Last Updated on April 22, 2022
Investors looking for new market alternatives may want to consider the advantages of thinking small. The popularity of trading the E-mini S&P 500 futures has continued to grow in popularity faster in recent years than its big brother, the S&P 500 futures contract. Then there are also the Micro E-mini futures, which are a miniaturized version of the E-mini contract. What do these futures contracts entail? How are they different from each other? And more importantly, how can you get in on trading them? These are the things we look at in this article.
For the beginner trader, risking thousands of dollars on a single full-size futures contract may be more than he or she can afford to risk. The E-mini and Micro E-mini contracts allow the trader to get in the game with a lot less money at risk.
In order to have a clearer understanding of how the S&P 500 E-mini and Micro E-mini contracts operate, it’s only prudent to start with a brief overview of their original ancestor, the full-size S&P 500 futures contract.
- S&P 500 Futures Market Background
- S&P 500 E-mini Futures
- S&p 500 Micro E-mini Futures
- Differences Between the S&P 500 E-Mini and the Micro E-Mini
- Forces Affecting the E-mini and Micro E-Mini S&P 500 Futures Markets
- What Are The Risks of E-Mini and Micro E-Mini Futures Trading?
- Conclusion
S&P 500 Futures Market Background
The S&P 500 index belongs to the complex of financial futures products within the commodities futures traded on the U.S. financial market. It’s a type of derivative contract that provides investors with an investment based on the expectation of the S&P 500 Index’s future value, so it is particularly common among stock portfolio managers looking to hedge risk over a given time frame. Essentially, they can short these contracts to protect their portfolios from the downside price risk of the broader market.
The futures contracts are based on the Standard and Poor’s 500 (S&P 500) Index. The index is comprised of roughly 500 of some of the world’s largest companies whose stocks are traded on U.S. exchanges. This makes the S&P 500 futures one of the best indicators of overall market direction. Large traders and institutional investors often use it to speculate on the future value of the S&P 500 by buying or selling futures contracts. Trading is done on the Globex Platform of the Chicago Mercantile Exchange (CME), which introduced the S&P 500 futures in 1982.
S&P futures contracts trade almost 24 hours a day, allowing brokers and traders to assess the levels of the futures markets before the stock markets open. This is one of the reasons they’ve been so popular over the years.
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S&P 500 E-mini Futures
S&P futures contracts were a phenomenal success. So much so that the value of the existing S&P contract eventually became too large for retail traders to get into. This led to the introduction of the S&P 500 E-mini futures contract by the CME in 1997. Trading the E-mini S&P 500 officially began on Sept 9, 1997, at a value of 1/5th that of the full-sized contract and required 1/5th the margin to trade. Like the S&P 500, the E-mini traded electronically, meaning you can trade them almost 24 hours a day.
As expected, it made futures trading accessible to more traders and quickly became a success. The E-mini S&P 500 is the most actively traded E-mini contract in the world today. Although the bulk of the trading volume is made up of traders speculating on the future price of the underlying index, the E-mini is also often used for hedging market risk exposure.
Let’s say you have a well-diversified stock portfolio but you’re worried that a market correction is just around the corner. You have two ways to go about it — one, close all your open trades and simply wait for the market correction to play out with no risk to your capital — or two, hedge your position by shorting the E-mini S&P 500 to balance out your risk exposure while still having the potential to earn dividends from your portfolio equity holdings.
If there is a decline in the market, then profit from your short futures position may offset the losses in your stock portfolio. On the other hand, if the market rallies and your futures position produces a loss, it will be offset by the appreciation of your stock portfolio.
S&P 500 E-Mini Futures Contract Specifications
| S&P 500 E-Mini Futures Contract Specifications | |
|---|---|
| Product Symbol | ES |
| Contract Size | $50 x S&P 500 Index |
| Minimum Price Fluctuation | 0.25 index points = $12.50 |
| Trading Hours | CME Globex: Sunday – Friday 6:00 p.m. – 5:00 p.m. Eastern Time (ET) with trading halt 4:15 p.m. – 4:30 p.m. |
| Settlement Method | Financially Settled |
| Listed Contracts | Quarterly contracts (Mar, Jun, Sep, Dec) listed for 5 consecutive quarters |
| Termination of Trading | Trading terminates at 9:30 a.m. ET on the 3rd Friday of the contract month |
Data Source: CME
For the daily settlement prices, the E-mini is essentially the same as that of the full-sized contract. Although there will be slight variations due to the differences in the minimum tick sizes between the E-mini contract and its full-sized counterpart.
Because E-minis offer electronic trading, low margin rates, and are generally more affordable, they have been very successful, especially among retail traders. And with this success, the CME and other exchanges have gone on to launch more E-mini futures contracts over the next 10 years. However, none of them have been quite as successful in attracting traders and trading volume as the S&P 500 E-mini contract.
Just when you thought you’d seen it all, the CME decided to change tack and launch the Micro E-mini in 2019.
S&P 500 Micro E-mini Futures
As you’re probably already aware, flexibility and leverage are the main advantages of futures trading. The ability to invest in a traded asset with relatively small capital means participants have access to opportunities that simply do not exist in other markets. The introduction of the E-mini futures contract was a game-changer in that regard.
However, the Micro E-mini futures takes it even further by offering traders a chance to trade via an even smaller contract.
A Micro E-mini futures contract is 1/10th the size of the E-mini contract so you can now trade the same S&P 500 index with even less capital and lower margin requirements. Trading S&P 500 Micro E-mini officially commenced on May 6, 2019, and was warmly welcomed by the market.
It hit a volume of almost 417,000 traded contracts barely a month later, on June 3, 2019,
So why did the CME launch Micro E-mini futures?
Well, they wanted to make the market more appealing and accessible, kind of how they did when they introduced the E-minis back in 1997.
Here’s their explanation:
“Since the launch of the E-mini product suite in 1997, the notional value of these contracts has increased dramatically. As a reference, see the price chart of the S&P 500 since its launch in 1997. The notional value of the E-mini S&P 500 futures contract has increased from ~$47K on the date that it launched to~$145K on April 22, 2019. The amount of capital needed to access the futures market has become too burdensome for many individual traders. To make our more market accessible to all, CME will launch the Micro E-mini suite of futures, which feature multipliers 1/10 the size of their E-mini counterparts (i.e. $5 multiplier for Micro E-mini S&P 500 futures contract vs. $50 for E-mini S&P 500 (ES) futures).”
Non-institutional traders may find the Micro E-mini contract particularly appealing since it lets them access more product choices within their overall portfolio. Plus it allows for testing a trading method in a live market but with a risk exposure that is only 1/50th the size of a standard contract.
S&P 500 Micro E-Mini Futures Contract Specifications
| S&P 500 Micro E-Mini Futures Contract Specifications | |
|---|---|
| Product Symbol | MES |
| Contract Size | $5 x S&P 500 Index |
| Minimum Price Fluctuation | 0.25 index points = $1.25 |
| Trading Hours | CME Globex: Sunday – Friday 6:00 p.m. – 5:00 p.m. Eastern Time (ET) with trading halt 4:15 p.m. – 4:30 p.m. |
| Settlement Method | Financially Settled |
| Listed Contracts | Quarterly contracts (Mar, Jun, Sep, Dec) listed for 5 consecutive quarters. |
| Termination of Trading | Trading terminates at 9:30 a.m. ET on the 3rd Friday of the contract month. |
Data Source: CME
Differences Between the S&P 500 E-Mini and the Micro E-Mini
Based on the breakdown of each contract type above, you can already notice some of the fundamental differences between the E-Mini and the Micro E-Mini. Let’s go a bit further by zeroing in on the top five differences when trading them:
Tick Size
A tick refers to the measurement of the upward or downward movement in the price of a contract. It is used to determine the profit or loss made on a particular trade. It is measured based on its movements from the original purchase price.
In the S&P 500 index E-mini contract, a one-point movement is worth $50 and the tick is measured at 0.25 index points. As such, one tick movement in the E-mini futures contract, up or down, is worth $12.50 ($50 x 0.25).
On the other hand, the Micro E-mini future contract has a vastly reduced tick size at only $1.25. This is because a one-point movement is only worth $5 even though the index point remains the same at 0.25. So at $5 x 0.25 equals to the tick size of $1.25.
Cost To Trade
To trade either E-mini or Micro E-mini futures, a trader must first put up a margin deposit for each contract traded. The trader must also maintain an ongoing margin to cushion any losses sustained on each trade.
The S&P 500 Micro E-mini futures contract is essentially the same as the E-mini contract, except its 1/10th size.
Therefore, a one-point movement in the E-mini contract is worth $50.
Whereas, a one-point movement in the Micro E-mini contract will equal 1/10th of that $50, which is $5.
The margin to trade these contracts also follows the same principle.
Let’s say you open a day trading position at an initial margin deposit of $4500 to trade a single E-mini contract.
If you want to trade the Micro E-mini, you’ll only need 1/10th of $4500, which equals to $450 per contract.
This makes it attractive to newbie traders and perhaps even Forex and Crypto day traders looking to diversify their portfolios.
Those are just the initial margins. You’ll also need to factor in the margin coverage for each position you take.
There are other things to consider as well. For example, some brokers require additional margin for holding a position overnight.
Who It’s For
Anyone who knows what they’re doing can enter the S&P 500 futures market and come out with some pretty good gains.
Unfortunately, the capital required to take up positions is often a huge barrier. So it essentially boils down to how much you are able and willing to put up. Then there’s also the matter of your risk appetite. Most beginner traders opt for the Micro E-mini since it presents a much lower risk exposure than the E-Mini contract.
Of course, this isn’t to say institutional investors can’t invest in the Micro E-mini futures market as well.
It’s just that they usually work with huge sums of capital and will usually prefer regular S&P 500 futures or the E-mini contract.
Contract Size
The contract size for futures refers to the value of the contract based on the price of the underlying futures contract times a contract-specific multiplier.
The contract-specific multiplier of the E-mini S&P 500 is $50.
Therefore, to get the contract size, it needs to be multiplied by the S&P 500 Index price.
So if the S&P 500 is trading at 2,600, the value of the contract is $50 x 2,600 = $130,000.
For the Micro E-mini, however, the contract size is smaller because the contract-specific multiplier is $5. Therefore, the contract size is $5 x 2,600, which equals $13,000.
Trade Volume
Micro E-mini futures hit the ground running with its impressive start of exceeding one million contracts traded within the first three days of trading.
The volume has since cooled and is now trading under 500,000 contracts per day. Still, Micro E-mini futures contracts are tapping directly into the growing segment of retail traders so it’s only a matter of time before they record trade volumes in the millions again.
E-mini S&P 500 futures, on the other hand, have been enjoying some pretty good trade volumes recently. How will the market fare in 2020 with Micro E-mini’s growing popularity? Only time will tell.
Forces Affecting the E-mini and Micro E-Mini S&P 500 Futures Markets
Since the S&P 500 futures market is a derivative market of the S&P 500 index, any factor influencing the movement of the index will also influence the futures market. These include global events that directly affect S&P 500 companies, economic and political stability in the United States, and major economic reports in other nations.
Timing is also crucial. For instance, most financial or economic data and reports from European markets are usually announced between 3 AM and 4 AM CST and can often have an impact on the E-mini and Micro E-mini futures markets in the States. In fact, this period is almost always a market-moving event and traders are often watching the market for reactions to news from Europe.
What Are the Risks of E-Mini and Micro E-Mini Futures Trading?
As with any kind of futures trading, there’s always that inherent risk — the risk of losing more money than you initially invested. This is known as the back-end risk, which basically means you won’t know if you’ve made a gain or loss until the contract’s expiration date.
Of course, you can choose to close out your position before the expiration date.
However, if you hold the futures contract until expiration and your position lost more than what you initially invested, then you’ll owe money to the broker.
This will be taken out of your margin coverage.
For this reason, you should be fully familiar with at least one solid futures trading strategy before entering the market.
There are several programs that allow you to download historical market data and test out your trading strategy without using real money.
If you feel ready, start with the Micro E-mini futures contract until you’re willing and able to expand your risk exposure.
Conclusion
The E-mini S&P 500 futures market continues to dominate index futures for good reasons. It provides a low margin entry into a highly liquid global market and allows for reasonable risk management. But the advent of Micro E-mini S&P 500 futures could shake things up for the E-mini with its even lower margin entry and risk exposure.
In any case, they’re both unique tools that can help you achieve your trading goals.
Like any other tool, be smart about it and use them well.
Now that you’re armed with this knowledge, consider putting your skills to the test in The Gauntlet Mini™ and take your first step to becoming a professional trader here.
