, according to the CME Group, stands at more than $100 billion. This value far exceeds the cumulative traded dollar volume of the underlying 500 stocks.
E-Mini S&P 500 Futures Options
Most traders who venture into the stock market begin by trading futures options as opposed to doing straight futures contracts. This is because the risk of loss and the volatility in options is less if compared to futures contracts. But what are futures options?
In trading, dealing with an option involves having the right and not the obligation to buy and to sell a futures contract at a designated strike price. Trading in options allows the trader to speculate on futures contract price fluctuations, and it is accomplished by buying call or put options.
One of the popular futures that is trading is the ES futures (E-Mini S&P 500 futures options). Most traders choose this option because it provides deep liquidity and 24-hour market access for S&P 500 index speculation.
The trading strategy utilized by E-mini S&P 500 options ranges from basic to complex. These options on futures are flexible and versatile. They provide leeway for other trading opportunities, including spreading strategies and outright positions as well as hedging. ES futures and options are based on the underlying Standard & Poor’s 500 stock index, which measures the performances of stocks across the 500 leading large-capitalization firms listed on U.S. stock exchanges.
E-mini S&P Futures Vs Micro E-mini S&P futures?
Since flexibility and leverage are some of the main advantages of futures trades, traders prefer investing in such assets with relatively small capital because it gives them access to various opportunities that are lacking in other markets, and E-mini futures trading was a game changer in that regard. However, there is another variant that offers even more flexibility – Micro E-Mini futures. It presents an opportunity for trading in even smaller futures contracts.
Micro E-Mini S&P futures contracts are one-tenth the size of the E-Mini S&P futures contract. This means that trading in these futures gives you the chance of trading the same S&P 500 index in small amounts of money and lower margin requirements.
Micro E-Mini S&P 500 futures was introduced officially in 2019, and it was more than welcomed by the stock market, which was evidenced by the hundreds of thousands of traded contracts a month after it commenced.
There are several fundamental differences between E-Mini S&P futures and the Micro E-Mini S&P futures. Here are a few:
- Tick size – The tick size refers to how the price of a futures contract climbs and falls. It is the determinant of profit and loss made on a specific contract and its measurement is based on the original purchase price. A one-point movement in an E-mini contract is worth $50, and its tick is measured at 0.25 index points. This means that a single tick movement in such a contract is worth $12.50 ($50 times 0.25). Micro E-Minis, on the other hand, are valued at $5 for every single movement. With the index point remaining the same, the tick size will amount to $1.25 ($5 times 0.25). This, in a nutshell, is how E-minis work.
- Cost to trade – The margin to trade on both futures follows the tick size principle. As already mentioned, micro E-mini futures are one-tenth of E-mini futures. This means that if you open a day trading position at an initial margin deposit of $5000 to trade one E-mini contract and somehow you decide to trade in micro futures, you will only need $500 per contract. This margin is attractive to newbies and to a lot of day traders who are trying to diversify their portfolios.
- Who it’s for – Micro E-mini futures are attractive to those who like to risk less and to the newbies looking to take up positions in trading S&P futures but who are constrained by the starting capital. Of course, institutional investors can invest in micro E-mini futures as well.
- Contract size – Contract size for futures is the value of the contract depending on the price of the underlying futures contract and the contract-specific multiplier. For example, the contract multiplier for E-Mini S&P 500 futures is $50; therefore, the contract size is obtained by multiplying contract-specific value with the S&P 500 index price. This value is greatly reduced in micro E-minis since the contract-specific multiplier is $5.
Why Trade S&P 500-Based Futures?
S&P 500 futures is a preferred destination for many investors and traders. And it is mainly because of the following reasons:
- Efficiency – The amount of daily traded volumes of S&P E-mini futures usually exceed the one million mark on the front month of the contract. This means that if you want to boost your trade-related efficiency and maximize liquidity and the robust depth of the market, look no further than S&P 500-based futures. The platform minimizes slippage while promoting efficiency.
- Leverage – If you are an active trader, then you know that where there is leverage on trading is highly critical. Because E-Mini S&P 500 futures provide a much larger purchasing power scale than traditional stocks, it remains a favorable choice. E-mini S&P 500 futures allow you to achieve sizable positions with a small capital requirement.
- Low barriers to entry – Thanks to technology, traders and retail investors from all walks of life can trade in E-mini futures. Coupled with the reduced margin requirements for participation, the remote exchange connectivity, and the reduced fees or commissions, E-Mini S&P 500-based futures remain perpetually attractive. Typically, all you need to become a trader on these electronic futures is some capital that you’re willing to risk, a good internet connection, and some knowledge of computing.
- Flexibility – There is superior flexibility in trading on futures as opposed to conventional stock. Whether in the long or the short market, you can still benefit. The same goes for buying or selling futures contracts regularly. What is even better is that you utilize naked-shorting or the high-volume strategies, which are usually unavailable in traditional equities trading unless with a significant amount of capital and an advantage to a unique brokerage service.
- Volatility – E-Mini S&P 500 futures are priced depending on how an asset’s value is perceived to be at an upcoming point in time. In response, the prices frequently exhibit some fluctuations with respect to a vast array of factors, such as breaking news, contract expirations, and economic and financial events. They influence the way these futures are priced and significantly increase their periodic volatilities. Consequently, the high number of participants in S&P 500 futures trading has also enhanced the volatility. These traders can capitalize on substantial swings in futures pricing almost all the time.
How Trading S&P 500 Futures Help Hedge a Portfolio and Maximize Portfolio Efficiency
Even though the biggest chunk of the trading volume is traders risking on futures prices of the underlying stocks or the index, S&P 500 E-Minis can be used in hedging a portfolio and maximizing its efficiency to protect downside risk.
For instance, if you have an excellently diversified stock portfolio and are worried that a market correction is unavoidable, you have two options. The easiest one is to close out all your open trades and get through the market correction without risking your capital. Or you could hedge your position by selling the E-mini S&P 500 futures and stabilizing your risk while still having a chance to utilize the cash equities in your portfolio to gain some dividends.
This will mean, however, that you will balance out the number of futures contracts you are trading in with the sum value of your portfolio. In such a case, you will be able to offset the losses on your stock portfolio only if the market does not decline to lead to your short futures position yielding profits. If, on the other hand, the market rallies, your futures position will produce some losses. These losses, however, can be offset by the appreciation of your stock portfolio.
Which Is the Best E-Mini Contract to Trade?
The S&P 500 E-Mini (denoted ES) continues to top the charts in index futures, making it one of the best E-mini contracts to trade in. Owing to its popularity, there are a lot of brokers doing their best to provide conducive conditions for new clients, and, therefore, using E-minis is an attractive option.
However, you can also consider trading in Micro E-Minis (MES), Dow (YM), Crude Oil, Gold, NASDAQ (NQ), and 10-Year Treasury Notes futures. It is also important to note that the right E-mini contract for you may not suit the needs of another. Besides, each market has its own personality and is as diverse as its traders.
How Do You Get Started?
Trading in futures offers a swift and cost-effective way of accessing financials and stock markets 24/7. If you are confident enough to commence trading futures contracts, then it comes highly recommended that you begin with simulated trading to familiarize yourself with the broad market terminology, the price quotations, and the general personality of a specific market.
Remember, trading in futures is as simple as sticking to your trading plan, fully comprehending how big and how many contracts you are going to trade, and understanding your risk. Also, don’t get sentimentally attached or involved in a particular trade. If you follow these tips, you can get started with buying and selling E-minis.