E-minis Trading

The specialized world of Derivative Futures Index trading is also known as E-minis, which are small Futures Contracts on the S&P500 Index, the NASDAQ 100 Index, the Dow 30 index and other major indices.

Why Index Futures

Why Trade E-minis?

Trading index futures enables you to participate in broad market moves with one trading decision, without having to select individual issues. Index futures and options contracts closely follow the price movement of their respective underlying indexes. These products are widely used by financial professionals as well as individual investors, for portfolio protection as well as investment reward. Trading E-Minis offers up to 10 to 1 leverage and virtually 24/5 trading hours.

E-minis vs "Large" Futures Contracts

While better-resourced individuals and institutions participate by trading the S&P futures, the $23,000-plus margin per contract required to trade the "big" S&P 500 futures is prohibitive. The phenomenal growth in the value of the S&P 500 futures has put the contract beyond the reach of many individual investors. The E-mini S&P 500 is a scaled-down version of the S&P futures that lets traders get in on the fast action of the electronically traded futures contract. Small contracts also exist on other large indexes.

The E-mini S&P 500 contract is for both new and experienced traders. But its smaller size was designed with the individual investor in mind. The contract value is 50 times the underlying index, just 1/5 the size of the "big" contract. For example, if the underlying S&P 500 futures is 1400.00, then one contract has a value of $70,000.

With the E-mini, a trader never actually owns any of the component stocks of the S&P 500 index. The E-mini, like all futures contracts, are legally binding agreements to buy or sell the cash value of the contract at a specific future date. All E-mini contracts are settled in cash, called offset, where a buy position is closed by a sell position, or vice versa.

Futures contracts are "marked-to-market" meaning margin accounts are adjusted daily to reflect profits and losses. If there is a net gain on any given day, it is noted in the account at the end of the day. Conversely, if there is a loss, it too is marked to the market and reflected in the account at the end of the day.

If gains accumulate, traders can remove the profits from the account. If there are losses that drop the account below the minimum "maintenance" margin requirement, your broker can close out your positions and specify that you deposit additional money to continue trading, an action called a "margin call." You can also lose all of your margin—and more—if the market were to make an unexpected move against a position and you had not pre-arranged to exit by placing a stop loss order.

The minimum price movement of the E-mini contract—called a "tick"—is also smaller than the larger contract. The tick value is .25 index points, or $12.50 per contract. This means that if the futures contract moves the minimum price increment (one tick), say, from 1400.00 to 1400.25, a long (buying) position would be credited $12.50; a short (selling) position would be debited $12.50. Also, a one-point move (four ticks) is $50.00 per contract ($12.50 times four ticks). This means that if a trader enters a long position at 1400.00 and covers the position at 1410.00, $500 is credited to his account. Conversely, if the E-mini declines from 1400.00 to 1390.00, and the trader had taken a long position, he would have a $500 loss debited to his account.

The following video is an example of a E-mini Nasdaq 100 Index Futures trade:

Momentum Trading

During the week, the E-minis trade virtually around the clock, pausing for just 30 minutes between 4:15 and 4:45 PM ET. On weekends, trading stops at 4:15 PM ET on Fridays and then resumes at 6:30 PM ET on Sundays.

Over 100,000 Lessons from the Pros readers. Check out last week's issue.

Free Class