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Mini Futures

2011-03-04 13:18:52

Mini futures are the truncated versions of large-sized stock index futures

contracts that are traded on the Chicago Mercantile Exchange (CME). They are

available for a broad range of indices, such as the S&P 500, Russell 2000 and

NASDAQ-100.

Electronically traded mini futures are called E-mini and were first introduced

on the CME in September 1997.

Mini futures are used by individual investors for participating and profiting

from the benchmark index. The margins required by these mini futures contracts

are significantly lower than that for normal stock index futures contracts. For

example, the margins required by a mini S&P 500 futures contract is about 20%

of that of the S&P 500 futures contracts.

How are Mini Futures Traded?

Mini futures contracts are agreements to buy or sell the cash value of the

specified index at a specified future date. These contracts are valued at 50

times the futures price. For example, if the mini futures price is at $100, the

value of the contract would be $5,000 (50 * 100).

The tick (also known as the minimum price movement) of the contract is 0.25 of

the index points. Like their larger counterpart, mini futures are settled in

cash and there is no delivery of the individual stocks.

Benefits of Mini Futures

The benefits of using mini futures are:

They can be used for hedging against unexpected market fluctuations.

Since electronic trading is followed for these mini futures, they can be

traded easily from any remote location at any time.

They are affordable, since an investor does not have to purchase an entire

stock index futures contract.

Investors do not need to maintain a high cash balance in their day trade

account to conduct day trading in an index.

Drawbacks of Mini Futures

Mini futures are dependent on fluctuations in the price of the shares indexed

in the related stock index. Therefore, these are prone to market volatility and

involve a high level of risk.

Moreover, an investor has access to 15 to 20 times the amount of cash they have

on hand. Thus, a trader can lose all the funds available to him/her quickly in

the absence of successful stop strategies.