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Everything You Must Know About E-mini Futures

10 Jul 2023

What are E-mini futures?

E-mini futures are smaller-sized versions of major indices and commodities traded on exchanges like the Chicago Mercantile Exchange (CME). With their smaller size and flexibility, E-mini futures have opened new opportunities for institutional players and individual traders to participate in the market.

The origins of E-mini futures: A revolution in trading

E-mini futures came into existence in September 1997 as a response to the growing demand for more accessible trading options. The original exchange-traded S&P futures introduced in 1982 had large contract sizes, which limited participation to institutional players and large traders. As the value of S&P 500 index skyrocketed, it became challenging for smaller institutions and retail individuals to enter the market.

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However, the introduction of electronic trading platforms and E-mini futures on the CME's GLOBEX platform marked a turning point. E-mini S&P 500 futures quickly gained popularity, offering smaller contract sizes and extended trading hours. The trading volumes surged, establishing E-mini S&P 500 futures as the world's most liquid and extensively traded equity derivative on multiple exchange platforms.

Today, E-mini futures extend beyond equity indices to include commodities and currencies, providing diverse trading opportunities. The most popular E-mini futures include the E-mini S&P 500 (ES), followed by the E-mini Nasdaq-100 (NQ), the E-mini Dow (YM), and the E-mini Russell 2000 (RTY).

How do I trade E-mini futures?

Trading E-mini futures involves understanding the contract specifications and utilising the right strategies. Here are the steps to start trading -

  • Choose a trading platform - Access a reliable trading platform that offers E-mini futures, such as the CME GLOBEX platform, which allows for nearly 24-hour trading.
  • Understand contract specifications - E-mini futures contracts are 1/5 the size of standard contracts, with quarterly settlements in March, June, September, and December.
  • Calculate contract value and Tick size - Each point change in the underlying index results in a $50 gain or loss. The tick size, representing the minimum price change, is set at 0.25 points.
  • Set initial margin - The initial margin requirement is typically 5% of the contract value, but day trading margins can be as low as 1-2%. Some brokers may offer margin funding and credit lines, further reducing the margin requirement.
  • Implement risk management - Develop a risk management strategy to protect your capital, including setting stop-loss orders.

Why trade E-mini futures?

E-mini futures offer numerous advantages, contributing to their widespread popularity among traders and investors. Here are some key benefits -

  • Simplicity - Compared to other derivatives, E-mini futures are less complex, making them easier to understand and trade.
  • Versatility - All strategies applicable to standard contracts can be implemented with E-mini futures, allowing numerous trading approaches.
  • Global exposure - E-mini futures based on major indices provide international exposure and high liquidity, ensuring prices aren’t easily manipulated.
  • Lower margins - Smaller contract values and lower margin requirements make E-mini futures accessible for individual investors and small traders.
  • Risk management - E-mini futures based on broad market indexes like the S&P 500 offer a less risky approach than trading individual stocks.
  • Hedging opportunities - E-mini futures can be used as cost-effective hedging tools to protect portfolios and manage risk effectively.

E-mini futures gain traction in India

E-mini futures have also made their way into the Indian market, with the NSE International Exchange listing them for trading in September 2011. Indian members of the NSE and their clients can trade E-mini futures in US dollar terms without additional paperwork or permits. This enables Indian traders to access global markets conveniently.

What is the future of E-mini futures?

In 2019, the CME introduced Micro E-mini futures, traded at 1/10 the size of regular E-mini contracts. These contracts aim to make trading even more accessible to individual investors and novice traders. With benefits such as lower margin requirements, manageable tick sizes, and the ability to convert to full-sized contracts, Micro E-mini futures have quickly gained popularity.

Are E-mini futures right for you?

E-mini futures have transformed the trading landscape, providing traders with an accessible and versatile instrument for trading and hedging.

You can consider E-mini futures if you are looking to diversify your portfolios, access leverage, and trade with lower capital requirements. However, it's essential to understand the risks involved and develop a well-rounded trading strategy before beginning.

 

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