ES (E-mini SP 500)
I trade the E-mini S&P 500 exclusively. I find advantages in specializing in one market. For those who are not yet trading futures because they don't understand them, I hope this introduction will provide you with enough information and confidence to look seriously at trading the E-mini. Below I will give you basic information on the E-mini for the S&P 500 and the advantages I see trading this market.
BACKGROUND: The Chicago Mercantile Exchange (CME) introduced the S&P 500 futures contract in the Spring of 1982. The commodity ticker symbol for the "big" contract is SP. The drawback to SP was that it was expensive and out of the financial reach of most individual traders. It became the domain of institutions and large market players with deep pockets. In order to open up index futures trading to the individual traders, the CME created smaller sized future contracts called the E-mini in 1997. The current value of the E-mini contract is 1/5 the size of the big contract. The E-mini quickly became the fastest growing product in CME history, and the most popular equity index futures contract in the world. There are good reasons for this.
Whereas the big contract (SP) is traded by the old-fashioned open-outcry method on the trading floor, the new E-mini (ES) is traded electronically through CME's Globex system. When the E-mini S&P 500 was introduced, the big contract (SP) was valued at $500 times the index. Subsequently, the big contract was split 2:1 and a contract is now valued at $250 times the S&P index. The E-mini is valued at $50 times the S&P index.
What is a Future's Contract?: It is an agreement between a seller and a buyer to deliver and take delivery of a commodity at a specified future date. But in the case of the E-mini S&P 500 futures contract, the commodity is a portfolio of stocks (500) represented by a stock price index (the S&P 500). In practice, the delivery is a cash settlement of the difference between the original transaction price and the final price of the index at the termination of the contract. Rather than waiting for the end of the contract, however, the cash settlement occurs incrementally daily until the termination of the contract. The futures contract price corresponds to the underlying index, although it is not exactly the same. It can be higher or lower, but tracks closely enough to serve as a reasonable proxy.
The Value of the E-mini S&P Futures Contract: This can be calculated by multiplying ES' closing value by $50. As I write this, ES closed at 1091.50. Therefore, one ES contract is worth 1091.50 X $50 or $54,575. The important numbers for trading are: 1. How many ticks (minimum price fluctuation) are there in 1 point on the index? and 2. What is the value of a full point or a tick? For the big contract (SP), there are 10 ticks in a point, and each tick is worth $25, making a full point worth $250. For ES, there are 4 ticks in a point, and each tick is worth $12.50, making a full point worth $50. With my broker, a round trip trade with 1 contract costs about $3. So if I make one tick profit on a trade ($12.50), I cover the cost of the trade and make profit. If I make 5 points on a trade with 1 contract, my profit is 5 X $50 = $250 minus commission. Five contracts would have yielded a nice $1,250 profit! What are the margin requirements to trade ES?
Margin Requirements: This is what makes trading the E-mini's so appealing. The margin requirements vary from broker to broker, so I will give you my broker's margin requirements.
- Initial intraday margin: amount in your futures trading account needed to open a trade during the regular session ~ Margin Requirement per contract = $1,406
- Intraday maintenance margin: amount needed in trading account to maintain each contract ~ Margin Requirement per contract = $1,125
- Initial Overnight Margin: amount needed to carry each contract through the 16:15 closing of the day session ~ Margin Requirement per contract = $5,625
- Overnight Maintenance Margin: amount needed to maintain each contract that was held through the 16:15 close of the day session ~ Margin Requirement per contract = $4,500
As an example, if you have a $7,500 futures trading account, you can:
- Trade a maximum of 5 contracts during the day. ($7,500/$1,406 = 5.33)
- Avoid a margin call during the day (maintenance requirement) if your account doesn't fall below $5,625 (a coincidence that it is the same as the initial overnight margin requirement), and you are trading the maximum 5 contracts. ($1,125 x 5 = $5,625) This is not calculated at the close of the trade, but while the trade is active, and is based on the changing price.
- Carry 1 contract through the 16:15 close of the day session. You would need $11,250 to carry 2 contracts through as an initial overnight trade. ($5,625 x 2 = $11,250)
- Avoid a margin call on a 1 contract overnight trade if your account doesn't fall below $4,500.
A couple observations can be made from the facts just stated. First, you have tremendous leverage trading ES. Secondly, you are severely penalized if you carry a trade through the 16:15 regular session closing. This is basic information for those who trade ES already, but for those who are still considering it, I hope this is useful. I wish someone had made all this clear to me when I began trading the E-mini. A fear of the unknown kept me away from it.
Advantages: Why do I trade an E-mini?
- Minimal cash requirement to open a futures trading account.
- Highly leveraged trading vehicle (money can be made and lost fast!). The margin requirement are low. To day-trade stocks, a minimum $25,000 trading account is required.
- You can participate in broad market moves, with one trading decision (one chart to analyze) - instead of having to select individual stocks (analyzing many charts).
- No market research is necessary.
- You are on a level playing field when placing trades because of an around-the-clock electronic trading platform (Globex) that the E-mini is traded on. The full-size contract, SP, still uses the open outcry pit trading method, with inherent delays. For this reason, even large institutions and hedge funds trade the E-mini.
- Generally low commissions.
- High liquidity and therefore minimal slippage and tight bid/ask spread (1 tick)
- No up-tick rule for shorting,
- Beautiful charts to analyze. Even 1 minute charts reveal Elliott Wave patterns.
Exclusively Trading ES: Aside from my IRA, all my trading is done with ES. Why do I specialize?
- For me, there are advantages to specializing. There is the old saying that a generalist learns less and less about more and more, until he or she knows nothing about everything; and the specialist learns more and more about less and less, until he or she knows everything about nothing. Well, in this instance I think I get closer to learning more and more about something.
- I believe that markets have personalities. By getting to know one market intimately, you can feel when you are in synch with the market and when you're not. That's an edge.
- I like the way ES moves, and the charts it makes.
- By trading ES exclusively, I feel like I am part of an unfolding story that I am following closely. When I jump from stock to stock or index to index, I have to reanalyze charts and I feel I may be missing some subtleties when I'm jumping around.
- IMO, ES is the ideal trading vehicle. What more do I need?
Try MortiES' 30 day free trial.