From the July/August 2013 issue of Futures Magazine • Subscribe!

Getting started with mini and micro contracts

Mini and micro contracts likely have done more to open the world of derivatives to retail traders than almost any other innovation. Still, some traders may wonder why they should bother with mini contracts when full-size contracts are available, and they have the capital needed to trade them. However, rather than seeing the mini contracts’ smaller size as a negative, many traders prefer to focus on that aspect as a positive.

Because derivatives, like futures and options, are based on contracts with set specifications, size does matter and is something exchanges have to balance closely. “In the beginning we had the S&P; it was $500 a point. That got too big and CME had to reduce [the multiplier] to $250, then started the E-mini S&P,” says Jeffrey Friedman, senior commodities broker at RJO Futures.

Traders quickly realized that the smaller contract size opened up a number of opportunities for both small or large, novice or experienced, traders.

Gaining experience

With mini and/or micro contracts available in products throughout the futures landscape and recently introduced in the stock options world, there are plenty of opportunities for new traders to learn the ropes without the risks associated with full-size contracts. 

Looking at the S&P 500 traded at CME Group, the full-size contract has a multiplier of $250 while the E-mini contract’s multiplier is $50. This smaller size offers newer traders two distinct opportunities. First, it means smaller traders can participate in the markets and not get completely wiped out by a single trade that goes against them; and second, it provides a lower risk environment for traders to gain experience and develop their strategies. “The beginner can get a lot more experience once he starts trading while he develops the methodology and discipline for trading,” Friedman says. 

Particularly, the smaller contracts allow newer traders to develop their risk control strategies while not getting wiped out in the process, says J.J. Kinahan, chief derivatives strategist at TD Ameritrade. “One of the things we stress in our education programs is that it’s not that difficult to become a bigger trader when you’ve had some success. What is difficult is to trade too big at the beginning and then try to ‘make it up’ with bigger trades later even though you’re struggling,” he says.

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