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Trading With E-Mini Index Futures

Updated on 2013-05-14 by Guest

Pioneered by the Chicago Mercantile Exchange, the E-mini futures were launched during 1997 to 2002 to track the popular stock indices in the capital markets across the financial world. The four major indices, which form the underlying asset for E-mini futures, are S&P 500, NASDAQ 100, Russell 2000 and S&P Midcap 400 Index. Stock index futures are designed to track the movements in the underlying indices and thereby enable the investors to gain profits from favorable movements in the indices. Index futures are popularly used by investors and fund managers to hedge portfolios against the loss of risk due to adverse price moves. An investor by holding a position in the E-mini index futures would tap the benefit of tracking the major indices of the capital markets as follows:

E-mini S&P 500 futures

This futures contract is designed to track the benchmark for large capitalization stocks of the US capital market – the S&P 500 Index. The multiplier used for calculating the value of E-mini S&P 500 futures is $50, which is obtained through the Special Opening Quotation (SOQ) Method. For example if the value of S&P 500 Index is 965, then the value of one E-mini S&P 500 futures is $48250 (965*$50). As the futures contracts are subject to the process of marking to market, the minimum tick value is specified for each E-mini index futures so as to enable the calculation of values, which should be debited or credited to the margin accounts of the investors. The minimum tick value specified for E-mini S&P 500 futures is 0.25 index points of S&P 500 or $ 12.50 (0.25 * $50)for each contract. Thus if you had taken a long position in E-mini S&P 500 futures, then your margin account would be credited with $12.50 for every 0.25 points upward movement in the S&P 500 Index for each contract you own. On the other hand, your margin account would be debited with the same amount if you hold a short position in the futures.

E-mini NASDAQ 100 futures

This E-mini futures is designed to track the NASDAQ 100 index, which is used as a benchmark for the firms operating in biotechnology, information technology and telecom sectors. This futures contract thus appeals to investors who look out for opportunities in technology areas. The multiplier for E-mini NASDAQ 100 futures is $20 and the tick size specified for the futures is 0.50. Thus, every movement of 0.50 points in the NASDAQ 100 index would amount to an adjustment of $10 in the margin account of the investor.

E –mini Russell 2000 futures

This contract tracks the Russell 2000 index, which is a market capitalization benchmark of small cap US stocks. The multiplier used for calculating the value of E-mini Russell 2000 futures is $100 and the tick size specified is 0.10. The minimum margin adjustment for every 0.10 points move in the index would be $10.

E-mini S&P Midcap 400 futures

This futures contract is designed to track the mid cap companies of US capital market through its benchmark index S&P Midcap 400. The multiplier used is $100 and the tick size is 0.10 accounting for a margin adjustment of $10.

As you could observe, the E-mini futures are attractively designed to track the companies of all levels of market capitalization – large, mid and small cap and also provide for specifically tracking technology related firms.
The E-mini index futures, thus by tracking the world’s popular index, prove to be highly attractive for investors who experience an exposure as broad based as that of an entire stock market. E-mini futures have few more characteristics, which add up to their popularity:

●      As E-mini futures are based on the broad based indices such as S&P500, NASDAQ 100 etc the liquidity of the futures contract is substantially higher with large outstanding interests and tight bid / offer spreads.

●      The futures could be traded through online trading facilities and are available for trading for all time round the clock (23 ½ hours a day, 5 days a week).

●      E mini futures enable the investors to track the movement of a basket of equities at very low prices, which would have otherwise demanded heavy investment to purchase equity share separately.

●      The diversified nature of the underlying indices enables the investor to take advantage of various trading strategies such as hedging and spreading.

When you look out to trade in E-mini futures, you may adopt any of the following common trading strategies:

1.      You may opt to follow the most popular trading strategy of buying low and selling high to make profits from E-mini futures also. The entry and exit points into the E-mini futures may be determined based on the analysis of the underlying index, which the futures contract tracks.

2.      On the other hand, short selling is also very common while trading in futures contracts. You may opt to earn profits when the market is declining by engaging in short interests of E-mini futures.

3.      The accessibility of E-mini futures through online trading facility proves it to be highly attractive if you are a day trader as it enables to track the movements virtually round the clock

Once you have established your trading position in the E-mini futures, exit from the position can be done through three alternative methods:

●       It is not necessary that an investor waits until the contract expires to close the futures position. If you find a favorable position in the market movements prior to expiry of the contract, you may tap the profits sooner by offsetting your position in the futures. This may be done by taking an equivalent but opposite position in the same futures contract.

●      On the other hand, you may also opt to wait until the contract expires and earn your profits from the cash settlement of E-mini futures. A technique called “Special Opening Quotation (SOQ)” is adopted to calculate the price equivalent for each unit of the underlying index.

●      Further, you may also opt to expand the time frame of your trade in E-mini futures by rolling over your position to the next expiration date before your contract matures. This method involves shedding the position in the existing futures contract and opening a new and equivalent position in another futures contract, which expires at a later date than the previous one. By this method, the investors may opt to be exposed to the favorable movements in the market for agreed upon price differentials.

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Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.