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Anna Johansson
Anna Johansson
Articles (38) 

Are E-Mini Futures Preferable to Traditional Futures?

If you have experience trading futures, you’re more than ready to explore e-mini or micro e-mini contracts

March 08, 2020 | About:

Any experienced futures investor can tell you that the field is intimidating. The language is complicated and lacks the intuitive nature of more conventional stocks, but recently there’s been a move to make futures investing more accessible. E-mini futures rely on the same contracts structure of conventional futures, but are more affordable and an ideal starting point for newcomers.

Here’s what you need to know to get started.

A Chicago Exchange product

The Chicago Mercantile Exchange, also known as CME Group (NASDAQ:CME), has recently been praised for its innovative efforts, and the results show. Trading independently on the NasdaqGS as CME, the exchange opened the year with a powerful showing, announcing a first-quarter dividend of 85 cents per share, a 13% increase over prior dividend levels. The e-mini class is a key part of this success, but they may soon be overtaken by an even smaller set of contracts, raising the question, how small can they go?

The history of small contracts

E-mini futures have been around since the late 1990s, and they take their name from their size: an e-mini contract is one-fifth the size of a normal S&P 500 contract. From that baseline, there are a variety of e-mini contracts available, including specific Nasdaq Biotech futures (BQ), Nasdaq 100 companies (NQ), S&P Smallcap and Midcap (SMC and EMD), as well as conventional commodities and forex rates. As of spring 2011, CME lists 44 e-mini contracts, and there are several others traded on the Intercontinental Exchange.

Why e-minis?

As with so many other investment opportunities, smaller is better because of the way more affordable options diversify the market. Simply put, more people can afford the risk of investing in e-mini futures than can invest in conventional futures contracts. Unfortunately, even e-mini contracts have ballooned in recent years, with a 200% increase on equity index futures. That’s pushed margins up to $7,500 on $150,000 contracts, once again limiting the market. This was also more accessible to big money ventures like hedge funds, though not as accessible as the new micro e-minis.

Race to the smallest

Futures investors are notoriously more risk-motivated than other market players because they’re bound by contracts and timelines that otherwise don’t come into play, but new micro e-minis, lauded as CME's most successful product in its 170-year history, let participants negotiate these stakes without risking too much. Micro e-minis are one-tenth the size, which means they’re ideal for those who are risk averse, don’t have a lot to risk or are trying to master the futures market before putting more funds on the line.

There are advantages for big, experienced investors as well. Smaller contracts make it easier for savvy investors to make their own processes more precise, controlling for delta swings due to contract expiration. For these investors, e-minis and micro e-minis are tools they can use alongside their full-scale contracts for increased profit – they aren’t just a practice field for newcomers.

Finally, experienced futures investors know that when a contract looks good, it can be hard to tack on some extra profit because the buy-in is large and the timing is tricky. Smaller contracts are more flexible, enabling investors to take on a greater degree of exposure and diversify their portfolio without typical futures margins.

Today’s futures marketplace

If you have experience trading futures, you’re more than ready to explore e-mini or micro e-mini contracts, but for those who have long stayed away from futures contracts, consider this your opening. Micro e-minis, in particular, have gained acceptance and liquidity far more quickly than other new finance offerings, and they’re already trading at high volumes. Why not see what the market has to offer?

Disclosure: I do not own any of the stocks mentioned in this article.

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About the author:

Anna Johansson
Anna is a freelance writer, researcher, and business consultant. A columnist for Entrepreneur.com, HuffingtonPost.com and more, Anna specializes in entrepreneurship, technology, and social media trends. Follow her on Twitter and LinkedIn.

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