One thing holding many stock market speculators back from dipping their toe into the futures markets is the high levels of risk.
Those speculating in the stock market, particularly in ETFs such as the SPX, SPY, and QQQ now have a stepping stone into the advantages of the futures markets including around-the-clock market access, favorable tax treatment, easier tax reporting, ease of shorting the market, and trading on margin without the burden of paying interest charges to a brokerage house.
CME Group has accurately pinpointed the need for smaller contracts aimed at more risk-averse speculators, or those with smaller accounts. Over the years they have released similar products in other markets (the mini grain futures and micro-currencies). I am a big fan of these products, but they weren’t necessarily game changers for the industry because they did little to curb the hesitation of traders to venture into unfamiliar territory. The Micro E-mini suite of stock index futures, on the other hand, do exactly that.
Manageable Size
Micros include contracts for the S&P 500, the NASDAQ-100, the Dow, and the Russell 2000. Each of these bite-sized contracts will be one-tenth the size of the traditional E-mini versions. This means instead of a trader making or losing $50 per point in the S&P or $20 per point in the NASDAQ, they will make or lose a more manageable $5 or $2 respectively; the Micro E-mini Dow will produce a 50 cent profit or loss per point and the Russell $5 per point. Further, the tick value of each will be $1.25 for the Micro E-mini S&P 500 futures contract and $0.50 for the others.
The margin required to trade these products is estimated to be about $660 for the Micro E-mini S&P 500 and the micro-sized Dow, $836 for the Micro E-mini NASDAQ-100 futures contract, and less than $500 for the “petite” Russell 2000.
If you are wondering what the contract size is and the margin is, you are asking the right questions. As with any index future, the contract size is dependent on the index price. The value can be determined by multiplying the point value by the current price. Thus, if the S&P 500 is trading at 2,850 the Micro E-mini futures contract would represent $14,250 worth of an S&P 500 allocated portfolio of stocks ($5 x 2,850); similarly the notional value of a NASDAQ Micro E-mini futures contract would be $15,600 at a price of 7800 (7,800 x $2) and the Micro E-mini Dow futures contract would represent $13,000 worth of Dow Jones Industrial average stocks with the index valued at 26,000 (26,000 x $0.50)
Not Just For Large Accounts Anymore
The size and cost of these new products enable traders with low risk tolerance to more comfortably participate in futures. Nevertheless, even trading Micro E-mini futures requires participants to educate themselves on the risk involved.
Trading futures is no longer reserved for those with either large trading accounts, high tolerance to risk, or both. With Micro E-mini stock index futures, those looking for efficient around the clock trading with mitigated risk exposure, will now find what they are looking for in the futures markets.
There is a substantial risk of loss in trading commodity futures, options, ETFs. Seasonal tendencies are already priced into market values.
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
