Trading The E-Mini Nasdaq 100

January 6, 2003
Marc Dupee

Take advantage of
market volatility and your knowledge of tech by trading an index of the most
famous names. The E-mini Nasdaq 100 lets traders get in relatively cheaply on
one of the quickest futures contracts out there.

Following in the footsteps of the
wildly successful E-mini S&P contract — the fastest-growing contract in the
history of futures trading — the E-mini Nasdaq 100 contract is fast becoming
one of the most popular futures trading vehicles. Launched on June 21, 1999, the
E-mini Nasdaq 100 contract provides many of the desirable benefits and
profit-potential of the evolving technological frontier and new economy, yet at
a price and on a playing field level enough to be accessible to smaller traders.

The contract shares many of the
characteristics of the E-mini S&P futures contract, yet retains important
distinctions that make it an attractive trading vehicle. Like the other
electronic mini contracts, the E-mini Nasdaq 100 is based on and closely
tracks, a larger contract that trades in open outcry at the Chicago Mercantile
Exchange (CME), in this instance, the Nasdaq 100 futures. Foremost, the contract
is not based on the Nasdaq Composite, the index widely touted in the financial
media, but rather is based on the Nasdaq 100
(
NDX |
Quote |
Chart |
News |
PowerRating). Many traders new to the
contract fail to realize that the Nasdaq 100 does not track the Nasdaq Composite
and so they end up making errors. If you base your trades on the Nasdaq
Composite, a gauge of approximately 5000 stocks, you will not be watching the
right index.

The stocks underlying the Nasdaq-100
index are a much narrower gauge of tech-stock activity and reflect movement of
the biggest and best-known tech issues. Names such as Microsoft, Cisco, Intel,
Qualcomm and Oracle now dominate the Nasdaq 100 which is a modified market
capitalization weighted index, meaning limits on weightings are imposed to
prevent any one stock from excessively dominating the index.

Following are the leading 12 stocks on the Nadaq 100 arranged by weighting. It
pays to know these stocks and to know how they move since they
disproportionately influence the movement of the Nasdaq 100 index.

CSCO – 8.5%

MSFT – 7.5%

INTL – 7.1%

QCOM – 5.0%

ORCL – 4.5%

SUNW – 3.2%

JDSU – 3.0%

NXTL- 2.6%

DELL – 2.5%

WCOM – 2.2%

VRTS – 2.1%

AMAT – 2.0%

With the heavy weighting in Nasdaq big-cap stocks, it is sometimes possible to
determine market direction by following the movement of the leading names. Their movement alone usually influences the direction of the
Nasdaq 100 futures and the E-mini Nasdaq 100, which closely tracks the big
contract.

Big And Small

The E-mini contract is based on the
bigger Nasdaq 100 futures contract. The value of the big contract is calculated
by multiplying the current point value by $100. In the first four months of
2000, the big contract has fluctuated between $320,000 to $500,000. With a
margin requirement for the big contract of $37,000, market volatility in 2000
has meant that the contract has provided considerable bang for the buck.
Consider that on its biggest-range day ever on April 4, 2000, the contract’s
movement of over 515 points meant that the dollar value of the contract
fluctuated–from high to low–over $51,000 per contract (the average daily
dollar move is closer to $9,000).

The difference between the
“big” Nasdaq 100 futures contract and the E-mini is that the smaller
contract is one-fifth the size of the big contract. The E-mini contract lets traders in on this action but in a scaled-down way.
Like the one-fifth contract size, the margin is approximately 20% that of the big contract, or $7,500 instead of $37,500. Most brokers will allow
traders who do not take positions home overnight–who daytrade the contract–to
margin a contract with approximately $4,000.

Contract Basics

Like all futures contracts, E-Mini
Nasdaq 100 futures contracts are legally binding agreements to buy or sell the
cash value of some underlying instrument, in this case the Nasdaq 100 Index, at
a specific future date. If you are unclear about the difference between stocks
and futures, or for basic information on futures trading, spend some time
reading through the Futures
Trading 101 section. The contract trades in four months: March, June,
September and December.

The minimum price movement, or tick, of the E-mini Nasdaq 100 futures, is 0.50
index points or, $10 per contract. One full point is $20. If the futures
contract moves one tick, from 4100.50 to 4101.50, a long (buying) position would
be credited $20 and a short (selling) position would be debited $20. The
contract sometimes moves 45 points ($900 on the E-mini) in five minutes, so
large gains and losses can stack up quickly.

All contracts are settled in cash, meaning you will never take delivery of, or
be expected to deliver, any component stocks on the Nasdaq 100 Index once a
contract expires.

Similar to all futures trading,
accounts are “marked to market” daily such that any point-change in
the contract is reflected in your account and you are credited any gains, or are liable for any losses, at the end of each
trading day. Additional deposits into the margin account may be required beyond
the initial balance if a position should move against you and the
“maintenance margin” or performance bond drops below the required
level.

One of the benefits — leveling the playing field — with the E-mini Nasdaq 100 is the
“E” or electronic part of the contract. Orders of fewer than 30
contracts are routed, matched, filled and confirmed through Globex2, a pit-less
trading arena. Trades are matched electronically by time and priority, meaning
that the first order in at the best price gets filled first. An algorithm exists
that lets some smaller orders get filled before the largest orders at the same
price and time, enhancing fairness to small traders during thin trading
periods. Electronic matching eliminates many of the inefficiencies that result
from open outcry. Trades are generally executed right at the market with fills
occurring as soon as your price is hit. Confirmations are routed back within
seconds to traders tied into the Globex2 system (check with your broker).
Similar to direct access trading software for stocks, systems tied into Globex2
allow traders to place standing orders electronically. Orders of 30 or more
contracts are filled during the open outcry session (only) on an all-or-none
basis.

Another virtue of the contract is that it trades electronically practically 24
hours a day, from 3:30 PM until 3:15 PM (Chicago time) the following day.
Trading halts on weekends, stopping at 3:15 PM Friday and resuming again at 5:30
PM on Sunday.

Benefits Of Trading The Contract

Several factors might play into making
the contract an attractive trading vehicle. CME Chairman Scott Gordon summed it
up this way: “With the E-mini Nasdaq 100 futures, investors can participate
with a single transaction in the growth of the hottest technology companies that
have taken the world by storm.”

Technology has indeed led the bull
market through the 1990s, and traders who rode the bull benefited. Dave Lerman,
Senior Director of Equity Index Products Marketing at the Chicago Mercantile
Exchange explained, “If you’ve been long for any significant amount of time
in the last two years, then you’ve made money. The Nasdaq 100 was up 101% in
1999 and 85% in 1998. It was hard not to make money unless you were a bad
scalper or unless you were in and out a hundred times a day. The contract charts
nicely–there have been so many nice moves, many of them 5% and 10% moves. The
contract comes into support nicely, digs in, and then pops back up. Every 10%
dip you bought in 1999, you made money.”

Some individuals find trading
individual stocks too difficult and time-consuming, yet they have a strong
conviction about the direction of the broad market and want to get involved.
With the Nasdaq 100 futures (and E-minis), you can easily (and cheaply) access
being exposed to the leading technology stocks without having to take individual
positions on a number of stocks.

In the same way, the advantage of just buying the index and not having to worry
about the risk associated with shocks stemming from surprise announcements such as missed earnings, provides protection from untoward,
adverse movements in individual issues.

While tech has been noteworthy for
staggering gains in 1998 and 1999, volatility and multiple
“corrections” have marked the year 2000. In 2000, Nasdaq 100
futures have triggered trading curbs on several occasions. Trading curbs limit
trading below a specified level for 10 minutes in order to give traders a chance
to reflect, and to prevent panic-selling from exacerbating downdrafts. Trading
curb levels are set quarterly. For the quarter beginning April 2000, the
percentage levels are calculated from the 4400 level, meaning a 2.2%, 110-point
move triggers the first 10-minute curb. A 5%, or 220-point move triggers the
next 10-minute period where trading is not permitted below the 220-point level,
and so on.

The benefit with the E-mini Nasdaq 100
in down markets–and with all futures contracts–is there is no “up-tick
rule.” This means that, unlike stocks trading, a trader does not have to
wait for a stock to trade up in a downdraft in order to establish a short
position. You can just as easily sell short and benefit from a decline in the
E-mini as you can with a long position in a rising market. Also, many traders
use futures contracts as a “hedge,” protecting long stocks portfolios
with short positions when the market “corrects,” without having to
liquidate sizeable long that they have earmarked for longer-term growth.

Approaches To
Trading

There are a variety of approaches to
trading this contract. Realize that the contract at times moves very quickly,
meaning you may have to establish wider stops to prevent getting prematurely
wiggled out. Whatever your approach, keep your eye on, and develop a feel for,
the movement of the 12 stocks that account for 50% of the movement in the Nasdaq
100 Index. Their movement alone generally influences the movement of the other
Nasdaq 100 stocks.

Many traders are having good success trading this contract using pivot points,
support and resistance levels calculated for you daily in the Futures
Indicators section on the TradingMarkets.com site. This straightforward
approach arithmetically determines a pivot point as well as two resistance and
two support levels. If the contract trades up through the pivot point, you buy
them and if they trade down through the pivot point, you sell them. The first
resistance (R1) becomes a price objective if you’ve bought them, and if they
break through R1, than R2 becomes the objective. The same approach is used on
downside trades with S1 and S2 serving as price objectives.

Many traders utilize momentum
approaches when trading technology stocks and the prevalence of momentum
strategies bleeds over into the tech futures. TradingMarkets.com’s proprietary
indicators for determining both upside and downside momentum are presented daily
on the Momentum-5
and the Implosion-5
lists. These lists apply to all of the major futures markets and have
consistently issued tradable signals, both up and down for the Nasdaq 100
futures, and by extension, the E-mini Nasdaq futures.

Also, watch closely and learn to
utilize the indicators from the Market
Bias Indicators Page, particularly the CVR signals. Signals taken together
from this page provide a strong indication of market turns and can get traders
in on explosive reversals.

Trading The E-Mini Nasdaq 100

BUY THE FEAR, SELL THE GREED

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