Trading indexes rather than individual securities is a viable strategy many traders use to speculate with and investors use to hedge their portfolios. Indexes allow traders to get exposure to general market conditions instead of individual stocks. Some investors want to use leverage to get exposure to indexes, and e-mini futures can help.
The micro e-mini futures contract is a financial vehicle that allows retail traders to speculate on stock market moves with a small contract, which costs much less to trade than the larger stock index futures contracts. Futures contracts also trade on margin, giving you leverage in the market if you have limited resources.
How Do Micro E-Mini Futures Work?
Futures are financial derivatives that are valued by the price of an underlying asset. Futures contracts represent an obligation to either cash settle or accept delivery of the asset if assigned by the seller where physical delivery is allowed. The micro e-mini is one of many types of futures contracts traded in a nearly 24-hour market that operates from Sunday evening to Friday evening EST.
Micro e-mini futures are somewhat different from commodity futures in representing stock indexes. Index futures are not physically delivered like corn or crude oil, so these contracts are always settled in cash.
Micro e-mini futures offer benefits for traders with limited capital or traders who are looking to fine-tune a larger position already in their portfolios. They are a relatively new financial instrument offered by the Chicago Mercantile Exchange (CME) Group. Micro e-minis offer cost-efficient exposure to the four major indexes in the U.S. — the S&P 500, the Russell 2000, the Dow Jones Industrial Average (DJIA) and the NASDAQ 100.
The micro e-mini futures contracts are smaller versions of the e-mini futures contracts (smaller versions of the primary stock index futures contracts). E-mini futures are some of the most popular, liquid and actively traded of all equity index futures. Micro e-mini contracts are pegged at 1/10 of the size of e-mini futures.
When you buy or sell a micro e-mini contract, you are contracting at the current price of the index multiplied by its multiplier. You can buy or sell the contract before its expiration date. However, suppose you are trading in a margin account. In that case, the broker might close out a losing position automatically or issue a margin call if the funds in your account are insufficient collateral to continue to hold the trade.
Best Brokers for Futures
Nearly every reputable futures broker will give you access to micro e-mini trading. Make sure you have a fully functional trading software program that integrates with your chosen broker to trade futures.
Micro e-mini futures contracts have a notional value at a set multiple of the underlying index their value is derived from. The current multiplier values are as follows:
- S&P 500 Micro E-Mini: $5 x S&P 500 Index
- NASDAQ 100 Micro E-Mini: $2 x NASDAQ 100 Index
- Russell 2000 Micro E-Mini: $5 x Russell 2000 Index
- DJIA Micro E-Mini: $0.50 x DJIA index
In most cases, you will not have to pay the full notional value of the contract in cash to hold a futures contract. Brokers allow traders to operate on margin, which allows the trader to put up a fraction of the notional amount of the contract as collateral for the trade to protect the broker against possible trading losses. As long as you deposit the required percentage of the cash upfront and maintain your account balance above a certain level, you can hold the trade until expiration.
Like other futures contracts, micro e-mini futures terminate trading at 9:30 a.m. EST on the 3rd Friday of the contract delivery month. Contract months are March (H), June (M), September (U) and December (Z). Futures are cash-settled based on the index's final settlement price. The CME Group's product code for the micro e-Mini S&P 500 index future is MES, MNQ for the NASDAQ 100 index future, M2K for the Russell 2000 index and MYM for the Dow futures contract.
The amount of margin needed to maintain your holdings may change. Should the value of your contract fall, your broker may hit you with a margin call. A margin call means you need to increase your margin account balance to compensate for the lower value of the futures contract — since the broker will only take so much risk and requires you to provide sufficient collateral. Your broker will close out your trade if you can't meet its margin requirements. Your broker's terms of service will inform you of the margin percentage you must maintain to initiate and continue to hold a futures contract.
Outlook on Micro E-Mini Futures
Micro e-mini futures move in tandem with the major underlying indexes. Economic uncertainty plagues these indexes, and declining consumer spending can translate into future losses for companies. Interest rates and inflation remain elevated which creates an uphill battle for equities.
Many experts have described the markets as disconnected from the economy. Holding onto reliable companies over the long run can help investors realize respectable gains.
What Time Do Micro E-Mini Futures Open?
All micro e-mini futures trade on CME Globex from Sunday 6 p.m. to Friday 5 p.m. EST with a scheduled break from 4:15 p.m. to 4:30 p.m. EST.
Strategies for Micro E-Mini Futures
Before you decide to use micro e-mini futures contracts to trade, you must decide what kind of trader you are and what you are using them for. Are you speculating on a market direction? Does your portfolio currently hold a position that you think needs management or hedging? Micro e-mini futures are a powerful tool, but you must have a vision for their use.
Because the major indexes are trading at a lower correlation to each other than usual, you may use micro e-minis to hedge relevant portfolio positions.
Scaling into a Position
Some traders use the smaller size of the micro e-mini to scale into a position gradually by buying contracts at different price targets or expiration dates as the market continues to move in the expected direction. The resulting aggregate position has an average entry price that can be compared to the current market to assess your breakeven point.
The lower cost of micro e-minis means you can speculate without losing as much money as fast. Keep in mind that the futures market can be extremely volatile, just like the underlying market, and trading them can cost you your margin account balance if your positions are not managed properly.
Recent Posts on Micro E-Mini
Although micro e-minis follow the movements of the underlying stock market index, their unique properties warrant specialized study. Here are a few of the most important articles dealing specifically with these important financial tools.
Making Major Moves Now with Micro Futures
Futures are leveraged derivative instruments that are not appropriate for all traders. Used improperly, futures can cause a trader to lose money quickly. It is very important to understand why you are using micro e-mini contracts. Though the CME created them to keep futures contracts from being cost-prohibitive to retail traders, it is always good to have a good trading strategy and have enough capital on hand to manage your trades and money appropriately.
Micro e-mini futures can be used in a variety of trading strategies. Experiment using demo accounts (you trade with virtual money) to understand the intricacies of this powerful tool and the underlying markets before trading in a live account where your capital is at risk.
Frequently Asked Questions
What is the difference between micro E-mini and micro futures?
Micro e-mini futures 10% of the size of micro futures contracts.
Can you make money trading micro e-mini futures?
Yes. It is possible to make money trading micro e-mini futures. This strategy requires good market timing. Lengthier contracts give you more room for error and the ability to wait out unfavorable price movements.
Are micro e-mini futures risky?
Micro e-mini futures are riskier than many assets. However, these derivatives can generate significant returns. Investors should consider their risk tolerance and financial goals before investing in these contracts.