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Futures contracts are usually traded in lots – meaning you can’t buy one contract and trade it. For instance, NIFTY futures contracts are sold in lots of 75.
Enter e-minis. They’re fractional futures contracts that you can trade even if you don’t have the capital to get the whole lot. In this article, we’re going to explore e-minis’ history, how they work, and whether they can be part of your investment portfolio.
What are e-minis?
E-minis are called that because they’re electronic securities traded over the internet. They’re called minis because they’re a smaller, fractional part of the entire futures contracts. Hence, when a standard futures contract is broken down into various smaller parts, the fractional values of the total value of a standard futures contract is an e-mini.
E-minis were introduced on theChicago Mercantile Exchange in 1997. They were launched because the value of the then-existing S&P 500 was so large that most investors couldn’t afford trading on the lot. E-minis were created to cater to the retail trader and increase volume.
Futures are derivatives, which means that they’re instruments that derive their value from the prices of other underlying assets. For instance, futures based on TESLA would more-or-less reflect TESLA’s price movements and adjust accordingly.
In principle, buying a future means buying the right to buy or sell the underlying asset at a specific price at a specific date in the future. Futures are also marked-to-market, which means that the value of your futures portfolio will adjust in real time.
Trading E-Mini Futures
E-minis are usually traded in the United States on the Chicago Mercantile Exchange (CME). They are available widely on the following indexes:
- S&P 500
- S&P MidCap 400
- Russell 2000
- NASDAQ 100
- Commodities Index
- Currencies (FX)
E-minis are mini-futures, so they work like futures too. These futures are a little different from commodity futures in the sense that they don’t entail the actual delivery of the stock – just the price arbitrage. The cash, whichever way it must flow, gets exchanged on the delivery date.
Typically when investing in futures, investors will close their positions by starting a new one right when the old one ends. For instance, you can close your position in a previous E-mini by purchasing another one. The difference in the price and sale of these E-minis determine your overall P&L.
Advantages of trading E-minis
There are several advantages of E-minis. These include both the advantages of futures contracts as a whole, and the advantages of them being accessible in fractional parts.
- Ability to leverage – Futures contracts seem lucrative because as traders, you’re allowed to use leverage to augment your capital when making trades. This allows you to control far more money than you have in your trading account.
- Ability to hedge – Just like futures, E-minis can also be used to hedge stock market positions. Trading strategies can use a combination of straight stocks and futures (or options) to mitigate risk or magnify gains.
- More exposure for less money – With futures, you could have long or short exposure to the whole index of stocks for much less amount of money than it would take up to buy or short the same stocks or even the associated index-tracking funds.
- Trading available round the clock – With trading available 24/7, traders could respond to the market-moving events as they go around the globe.
E-minis are popular because they allow smaller, retail investors to participate in futures trading. If the markets allow people who don’t have enough money to participate, more volume, liquidity, and growth benefits everybody. That’s what the E-minis do for the futures market.
Remember that e-minis are futures contracts after all, and that they carry the same risks that the derivatives do. So make sure that you’re using stop losses, engaging in disciplined trading, and researching your stocks both technically and fundamentally before buying. Good luck!
Frequently Asked Questions
One E-mini costs 0.25, and is worth $12.50 per contract.
Yes, trading micro E-mini futures can be a good way to access the liquidity and advantages of the futures market without having to risk a large amount of capital. Most beginner traders try paper trading or a broker’s backtesting model to ensure that they’re up to it first.
Just like any other futures contract, E-minis on expiration are cash settled. This means that on the last day of your trading, the value of your contract is marked to market and your account is either debited or credited based on profit or loss.
To start trading the E-mini S&P 500, you will necessarily need a brokerage account. After you’ve opened an account, you will be given access to a trading platform where you can add money, post margin, and start buying futures.
The difference in the two products is their size; Micro E-mini futures are 1/10 the size of a classic E-mini.