If you love gap trading futures, then you’ll enjoy it even more with the mini futures.
There are several ways to trade the e-mini futures, but gap trading is the easiest method. However, before we talk about trading E-mini Dow futures and the Emini S&P500, we need to learn more about the mini futures.
What Is a Future?
Generally, a future is a derivative contract that obligates an investor to sell or purchase an asset at a predetermined price and date. Investors identify them by their expiration month; for instance, November gold future will expire in November.
A seller must sell, or a buyer has to purchase the asset at the predetermined date, irrespective of the market price when the contract expires.
These assets include financial instruments and even physical commodities. These contracts are used for trade speculation or hedging. When hedging, you’ll have to take a position opposite of your current trade, so when the price goes against you, you can help mitigate your loss.
What Are Mini Futures?
The mini futures, commonly known as Eminis, are electronically-traded contracts representing the size of the standard future.
The CME (Chicago Mercantile Exchanged introduced the mini futures in 1997. These E-minis gave investors an opportunity to access the futures market.
Like futures, mini-futures let investors hedge their bets. So you can also use them to speculate on the future prices of their underlying assets. When it was launched, it was based on the S&P 500 emini futures.
The CME set the first emini S&P 500 future at 20% of the price of the standard contracts.
The first contracts quickly gained popularity, resulting in the introduction of other assets. Currently, they cover a wide range of assets, including currencies, commodities, and indexes. Some popular indexes include the mini Dow Jones Industrial Average, S&P 500 future, Russell 2000, and Nasdaq 100.
Investors can also trade in a wide range of commodities, including copper, gold, soybeans, wheat, and Oil. But the Emini S&P is still the most traded mini futures on the planet. And since they’re traded electronically, you can hedge your positions 24 hours per day between Sundays and Fridays.
How Does It Differ From a Future?
Mini futures and futures are unique trading tools with lots of similarities. They both let you speculate or hedge on price movements, whether you’re trading commodities or indices.
Unlike the regular future, they have no margin calls. They offer leverage, which means you can pay for part of the contract while the issuer finances the remainder.
Plus, if the price of the contract changes by 1%, the mini future’s price will change abruptly. But it will depend on the kind of leverage introduced by the issuer.
Another difference is that the mini futures’ issuer offers a financial level. Remember, you’re not obligated to open a margin account, but there is a cost.
Unlike the standard futures, the mini futures come with a knock-out mechanism. This feature resembles a knock-out warrant, and it’s a percentage of its reference threshold. So when the price breaches the threshold, the eminis expire.
What Is the Attraction for the Investors?
Unlike the standard futures, the Eminis come with a stop loss mechanism or no margin call. This lets you implement all your strategies depending on how the asset price falls or rises. Therefore, you don’t need a significant investment, and the issuer caps your risk at your investment.
Some ways the mini futures can be attractive to investors include:
- You can purchase short emini futures to help hedge part of the risk of your portfolio.
- Instead of investing in a single company, you can diversify and get 5 mini futures at the same price. Basically, instead of purchasing shares worth $10,000, you can purchase five eminis for the same amount.
- You can speculate on the asset’s future price and limit your losses simultaneously using its stop-loss mechanism.