If you’re an individual investor,when it comes to futures contracts, size does matter. And under volatile market conditions, bigger is not necessarily better. Small contracts can mean more flexibility and risk control, which are major benefits when the market is erratic. Exchanges offer plenty of mini contract options that can help you boost your returns.
Perhaps the most popular small contract franchise is CME Group’s E-mini stock indexes, which are based on the S&P 500, the Nasdaq 100, and Dow Jones Industrial Average Index and have five quarterly contracts listed for trading. E-mini contracts are one-fifth the size of larger contracts (except for Dow futures that were originally offered by the Chicago Board of Trade and have had several alterations). The E-mini S&P 500 tick size is 0.25 point, or $12.50 per tick, the E-mini S&P MidCap 400 and E-mini Small Cap 600 tick size is 0.10 point, or $10 per tick. The E-mini Nasdaq 100 has the same tick size, 0.25 point, as the big Nasdaq futures. E-mini options spreads are also available on CME Globex. CME Group offered a very successful E-mini Russell 2000 contract until Russell Indexes signed an exclusive licensing agreement with the Intercontinental Exchange (ICE) to list all of its indexes. The mini Russell is now traded on ICE.
The daily settlement prices for the E-mini contracts are the same as the settlement prices for contract months of the regular-sized contracts. A position of five E-mini futures contracts is financially equivalent to a position of one regular-sized larger futures contract on the same side of the market in the same contract month.
“E-mini S&P is the best mini contract because of the liquidity. [It has] a ton of volume and that provides the liquidity. [It’s] easy in, easy out,” says Frank J. Cholly, senior market strategist for Lind Waldock (see “Lots of liquidity, no waiting”). “It allows traders to layer in a trade [and] it gives you that type of flexibility where you can average in a little easier. You do five minis before it equals one big contract in the S&Ps, so it offers you that flexibility. As the market starts to move in your direction, you don’t have to get out of everything all at once,” he adds.
The added flexibility is extremely important, especially for certain short-term trading strategies. If the size of your account allows you to safely trade only one or two big S&Ps at a time, it puts you at a disadvantage. Many short-term strategies call for you to take profits on a small move and then move your stop to break even. If you are trading 10 E-minis instead of two big S&Ps, you can lock in small profits and hang on to a couple of contracts for a breakout move.