The E-Mini S&P
As trading
technology rapidly evolves, there is a strong demand to learn more about the new
frontier of electronically traded vehicles. Marc Dupee, in consultation with
eminidaytrading.com, outlines the basics of the first, most active and perhaps
most accessible instruments out there, the E-mini S&P 500.
There is a great
deal of interest among traders
to
participate in movements of the broad market as represented by the S&P 500
index. 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, in many instances, 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 first electronically traded futures contract.
Introduced
in 1997, the E-mini S&P 500 contract provides a more cost-effective, and in
some cases, more efficient means of trading
the broad market. The contract is gaining in popularity among better-heeled
traders as well, because orders can be placed and matched electronically,
bypassing the obsolescing method of pit-based, open-outcry order fulfillment.
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 “bigâ€
contract. For example, if the underlying S&P 500 futures is 1400.00, then
one contract has a value of $70,000.
| “…orders can be placed and matched electronically, bypassing the obsolescing method of open-outcry order fulfillment.” |
With
the smaller contract value comes a more affordable margin requirement (i.e., a
performance bond requirement), usually in the area of $4,000-$5,000 per contract
at current market levels. So for every $4,000-$5,000 you have in your account with a
futures broker, you can control one e-mini contract with a value of $70,000. If
you do not plan to hold positions overnight and essentially “daytrade†the
E-mini, the margin requirement can be less. In some instances, brokerages may
permit $1,800 per contract to serve as margin on intraday plays.
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 position(s)
and specify that you deposit additional money to continue trading, an action
called a “margin call.” You can also lose all of your margin
(performance bond requirement)—