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What Are Micro Futures and How Are They Traded?

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Micro futures offer a way for investors to engage with the broader stock market. These contracts are designed to be affordable for individual investors, providing access to futures trading on the major market indexes, which have become prohibitively expensive for many. We’ll review what micro futures are and how they function. If you’re considering incorporating futures into your investment strategy, consulting with a financial advisor can help ensure your approach aligns with your financial goals.

What Are Futures?

A futures contract is an agreement to buy or sell a specific asset at a predetermined price on a specified date. Let’s use oil, one of the most actively traded commodities, as an example. Suppose you enter into a contract to buy 100 barrels of oil at $75 per barrel, with a settlement date of June 1. This means that on June 1, you are obligated to purchase 100 barrels of crude oil at $75 per barrel from the contract seller.

Futures contracts can be settled in two ways:

  1. Physical Settlement: The buyer receives the actual asset — in this case, 100 barrels of oil. While this is rare for most traders, it’s common for businesses like refineries.
  2. Cash Settlement: Instead of delivering the asset, the buyer and seller settle the difference between the contract price ($75 per barrel) and the market price on the settlement date. If the price rises, the buyer profits by acquiring the oil at a below-market price. Conversely, if the price drops, the seller benefits by selling oil at an above-market price.

Many futures contracts involve intangible assets such as stocks, currencies and options. These contracts are typically settled on a cash basis. A common type of intangible futures contract is the index future.

What Are Index Futures?

An index future is a futures contract tied to a specific market index. While index futures can be created for any market index, the most commonly traded contracts are linked to major equity indexes, including:

Index futures are pegged to the value of their respective indexes and are priced using a multiplier. The contract’s value is calculated by multiplying the index price by the predetermined multiplier. Upon settlement, the market value of the contract is compared to its initial purchase price, determining the profit or loss.

For example, consider an index future tied to a technology sector index. If the multiplier is $10, and the index is priced at $200, the index future’s market value would be $2,000. If you purchased the contract at a price of $1,500, you would earn a $500 profit because the seller would be obligated to settle the $2,000 contract at the agreed $1,500 price.

Since index futures represent intangible assets — the value of a market index—they are always settled on a cash basis. This eliminates the need for physical delivery, streamlining the transaction process.

The Index Futures Problem

As noted above, index futures trading largely happens around the four major stock market indexes in the United States. The multipliers for a standard index futures contract on these markets are:

  • The S&P 500 – $250
  • The Dow Jones Industrial Average – $25
  • The NASDAQ 100 – $100
  • The Russell 2000 – $250

For example, take a standard index future against the S&P 500. Suppose the S&P 500 closes at 4,227. This means that the value of this contract would be $250 x 4,227, or $1,056,750. Any index future would trade around this number, since when the contract closes one party will owe the other the difference between their position and the contract’s value. If, say, you sold a contract for only $56,750, you would be virtually guaranteeing an approximately $1 million loss.

If the S&P 500 moves by one point, a standard index future changes value by $250.

Ultimately, this made index futures prohibitively expensive for most investors. The market steadily shut out even large-scale investors, since few traders are willing to invest in a product worth more than $1 million per asset. Small investors can’t afford that purchase, while large investors can make much more money buying smaller assets in greater volume.

E-Mini and Micro E-Mini Futures

Chicago Mercantile Exchange (CME), which launched E-Mini Futures and Micro E-Mini Futures. 

The CME Group solved this problem with E-Mini Futures and Micro E-Mini Futures. It launched E-Mini Index Futures in 1997. Despite its name, an E-Mini Future, which is predominantly traded on the Chicago Mercantile Exchange, is a standard index future contract. It works exactly like a regular contract, except the CME Group applies one-fifth the multiplier of a standard index. The multipliers on E-Mini futures are as follows:

  • The S&P 500 – $50
  • The Dow Jones Industrial Average – $5
  • The NASDAQ 100 – $20
  • The Russell 2000 – $50

How E-Mini Futures Work

Five E-Mini contracts give you the same value of one standard index contract.

To continue our example above, the S&P 500 closed at 4,227. The value of an E-Mini contract would be $211,350. If the S&P 500 moves by one point, an E-Mini contract changes by $50 in value.

An E-Mini contract is far more accessible, and far more liquid on the secondary market, than a standard index future. However, the value of the stock market has continued to soar since the late 90s. When the E-Mini was first introduced, a standard S&P 500 contract would have been valued at roughly $47,000 (the S&P 500 was valued at around 940 points). Today an E-Mini has roughly the same value that a standard index future had in 1997.

How Micro E-Mini Futures Work

To accommodate this reality, in 2019 the CME Group introduced a new category of contracts: the Micro E-Mini. Once again, these are standard index futures. At the end of the contract’s term, you settle on a cash basis, either paying or collecting the difference between the face value of the contract and its market value.

A Micro E-Mini uses a multiplier one-tenth that of an E-Mini, and one-fiftieth that of a standard index future. The multipliers for the Micro E-Minis are:

  • The S&P 500 – $5
  • The Dow Jones Industrial Average – $0.50
  • The NASDAQ 100 – $2
  • The Russell 2000 – $5

So, let’s again use the same example, wherein the S&P 500 closed at 4,227. The value of a Micro E-Mini contract would be $21,135. If the S&P 500 moves by one point, the value of the contract changes by $5.

This is a far more tradable product, particularly in the futures market where investors don’t necessarily have to stake all of their cash up front. If your end of the contract loses value, you only owe the difference in value. For example, say the S&P 500 dips by one point when your contract closes. You won’t owe $21,136 on a Micro E-Mini. You will owe $5. With a standard index future, you would owe $250.

How E-Mini and Micro E-Mini Futures Differ

This is the difference between these contracts. Their market value has gotten enormous, and to buy a futures contract you still need to stake a portion of the contract’s market value in order to buy it. However, in addition, the different levels of contract help to reduce the contract’s exposure to volatility.

Each contract on a standard index, an E-Mini and a Micro E-Mini, is exactly as volatile as the others. They are all based on the same fluctuations in the same index. However, when an index fund changes, the value of a Micro E-Mini changes by one-fiftieth that of a standard index contract. This reduces the amount of money you can potentially make, but it also reduces the amount you can potentially lose.

Bottom Line

Oil is one of the most actively traded commodities,

Micro E-Mini Futures and their corollary E-Mini Futures are a type of derivative known as futures. These particular kind of futures allow investors to trade against the stock market as a whole. They were invented to give reduced exposure to the four major U.S. market indexes. Keep in mind that these contracts are not forward contracts, which differ in several ways from futures contracts.

Tips on Investing

  • How much should you balance risk vs. reward? That’s the question at the heart of the index futures. A standard index future, if you can buy one, offers literally fifty times the upside, while a Micro E-Mini offers you one-fiftieth the losses. Making these decisions is difficult, but you don’t have to go it alone. SmartAsset’s matching tool can help you find a financial professional near you to help you choose between risk, reward and everything else. If you’re ready, get started now.
  • Use a free investment calculator to get a good estimate of how your portfolio will grow over time.

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