E-mini Index Futures 101

The Pattern Day Trading Rule, requiring active stock day traders to maintain a minimum capital requirement of $25,000.00 in their accounts, forced many traders to search for different instruments to day trade the market as a whole... the obvious solutions were the E-mini stock index futures. The Pattern Day Trading Rule does not apply to futures, allowing traders with far less money to actively day trade without penalty.

What are the E-mini futures? Where do they trade? How are they traded? What are the other main reasons why all traders should know more about them? This article will answer those questions and direct you to more information on these popular and highly liquid trading products.

E-mini index futures are electronically traded, futures contracts based on an underlying stock index. The "E" in the name stands for electronic, meaning trading does not take place in a trading pit, but rather trade is strictly electronic, meaning via the computer. The term "mini" refers to the contracts being smaller than the original pit traded contract. But don't let the term "mini" fool you into thinking that these are benign, boring trading vehicles. The E-mini market can be highly volatile, requiring traders to maintain the utmost in risk control. It is also the playground for the best traders on earth.

Let's look at several examples of E-mini index futures. There are are multiple E-mini contracts, but for our purposes, we will focus on what I consider the primary ones. These include the E-mini S&P 500 (ES), the Dow Jones Industrial Average E-mini contract (YM). Other major E-mini index futures are based on markets such as the NASDAQ 100 and the Russell 2000. But let's look at the first two based on the S&P 500 and the Dow.

The S&P 500 E-mini Index Futures (ES)

This is the granddaddy of all E-mini contracts. Most popular of the E-minis, the E-mini S&P 500 is based on the broad and deep S&P 500 stock index. Introduced in 1998 when the value of the full size S&P futures contract simply became too big for most traders to access, the E-mini S&P is traded on the Chicago Mercantile Exchange (CME) GLOBEX platform.

The value of the ES is calculated at 50 times the index price. For instance, right now the SP500 is 1348 therefore the value of one ES is $67,400.00.

But don't let these numbers discourage you into thinking you need hundreds of thousands of dollars just to trade the E-mini S&P 500 index futures contract. E-minis have very low margin requirements, sometimes as low as $500.00 for Day Trading. I will explain this further in subsequent articles, but for now I just wanted to mention it so it's understood that you don't need to put up anywhere close to the full value to participate in these markets.

The E-mini S&P 500, as well as the other E-minis, have a quarterly expiration cycle starting in March and including June, September and December. It trades per tick with 4 ticks to a point. (A tick is defined as the smallest movement of the contract) Each tick is worth $12.50, therefore the ES trades at $50.00 per full point.

The Dow Jones Industrial Average E-mini Index Futures (YM)

This contract is based on the world's most popular stock index: the Dow Jones Industrial Average or Dow 30. The Dow E-mini was traded at the Chicago Board Of Trade (CBOT) until last January when it migrated, due to a merger, to the Chicago Mercantile Exchange (CME) GLOBEX platform.

The Dow E-mini is valued at 5 times the index. For example, if the DJIA is 13,000 the value of the YM is $65,000.00. Just like the S&P 500 E-mini, traders need only to post a small margin to be able to trade; again sometimes as low as $500.00 for day trading. The YM trades in full points with each point being worth $5.00. The YM is often favored by newer traders due to this fact. A $5.00 per point move is far more forgiving than the ES's $50.00 per point swings.

From Stocks to E-minis

Trading the E-mini index futures has become a way of life for many traders. These futures are advantageous due to no Pattern Day Trading Rule, plenty of volatility, tight spreads between the bid/ask, the fact that they can be sold just as easily as bought plus low margin requirements allow almost any trader to participate. I barely scratched the surface on these fantastic trading products. Further articles will dig deeper into the actual trading process.

Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.