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E-MINI AND MICRO E-MINI FUTURES - OWN THE MARKET AT A FRACTION

Updated: Sep 21

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There is well known trading strategy “investing in the market”, which translates to buying the leading S&P500 Index, a broad based capitalization weighted benchmark, which comprises of 500 companies listed on the New York Stock Exchange (NYSE) and the NASDAQ Composite, and is considered to be the best representation of the U.S. stock market. Investors can enter the index by transacting the S&P500 futures contracts, which are derivative contracts that provides investments based on the expectation of the S&P 500 Index’s future value, commonly used by portfolio fund managers looking to hedge risk over a specific period.


Originally, when the Index comprised of fewer organizations, the share price were lower, with investors purchasing it directly. Over time, when the companies increased, the price followed suit, putting Index out of reach for common investor. As this Index became popular due to its increased performance over time (10 year return estimated at 200%) and exceeded 95% of actively managed funds


To increase affordability and to help retail investors get exposure to the world’s biggest companies by market cap, the E-mini S&P 500 E-Mini futures contract (/ES) was launched and traded on the Chicago Mercantile Exchange (CME) in 1997, representing 20% of the value of the standard S&P 500 futures contract. This E-mini futures contract is traded electronically, almost 24 hours a day. The average daily implied trading volume for E-mini futures contracts is estimated to range between $100 - $200 billion, exceeding the combined traded volume in US dollars of all 500 underlying stocks. There are slight variations between the daily settlement process of the E-mini and full-sized contract due to the differences in the minimum tick sizes between the E-mini contract and its full-sized counterpart.


As E-minis offer electronic trading, low margin rates, and are more affordable, the CME and other exchanges have gone on to launch more E-mini futures contracts such as the Nasdaq 100, Dow Jones, S&P MidCap 400 Russell 2000, as well as on commodities and currencies were launched.


The S&P 500 E-mini can be subject to speculation. It is imperative to be vigilant and monitor the liquidity and volatility levels of the Index to be able to predict market turbulence. In addition, leveraged trading is also allowed. The trades on the highly regulated CME are public and are executed on a first-come-first-served basis following the CME’s clearing rules, in addition to CFTC (Commodity Futures Trading Commission) and NFA (National Futures Association). These procedures guarantee that all traders have access to the same Level 2 bid-ask spreads and make the E-mini trading process transparent and secure.


Subsequently, to further increase accessibility, in 2019, the S&P500 Micro E-Mini futures contracts (/MES) is launched. Valuing at 10% of the E-mini, this offering investors the opportunity to trade the same S&P 500 index with smaller contract, even less capital and lower margin requirements, providing greater flexibility and leverage. The S&P500 Micro E-Mini is now 0.02 % (1/50) the size of a standard contract.


Differences Between the S&P 500 E-Mini and the Micro E-Mini

Size of Tick

Ticks are defined as the upward or downward movements in the price of a contract, and determines the profit or loss made on one specific trade. This is measured based on movements from the original purchase price.


For the S&P 500 index E-mini contract, one-point movement is worth $50 and the tick is measured at 0.25 index points. Therefore, movement of one tick in E-mini futures contract (upward or downward) is valued at $12.50 ($50 x 0.25). Conversely, the S&P500 Micro E-mini future contract has a vastly reduced tick size at only $1.25, because a one-point movement is only worth $5 even though one index point remains at 0.25. So at $5 x 0.25 results in tick size of $1.25.


Trading Costs

A margin deposit for each contract needs to be put up and ongoing margin needs to be maintained to cushion any losses sustained for each transaction.


The S&P 500 Micro E-mini futures contract is 1/10th size of the E-mini contract. One-point movement in the E-mini contract is worth $50, and one-point movement in the Micro E-mini contract equals 1/10th of that $50, giving $5.


Regarding the margin to trade these contracts. For example, one investor opens a day trading position at initial margin deposit of $4000 to trade one single E-mini contract. To trade the Micro E-mini, 1/10th of $4000 is needed, which equals to $400 per contract. The margin coverage for each position taken will then need to be factored. Some brokers may require overnight holding margin.


Size of Contract

The contract size for futures is defined as value of the contract based on the price of the underlying futures contract times a contract-specific multiplier.


The contract-specific multiplier of the E-mini S&P 500 is $50. So to obtain contract size, it needs to be multiplied by the S&P 500 Index price. Therefore, if S&P 500 is presently trading at 3000, the value of the contract is $50 x 3,000 = $150,000. For the Micro E-mini, the contract size is smaller because the contract-specific


The price of the S&P500 E-mini future contracts are affected by market catalysts such as corporate announcement: product breakthrough, mergers and acquisition news, industry trends and legal issues affected one of the S&P Index constituents. It is also influenced by Federal Reserve policies such as interest rate manipulation. Global events such as trade wars, economic sanctions, military conflicts, political instability in the USA or other major economies may affect the market negatively. Also, as most financial or economic data and reports from European markets are usually announced between 3 AM and 4 AM CST and can often have an impact on the E-mini and Micro E-mini futures markets in the USA, traders are often watching


Risks of trading the E-Mini and Micro E-Mini Futures

The inherent risk for future trading translates to the risk of losing more money than you initially invested, known as the back-end risk, the trader will not be aware of whether a gain or loss is made until the contract’s expiration date.


One option is to close out the position before the expiration date. The other scenarios if the trader decides to hold the futures contract until expiration and the position lost more than what was initially invested, this funds will be deducted from the trader’s margin coverage.


Therefore, the potential trader needs to be familiar with trading strategy before entering the market using real money. It is recommended that inexperienced traders practise futures trading using simulated money until they are confident in the trading strategies. It is also advisable to start trading with Micro E-mini futures contract until the trader is willing to expand risk exposure to proceed to the E-Mini futures contract.


To conclude, both the E-mini S&P 500 and Micro E-mini S&P500 futures market provides affordable, low margin entry into a liquid market and allows lower risk exposure. These are unique tools that can help retail investors achieve their specific trading goals.




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