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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.