Micro E-Mini Futures Contract Explained

What is the Micro E-Mini Futures Contract?

Have you heard someone talking about a Micro E-mini futures contract, but have no idea what that is? If so, then keep reading, because I’m about to tell you exactly what they are.

In specific, the S&P 500 Micro E-mini futures contract is what we will discuss in this post. By the time you are done reading, you will have a better understanding about these derivatives.

The “Micros”, as they’re often called, were released in May of 2019 by the CME Group. These new derivatives made it possible for smaller accounts to trade futures. In this post, I am going to explain to you the benefits of trading micro e-mini futures. So let’s dig in!

micro e mini futures contract
Source: CME Group

Benefits of the Micro E-Mini Futures Contract

Firstly, their are multiple Micro futures contract uderlyings: S&P 500 (ticker: /MES), Nasdaq (ticker: /MNQ), Dow Jones (ticker: /MYM), Gold (ticker: /MGC), just to name a few. But we are going to focus on the index Micros; in specific, the S&P 500 Micro (ticker: /MES), because it is the most popular to trade.

So let’s jump right in!

The S&P 500 Micro E-mini futures contract is 1/10th the size of the “standard” E-mini S&P 500 futures contract (ticker: /ES). And the standard E-mini is 50x the index for one contract. What that means in English: Take whatever the S&P500 index value is (currently 3698) and multiply it by 50. This value is what you would pay to own just one contract of /ES. 

I should note: when you hear someone simply say “the E-mini”, or when they mention “S&P futures”, they are most likely referring to /ES.

e mini futures contract
Source: MarketWatch

Futures brokers give you leverage, so you would never ante up $184,900 (50 x 3698). Instead, you would use either day trading margin or initial margin for the buying power (margin) per contract. Every broker is a bit different, so check with them to find out what their margin requirements are. WARNING: The leverage is what makes futures trading VERY risky!

The Micro E-mini futures contract, however, is only 5x the index; 1/10 the size of /ES. And this is why they’re popular with smaller account traders, or less experienced traders. The contract size affects how much money can be gained or lost per trade. 

/ES Trading Example

 

Let’s revert back to the standard E-mini (/ES). If I buy one contract of /ES because I think S&P futures will rise in value, I will make or lose $50 per point. What I mean is: If /ES moves from 3698 to 3699, I will have gained $50. BUT!! If I am wrong, and /ES falls from 3698 to 3697, I will LOSE $50. “Just a measely 50 bucks”, you might be saying. Ya, maybe… but what if it drops 10 points? That would be $500 lost. Remember, it’s $50 PER POINT!

That per point value is simply derived from the equation of 50x the index. 

I will do another more in depth post on futures contracts to explain what all those numbers mean and how they’re determined later on. For now, let’s continue with the benefits of the Micro E-mini futures contract.

/MES Trading Example

If /ES per point value is $50, and if /MES (Micro E-mini S&P 500 futures contract) is 1/10th the size of /ES, then the per point value for /MES must be just $5 per contract. Right?… EXACTLY! And there is the main benefit in my opinion. 

Instead of risking $50 per point, you would be risking $5 per point when trading /MES. 

So using the same example as before: If I think the S&P futures will rise in value from 3698 to 3699, I could buy one /MES contract, and if I’m correct, I’d make $5 on the move. If I am wrong, however, and the index dropped from 3698 to 3697, I’d only lose $5 instead of $50. If the index crashed 10 points all the sudden, I’d only lose $50 instead of $500.

Of course, I’d personally have stop losses and take profit targets in place as well. But again, that’s for another post and discussion. 

Conclusion

As you can see, the main benefit to trading /MES and not /ES, in my opinion, is the fact its per point value on the losing side of a trade is less. This, however, does not completely negate risk mitigation. After all, money is money. Losing it SUCKS! Doesn’t matter if it’s $5 or $50… $50 or $500… any kind of losing is just never fun!

cautionWith all that said, and after I reiterate the fact that ANY KIND OF FUTURES TRADING IS VERY RISKY AND SHOULD NOT BE ATTEMPTED BY THE INEXPERIENCED… I will say that Micro E-mini futures trading can be a great way to get ones feet wet with trading futures, once they’re ready to go live after paper trading (simulated trading account with fake money). 

I still would NEVER take it lightly. The indexes can drop like a rock in a heartbeat. So that $5 per point can add up very quickly.

WARNING/DISCLAIMER: Investing and trading carry significant financial risks. I am not a licensed financial or investment adviser. Nothing on dumbmoneytrader.com should be considered financial or investment advice. Everything on dumbmoneytrader.com is for educational purposes only, and should NOT be considered advice. Consult a professional financial or investment adviser before making any financial decision. Never enter any investment or trade without consulting a professional and licensed financial or investment adviser. Never enter any investment or trade based on anything you read or see here on dumbmoneytrader.com.

 

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