What are E-mini Futures?

Investors are comfortable with the trading techniques they know will help them diversify. Once they know they have achieved their profit goals from equities, they move to other asset classes that have the potential to offer significant profits. Derivatives is one of those asset classes.

Derivatives allow investors to diversify and earn hefty returns. However, these derivatives are known to be expensive, and for a retail investor who does not want to invest a hefty amount, they become inaccessible. E-mini futures were introduced to tackle this situation and to make derivatives accessible to small investors. This blog will detail everything about derivatives, especially futures contracts and a type of futures contract called E-Minis.

What are Financial Derivatives?

Derivatives are financial contracts that derive their value from an underlying asset such as stocks, commodities, currencies etc., and are set between two or more parties. Derivatives are usually in the form of a contract, where the investor is obligated to buy or sell the underlying asset at a specified price on a certain date in the future. Derivatives can be used to hedge a position, speculate on the directional movement of an underlying asset, or give leverage to holdings.

There are two major ways through which an investor can trade in derivatives:

  • Futures Contract: It is a standardised legal agreement between the buyer and the seller of the underlying asset. Under a futures contract, a predetermined quantity and price are agreed upon, payable at a specific future date. This contract remains legal until the time of expiry of the contract.
  • Options Contract:This kind of contract is generally permitted in top commodities wherein the trader has the right but not a legal obligation to buy/sell the underlying asset at a predetermined price. Such a contract helps investors to make a profit based on price fluctuations without buying/selling the underlying asset mentioned in the contract.

Now that you understand derivatives, futures contracts and how they differ from options contracts, read on to learn about emini futures.

What are e-mini futures?

E-mini futures are a type of futures contract that is a fraction of a corresponding and comparable futures contract value. All the emini futures contracts traded electronically are lower in their price when compared to the corresponding futures contract. The emini futures contracts are mainly traded on the Chicago Mercantile Exchange (CME). There are numerous types of emini futures contracts. However, these generally refer to the S&P 500 futures. Some other examples of e-mini futures contracts are S&P Midcap 400, Dow Jones futures, Russell 2000 etc.

Apart from stocks, as mentioned before, the Emini futures contracts are also available for other asset classes such as commodities and currencies. Furthermore, you can buy Emini futures contracts for other types of indices such as large-cap stocks, mid-cap stocks etc.

Understanding e-mini futures: How do e-mini futures work?

The e-mini futures contracts were introduced in 1997 to allow non-professional traders to buy futures contracts. They accompanied a fraction of the price tag of traditional futures contracts that may seem expensive to small non-professional traders. If you want to trade futures contracts, you can do so through two options: stock futures or index futures. The index futures contains various stocks and create a risk-managed basket. These are the indices that are traded on the Chicago Mercantile Exchange and are known as Emini futures contracts.

Emini futures contracts are one-fifth of the value of the futures contract they correspond with. For example, if you have an Emini S&P 500 futures, their value is derived by multiplying the parent S&P 500 futures’ value by USD 50. If the value of the S&P 500 is 3,000, the value of the Emini futures contracts will be 1,50,000 (3000x50). This is how the Emini futures contracts are valued at one-fifth the value of the corresponding futures contract.

When you are trading the Emini futures contracts, you are betting on the value of the corresponding futures contract. For example, if you have bought Emini S&P 500 contracts, it will always mirror the performance of the S&P 500 futures. It means that if the S&P 500 futures go up in price, your Emini S&P 500 will also go up. However, the level will be five times lower than the original S&P 500 as the value of Emini S&P 500 is one-fifth.

Advantages of trading Emini futures

Here are the advantages of trading Emini futures:

  • Highly Liquid: Since Emini futures contracts are smaller in size than the traditional futures contracts, they are more liquid than any other type of futures contract. It means that you will have no problem selling them at any point as numerous buyers are waiting to buy the Emini futures.
  • Lower Margins: Every derivative contract requires you to have a margin amount with the stockbroker. As the Emini futures contracts are smaller in size, they have a lower margin requirement than traditional futures contracts. It can allow you to take more positions, increasing your profit potential.
  • International Exposure: By investing in international Emini futures contracts, you are provided exposure to fundamentally strong foreign companies. For example, the best US companies are added to the S&P 500 index and investing in Emini S&P 500 can allow you to profit from the best companies in the world.
  • Inexpensive: Emini futures contracts such as Emini S&P 500 are one-fifth of the traditional S&P 500, making them five times less expensive than the traditional futures contract. It can allow you to invest in futures contracts without investing a hefty amount, reducing the overall risk.
  • Risk Profile: Emini futures contracts are primarily indices, meaning they invest in a basket of securities. It is far less risky than investing in an individual stock as if one stock falls in price, the rise in the price of other stock averages out the overall losses.
  • Hedging: You can use Emini futures contracts to hedge against your positions in the stock market. As stocks mirror the direction of the index, the Emini futures contracts can be used to offset your losses in your stock portfolio.

How to trade in Emini futures contracts in India?

Emini futures contracts are legal in India and are sold through the National Stock Exchange. If you are looking to buy Emini futures contracts, it is mandatory to have a derivative trading account with a stockbroker. IIFL allows you to open a derivatives trading account by following a few simple steps. You can visit the IIFL website or download the IIFL Markets app from the app store for opening the derivatives trading account. Once you have, you can effectively buy the Emini futures contracts without any further formalities.

Final Word

Trading in an Emini futures contract is fairly simple and comes with the safeguarding of the National Stock Exchange. You can consult your stockbroker anytime and understand the obligations that come with trading in Emini futures contracts, and make an informed decision. However, as Emini futures mostly track the U.S indices, you must have a basic understanding of the international market and be cautious about excessive leverage.

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Frequently Asked Questions Expand All

You do not need a hefty amount to trade in Emini futures. The E-Mini S&P 500 Future Continuous Contract is currently priced only at around $4,000, with the margin amount being lower as per the stockbroker.

Emini futures can be highly volatile as international events can trigger high price movements. Furthermore, as it is tough to understand the international market, it makes the trades risky for an Indian investor.

Emini futures can allow you to trade in futures at a fraction of the price of traditional futures contracts, allowing you to make profits without investing a hefty amount.