What Are E-mini Futures Contracts?

E-mini futures contracts is 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 mostly accessible to institutional investors. They were too expensive for everyday investors. In 1997, members of the Chicago Mercantile Exchange (CME) realized that a significant percentage of 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. 

What Are Futures Contracts?

What Are E-mini Futures Contracts

Before embarking into E-mini futures contracts, it would be good to refresh our knowledge on futures contracts, also called futures. They are an alternative investment.

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. It is very common to purchase a future for a very large amount of oil, gold or wheat. 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 to their homes.  Hence, they sell their contract before the agreed-upon date.

How to Trade Futures?

Before trading any futures, it’s necessary to open an account with a broker. Not every broker offers this type of account. It is also necessary to be approved for a margin account.

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. A minimum of investment knowledge is required and suggested before embarking on this journey. We have the necessary tools on our platform 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. 

What Are E-mini Futures Contracts Explained

What Are 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 6 pm to Friday 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 they were 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. If you want to learn how to trade futures, take our futures course.

Pros vs Cons

Just like for any investment, there are pros and cons. Let’s explore them for E-mini futures contracts. 

Pros: As mentioned above, E-mini futures can be traded almost 7 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. 

Example

To make things clearer, let’s take a look at a hypothetical example on E-mini futures contracts. 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 of 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 amounts to $2500 plus any margin costs. The investor also 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 for futures. In the example above, we used the S&P index. It isn’t very volatile in comparison to commodities. They can experience much greater volatility, which can affect the outcome of the futures. Pay close attention.

E-mini Multipliers

In the example above, the E-Mini S&P had a multiplier of $50. This isn’t the case for every contract. They vary from $0.50, which is the case for the micro E-mini dow to $250, which represents 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. 

What Are E-mini Futures Contracts
(table taken from Wikipedia)

These numbers are more affordable for investors that don’t have millions of dollars to play with. Even institutional investors opted for E-mini futures contracts.

Now You Know what E-mini Futures Contracts Are

To conclude, E-mini futures contracts, also called simply futures, are yet 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 take a profit or to cut our losses short. It is mandatory to purchase these futures with a margin account.

Your investment isn’t limited to your the gain or loss on the trade, but also to the margin fee. Pick the appropriate broker for the best tools and fees for margin accounts. 

If you want to learn more about how you can profit from the stock market, head on over to our free library of educational courses. We have something for everyone, including trading options for those with small accounts. 

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