E-Mini S&P 500 Basics

Introducing the E-Mini S&P 500

Although the TradeSavant product portfolio doesn’t focus on equities, there is one stock-based staple that has shown excellent returns. It is called the CME E-Mini S&P 500, which is 80% smaller than the standard S&P 500 Futures Index and costs far less for the individual investor.

The CME is the Chicago Mercantile Exchange, the world’s largest futures exchange, and the S&P 500 is the most actively traded stock index in the world. The mini contract is very affordable for retail traders, with very low day trade margin requirements and great volume action because it is traded exclusively on the CME’s electronic GLOBEX platform. It is a very attractive equity option for individual investors for the following reasons:

• The S&P 500 is the most closely watched, actively traded and liquid of all futures products based on a stock index.
• The contract costs are a fraction of the standard S&P 500 futures.
• Investors can hedge against other index products, a cost-efficient way to benefit from rising or falling equity markets.
• The CME guarantees customers against default due the confidence it has in its sophisticated risk management and surveillance procedures.
• The CME has more than 95% market share of all domestically traded stock index futures and options on futures. Open interest in the CME’s index complex totals exceeds $93 billion, making it the world’s most liquid trading environment for stock index products.

E-Mini S&P 500 Futures explained

Mini S&P 500 futures are legally binding agreements to buy or sell the cash value of the S&P 500 Index at a specific future date. The contract’s value is determined by multiplying the contract’s price by $50 (i.e., contract at $960 would mean $960 x $50 = $48,000).  The minimum rise/fall of price movement is called a ‘tick’, and each one is worth 0.25, or $12.50 per contract. Here is an example of how it would look in practice:

• Contract moves from $960 to $960.25
• A long (or buying) position would be credited $12.50 and a short (or selling) position would be debited $12.50
• Contracts expire at the end of trading on the third Friday of March, June, September and December and there is no delivery of individual stocks.
• There are daily cash settlements and quarterly expirations will use the exact same price as the S&P 500. The same daily settlement prices allow Mini contracts to benefit from the liquidity of the S&P 500 futures.

Taking a position

To take a position in an E-Mini contract you are required to put up a portion of the contract value. This amount is called “margin,” but it is not like the margin requirements in stock trading. It is actually a “performance bond,” that you agree to honor the terms of the contract by either offsetting it before expiration or making a cash settlement. The amount of the performance bond is specified by the CME. Currently it is about $5,625 per contract.

If the market moves against your position, you may be required to add additional funds to maintain necessary bond levels. Consult your broker for their rules on posting bonds (margin), and always be aware of your liabilities and obligations.

Futures Contracts

The E-Mini S&P 500 contracts are cash settled and there is no delivery of stocks or goods upon settlements. The contracts expire quarterly with the same price as the standard S&P 500 contract, and always on the third Friday of the month in March, June, September and December. Futures ticker symbols are created by combining the base symbol ES, the contract month and contract year. Month codes are:

H=March
M=June
U=September
Z=December

Example of investment scenario

You have been following the equities market closely and you feel we are in a rising market, but you only have $10,000 to invest and want to balance upside and risk. Picking individual stocks would limit you to one or two equities, giving you little or no ability to hedge against a bad investment. Mutual funds give you downside leverage, but you can only follow the net asset value at the end of each day. You lose significant opportunity to trade during the course of the day, significantly inhibiting your potential upside.

Enter the E-Mini. You could purchase one contract and go long to reflect your Bullish outlook using a vehicle previously out of reach of the individual investor. Until recently, S&P 500 futures would have 5x beyond your investment means. New E-Mini S&P 500 contracts allow you to put your investment dollars to work by purchasing Mini S&P 500 futures. Now you can participate in the leading stock index futures market at a fraction of the cost.