E-mini futures contracts are a cheaper way to trade futures. You’re not paying as much. For investors who want to increase their exposure to future contracts, this article is for you. When future contracts were first released, they were most accessible to institutional investors. However, they were too expensive for everyday investors. In 1997, members of the Chicago Mercantile Exchange (CME) realized that many investors were missing out on the action. To remedy this, they released E-mini futures contracts. Eventually, the exchange released micro E-mini futures. They were even cheaper versions of those future contracts. In this article, we will first revisit what futures are. Second, we will elaborate on how E-mini futures contracts work and provide a hypothetical example.
Futures contracts are an agreement between a buyer and a seller to buy and sell a specific security at a predetermined price and date.
Popular examples are commodities and currencies. For example, purchasing a future for a large amount of oil, gold, or wheat is common. The contract can be sold for a profit or a loss before the agreed-upon date.
It is a very common practice to use futures as a hedge. Very few investors want to receive hundreds of barrels of oil in their homes. Hence, they sell their contract before the agreed-upon date.
How to Trade Futures?
Futures can only be traded in a margin account on the Chicago Mercantile Exchange (CME), ICE Futures US, and the CBOE Futures Exchange (CFE). The quantities of a contract are constant.
When we trade oil futures, it is, by default, 1000 barrels. Therefore, a minimum of investment knowledge is required and suggested before embarking on this journey. Our platform has the necessary tools to help you with your learning.
In the opening paragraph, we established that E-mini futures were too expensive for regular investors. Let’s take oil as an example again. Trading 1000 oil barrels might cost a bit too much. Hence, E-mini futures contracts were created.
E-mini Futures Contracts
E-mini funds and micro E-mini futures contracts are fractions of a standard contract. Most of these contracts are traded on the CME except the Russell 1000 and 2000.
They are traded on the ICE. E-mini futures can be traded from Sunday at 6 pm to Friday at 5 pm. There is a daily break from 5 to 6 pm.
E-mini contracts include the following 44 underlying assets: indexes (S&P, DJIA), MidCap 400, SmallCap 600, Nasdaq 100, Nifty 50, currencies (JPY/USD and EUR/USD), sectors (energy, healthcare, biotech, industrials, materials, tech, utilities, consumer discretionary and consumer staples), commodities (corn, soybean, wheat, crude oil, natural gas, heating oil, gasoline, gold, silver, and copper).
S&P mini contracts are by far the most widely traded in the world. When introduced in 1997, they became much more popular than standard futures contracts.
The latter was eventually delisted and completely replaced by E-mini futures contracts. So, if you want to trade futures, take the course of our future.
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Pros vs Cons
Just like for any investment, there are pros and cons. So, let’s explore them for E-mini futures contracts.
Pros: As mentioned above, E-mini futures can be traded almost seven days a week. Active traders will be delighted by this. Next, they also offer low-margin rates and commission fees. Finally, they are generally less volatile than certain securities. Overall, E-mini futures offer many positive attributes and diversity to a portfolio. However, it’s important to be informed before trading them.
Cons: Volatility is as much a pro as a con. Who remembers the price of oil in April 2020? It dipped below $0! Look at it two years later. It isn’t far from its all-time high set during the 2008 financial crisis at $140. The second con is its limited range. Only a handful of investments are available.
Let’s look at a hypothetical example of E-mini futures contracts to clarify things. Remember which contract is the most actively traded on the market? We will take the value of the S&P index at the time of writing this article. It is at 3900. The contract is set at $50 times the value of the index. That is the multiplier.
Suppose the investor sets a stop loss is set at 3850. The potential loss is $50*(3900-3850), which is $2500 plus any margin costs. The investor expects the S&P to reach 3950 in the next trading sessions.
They then add a limit order to sell when it reaches 3950. The potential profit becomes $50*(3950-3900), which amounts to $2500 plus any margin fees.
Margin calls can be an important factor in the future. In the example above, we used the S&P index. It isn’t very volatile in comparison to commodities. However, they can experience much greater volatility, affecting the future outcome. Pay close attention.
In the example above, the E-Mini S&P had a multiplier of $50. However, this isn’t the case for every contract. They vary from $0.50, which is the case for the micro E-mini, to $250, representing the E-mini Energy Select Sector Futures. In the case of commodities, it is a set number of bushels, barrels, gallons, ounces, or pounds. See the graph below for more details.
(table taken from Wikipedia)
These numbers are more affordable for investors that don’t have millions of dollars to play with. So even institutional investors opted for E-mini futures contracts.
Final Thoughts: E-mini Futures Contracts
To conclude, E-mini futures contracts, also called simply futures, are another way for investors to diversify their portfolios. These futures are an agreement to buy or sell a currency, commodity, index fund, or asset at a predetermined price and date.
It is possible to sell it before the agreed-upon date to make a profit or to cut our losses short. However, it is mandatory to purchase these futures with a margin account.
Your investment isn’t limited to your gain or loss on the trade but also the margin fee. Pick the appropriate broker for the best tools and fees for margin accounts.
If you want to learn more about profiting from the stock market, head to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.