Lessons from the Pros

Stocks

Manage Your Future with Micro Futures

We cannot control whether the markets will rise or fall, we cannot control economic data or influence the public’s perception of the market. There is only one thing that we can, with reasonable accuracy, control and that is our losses.

Strategies for Controlling Losses in the Market

There are three ways to control losses in the markets: size, duration and frequency. Until now, many traders and investors avoided trading futures because they could not afford the margin required to hold a contract or they could not afford the risk associated with the size of the contracts. Those barriers have now been removed with the introduction of Micro E-Mini Futures from the CME.

Micro e-mini futures contracts are 1/10th the size of the normal e-mini futures. These types of contracts have been offered on currency futures for some time already. The addition of the equity markets has been long awaited and opens the world of futures trading to many more investors and traders.

Looking at the contract specifications, the ES (E-Mini S&P 500 Index Futures) has a value of $50 times whatever the index is currently trading at. At the time of writing, that is 2830. The value of one ES is $141,500 (2830 x $50) and the margin deposit required is $6930.  The micro futures has a multiplier of $5 so the value is $14,150 and the margin is $693. Intraday margins are lower and are set by the individual brokerages themselves.

So, let’s compare the two futures contracts in action. The charts are nearly identical and core strategy would be applied the same way. In TradeStation, the intraday margin for the ES is $1732.50 This deposit from the trader’s account allows them to trade one S&P 500 E-Mini. The intraday margin for the micro futures is only $173.25, considerably less. The dollar amount of the risk and reward is also less but the percentage rate or return of 41.8% is the same as the larger contract.

Chart comparing micro e-mini futures with futures

The creation of the micro futures means that many more people can now enjoy the leverage offered with trading futures accounts. One can even invest with leverage with a futures IRA account. More importantly, with the futures IRA, you can look for profits from the downward movements in the markets by selling futures contracts. No longer are you restricted to only making money in bullish markets.

The CME recently rolled out micro e-mini futures for the equity markets and added the Micro ES, NQ, YM and Russell. They join the micros in the currency markets and gold. Make sure there is enough liquidity (volume) in the contracts before you start to trade in them.

Chart listing margins on micro e-mini futures contracts

The introduction of the equity index micro futures has opened-up futures trading to many who thought it was out of reach. Risk can be managed much better now as a trader can dial in as much risk as they are willing to handle instead of having to accept the larger risk of the E-Mini contract. Investors can do the same and possibly profit in nearly any market condition, bullish or bearish. The tax break for trading futures contracts extends to the micro futures and makes them attractive as an alternative for trading and investing in shares of stock.

Free Trading WorkshopAs their popularity grows, I am sure more contracts for different securities will be offered. Be sure to get the proper education and learn strategies to trade these contracts because, just like any asset class, if you do not know how to trade futures properly, you will likely lose money. There is risk in trading micro e-mini futures, but when used correctly they could open up additional opportunities for traders.


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.