Introduction to Futures – E-Minis and E-Micros:
Futures contracts are legal agreements to buy or sell particular commodities or assets are predetermined prices and at specified times. With futures, there is an obligation to purchase the underlying asset at the time of the expiration. Trading futures can be very lucrative, however purchasing the underlying asset can be very expensive, where most traders may not be able to cover the costs. Moreover, most traders do not wish to purchase the underlying asset, so they close their positions at least two weeks before the expiration date to prevent an issue with liquidity.
Futures contracts inherently hold a significant amount of leverage, which makes trading futures contracts difficult for beginning traders. Luckily as of recent, there has been an expansion towards E-Mini and E-Micro futures contracts, which represent a fraction of the values of standard futures. These mini contracts are primarily traded on the Chicago Mercantile Exchange and on the New York Board of Trade. There are 44 E-Mini contracts listed on the CME.
Why E-Minis Are Good For Small Accounts:
E-Mini futures provide trading advantages that many other contracts do not offer. They are very liquid, which equates to tight spreads, and are much more accessible and affordable to retail investors. The margin requirements are much less for E-mini futures, compared to full-sized contracts, and one can trade 23.25 hours each day, Sunday–Friday.
Types of E-Mini Contracts
There are many types of E-Mini contracts which are traded each day. The most popular E-Mini contract is the E-Mini S&P 500. The notional value of this contract is 50 times the value of the S&P 500, so if the S&P 500 reaches $2,800, the contract would be worth $140,000. There are also E-Minis for the Dow Jones Industrial Average, Russell 2000, and Nasdaq-100. One can also trade many currencies with E-Minis within the foreign exchange market.
Trading with the E-Micro
The E-Micro contract is a futures contract traded on the CME which is an even smaller fraction of the E-Mini contract. These contracts are one-tenth the size of E-Mini contracts and began trading as of May 2019. Now, with access to the E-Micro contracts, new traders who may have smaller portfolios can have greater customization over order quantity and risk management. While it is common for traders to often lose some profits when first learning how to trade, E-Micros are the perfect way for traders to reduce their losses by trading with less, and have become very popular since being introduced by the CME group.
Types of E-Micro Contracts
There are a few types of E-Micro contracts. Within the equities markets, there are E-Micro futures for the S&P 500, Russell 2000, Nasdaq-100, and Dow Jones Industrial Average. Moreover, within the forex market, there are contracts that represent many types of currency pairs, such as EUR/USD, AUD/USD, JPY/USD, GBR/USD, and more.
Who Should Trade With E-Micro vs. E-Mini
Traders who are just beginning to trade, and hope to experience the markets with lower stakes would prefer to trade with E-Micro futures. E-Micro futures can offer peace of mind to new traders because they are playing with less money. For example, imagine you are losing $50 for every drop in point in the S&P 500 E-Mini. [$50 = 1 point = 4 ticks (0.25) = 4*$12.5 (E-mini $ tick value = $12.5)] Because the E-Micro futures are 1/10 the size of E-Minis, a trader using E-Micros would only lose $5. [$5 = 1 point = 4 ticks (0.25) = 4*$1.25 (E-micro $ tick value = $12.5)]
Conversely, who are more experienced, and have a larger portfolio could benefit from E-Mini futures, as they have a higher reward. Individuals with knowledge on how to properly mitigate risk may find that E-Minis are the perfect trading instrument for them.
With new developments within the financial markets, traders are able to find products that best suit them, their experience, and their trading strategies. E-Minis and E-Micros are powerful instruments that enable retail traders to have access to the futures market, opening up a world of new trading opportunity. While trading can be both exciting and rewarding, there is risk associated with it, and by offering the E-Mini and E-Micro products, traders can find what is right for them.
Next Article: 5 Fundamental Forces and Their Effects On the Futures Market