E-mini futures
If you want to trade in stock futures, you have two options – one is single stock futures, and another is index futures. Generally, the latter is less risky than the former because you are investing in a basket of stocks that make up the index. This means gains in the others could offset any losses in one stock. However, it needs to be noted that stocks in the index tend to move in the same direction.
One type of index future is e-mini futures. These are stock index futures that are traded on the Chicago Mercantile Exchange (CME). There are two reasons why they are named so. One is their smaller size – these futures are one-fifth the size of a standard stock index (hence the name `mini’). They are traded electronically, and thus called `e’ mini futures.
There are several kinds of these futures, but the term generally refers to the e-mini S&P 500 futures that are listed on the CME. S&P is short for Standard & Poors. Others include Russell 2000, S&P Midcap 400 and Dow Jones futures. You can also get mini futures for commodities like gold and silver, and currencies like the US dollar. They are also available for other indices like small-cap stocks, biotechnology, China stocks etc.
How do e-mini futures work?
As we have explained earlier, e-mini S&P 500 futures are a kind of index futures contract. But before going into how e-mini futures work, let’s look at what the S&P 500 is. This is a stock market index based on 500 large companies listed on American stock exchanges including the New York Stock Exchange (NYSE), NASDAQ or the CboE BZX Exchange. S&P and Dow Jones indices maintain it.
These futures were introduced in 1997 because the full-sized S&P 500 contract had become too big and hence was out of the reach of smaller traders. It was a success and enabled many more participants in the market, enhancing liquidity.
Emini S&P 500 futures are one-fifth the value of the big S&P 500 futures contract, whose value is arrived at by multiplying the S&P 500’s value by USD 250. So, if the value of the S&P 500 is 2,900, the market value of the futures contract would be 2,900 multiplied by 250, which is 725,000. The value of e-mini S&P 500 futures would be one-fifth of that, viz 2,900 multiplied by 50, or 145,000
When you are trading in emini 500 futures, you are betting on the movements of the S&P 500 index. Let’s use an example. Say you expect the S&P 500 to go up, and you buy 100 e mini S&P futures. If the S&P 500 moves up to 3,000, you will be able to exercise your futures contract at 2,900. So, your profit would be (3000x50x100) – (2900x50x100), or USD 500,000. Conversely, if the S&P drops to 2,800, you will stand to lose an equivalent amount.
Trading in eminis takes place for the same reason as any other futures contract. To hedge against price movements and to speculate. Many fund managers use index funds to hedge their positions. Speculators too can take advantage of price movements in the S&P 500.
Advantages of trading emini futures
- International exposure: Trading in e-mini S&P 500 futures means that you will be able to get exposure to global companies, among the biggest in the world. You can take a long or short position depending on your expectations about the performance of these companies.
- High liquidity: These futures contracts are more liquid than standard futures contracts because of their smaller size. This is one of the reasons why they are traded more than conventional contracts.
- More variety: Since you are trading in an index futures contract, you will get exposure to many more stocks. This is better than investing in individual stock futures because then you would be putting all your eggs in one basket.
- Lower margins: Since the emini future contracts are smaller, the margins tend to lower too. This means more opportunities for leverage. Lower margins enable you to take more significant positions, which increases your chances of turning in a profit.
- Hedging: Large institutions use e-mini futures to hedge against their stock positions. Since stocks tend to move in the same direction as the index, they can use futures to offset any losses in their stock portfolio.
- Ease of access:Since trading is available almost 24×7, you can buy and sell according to the requirements of the situation and be on top of any international developments.
Disadvantages of trading emini futures
- Volatility: Global companies are also exposed to international events. If something happens in one corner of the globe, it will affect the fortunes of companies in the S&P 500. So traders in these futures will have to keep a close eye on international developments to stay on the winning side.
- Leverage: Thelow margins give you a higher advantage. But this leverage can be your undoing if you take significant positions and prices don’t move in the way you expect. In that case, you can make huge losses.
Trading in global derivatives in India
It is possible to trade in global derivatives in India through stock exchanges like the National Stock Exchange (NSE). You can do it through your broker, and there is no need for additional formalities.
Conclusion
The liquidity and convenience of e-mini S&P 500 futures make it attractive to investors. It’s the right way of getting exposure to international companies and a hedge against any changes in the fortunes of Indian instruments like equity. However, like all stock futures, you must guard against excessive leverage. It’s also useful to have a good understanding of international markets and developments. If you are wary of the risks involved in futures, you can always go in for the S&P emini options contracts. These require less risk since you have the choice of not exercising your right when prices don’t go your way.
