What is Emini futures

What is E-mini futures

Origins of E-mini

E-mini are the most popular version of futures contracts that are traded on Chicago Mercantile Exchange (CME), they are smaller size replicas of major Indices that are traded on the same exchanges. The first E-mini futures were launched in September 1997 and today the E-mini product offerings have grown to include other popular equity indices like NASDAQ 100, Dow Jones, Russell 2000, Commodities like Gold, Silver, Copper and Crude. Even contracts on G7 currencies are available under E-mini FX.

The original standardized exchange traded S&P futures were introduced in 1982 on CME and options contracts followed in 1983. The contract size was fixed at 250-multiple of index value, meaning the futures and option products were formulated for institutional players and large traders. By mid-90s after a decade-long secular bull run the index value had risen substantially and the contract value was well above the $500,000 mark, making it difficult for smaller institutions, family trusts and retail individuals to participate in trading. The S & P 500 Index by that time had become the barometer for the US economy and a global benchmark for equity indices. 

Electronic trading had obtained global acceptance, with many exchanges around the world migrating from “pit-based open outcry” style to more efficient electronic and screen-based trading. CME launched the first E-mini S&P 500 futures on its electronic platform GLOBEX, and it became an instant hit. The first day of trading recorded a volume of 7000 contracts. Three years later the volumes were up at 80,000 contracts a day. And currently, the daily volume averages 2 million contracts. The E-mini S&P 500 futures volume on a daily basis is higher than the total futures volume of indices of the next 7 countries.

How to trade E-mini futures

The E-mini S&P 500 futures are 1/5 the size of standard main futures contracts on the S & P 500 index and traded electronically for nearly 24 hours a day, for 5 days a week on CME GLOBEX trading platform. The contracts are settled on a quarterly basis and trading months include March, June, September and December. One point change on S&P Index results in $50 gain or loss i.e. the E-mini has a 50x multiplier on index value. Therefore, the contract value would be a function of index price multiplied by 50.

E-mini S&P Futures contract value = Closing price * Lot size = $3900 * 50 = $195,000

The tick-size which is the minimum price change on contract is set at 0.25 of a point, meaning for every tick change, the futures could have a payoff of $12.50/tick.

The SPAN margin as per CME is kept at 5%, which brings initial margin obligation to $9,750. However, the day trading margin limits are different and set very low, usually ranging from 1 - 2%, which would further bring down the initial margin in the range of $1,950 to $3,900.

Some discount brokers also offer margin funding and credit lines, which in turn makes trading E-mini S&P 500 futures within the reach of the most marginal and risk averse retail traders. The broker supported margin credit reduces margin limits to under $1,000 in most cases. This not only makes E-mini futures most accessible but also the most liquid and heavily traded exchange-based equity derivative in the world. 

The E-mini are also listed on NSE India through NSE International Exchange. The E-mini was listed for trading in September 2011 under Liquidity Enhancement scheme (LES) by NSE International Exchange. The LES program enables clearing and settlement of E-mini in US dollar terms. Indian members of NSE and their clients are allowed to trade on this platform without any additional paperwork or permits. Also, there is no need to open any separate trading account or foreign currency margin account for this purpose.

Benefits of E-mini futures

  • Simplicity - Futures are less complicated financial instruments compared to other derivatives, especially options. 
  • Versatile - All strategies that can be applied to a standard contract can be deployed using E-mini futures.
  • International Exposure - The global acceptance of a US benchmark makes E-mini very liquid. The high amount of liquidity and turnover, along with constant exchange monitoring and diverse nature of market participants ensure that at no point in time can the futures prices be manipulated. 
  • Liquidity – Higher liquidity also brings in efficiency in trading, meaning the traders can exit a trade at minimal slippage cost.  
  • Lower margins – The smaller size of contract values, greatly reduces the upfront margin to be posted at the initial time of taking a trade. This helps even individual investors and small traders to hedge and speculate on their portfolios
  • Risk exposure – E-mini futures are based on the S & P 500 index, which is a global benchmark with wide varieties of exposure to all economic activity in almost all sectors. This makes investing or trading in indexes far less risky, than trading in individual stocks, where issues like corporate governance, taxation and dividends can affect overall value of stock on an overnight basis.
  • Hedging – Since E-mini futures are relatively cheaper to hold and trade, using them as hedging tools to protect investor portfolios makes hedging very cost effective and efficient. And since the E-mini futures on S&P 500 mirror the market move, they often become perfect hedge instruments to play around with option Greeks as well.

The success of the E-mini futures contract has been so overwhelming that CME decided to launch E-mini F&O contracts in commodities and forex as well. The FX trading in E-mini has been as stellar as equity indices futures. The instruments are widely used by traders and small and medium businesses with international markets alike.

The CME in 2019 decided to launch Micro E-mini, which are traded in 1/10 of the normal E-mini derivatives contract. Thus, making them even more accessible to individual investors and novice traders. The first month of listing and operations of Micro E-mini, the CME clocked 11.25 million contracts, making this the most successful product launch in history of financial derivatives. 

In addition to accessibility, the micros derive the same benefit of full-size E-mini; lower margin requirement, manageable tick size, no exchange management fees, long hours of trading window – almost 24 hours, liquidity and ability to convert micro into a full sized E-mini contract. Thus making E-mini the most popular, tax efficient and preferred instrument for large corporations, institutions, and small traders and retail investors to trade, hedge and manage international exposure through just one market instrument.