Minis Provide Low-Cost Entry To Futures Market

By Noble DraKoln AAA

When it comes to trading mini-sized futures contracts, the average trader immediately thinks of the Chicago Mercantile Exchange's (CME) eMini markets. Rarely do traders think of mini gold, mini silver or mini corn. But not too long ago, these markets dominated the small trader landscape.

For 135 years, from 1868 to 2003, the MidAmerican Commodities Exchange (MidAm) operated as the only commodities exchange for everyday traders. When it was absorbed by the Chicago Board of Trade (CBOT) in 2003, the MidAm corn, oat, soybean, wheat, cattle, hog, gold and silver contracts became known as the CBOT mini contracts and virtually disappeared from the mainstream trading landscape. The contracts have received little attention from retail traders, even though they still have the ability to make commodities trading accessible to everyone once again. Read on to learn why you should consider adding these minis to your portfolio.

A Shift Toward the Minis
While larger exchanges such as the CBOT and the CME offered commodity contracts with margins in the thousands of dollars, the MidAm offered commodity contracts for as little as $100, making it the great equalizer of commodities trading. In other words, the MidAm made speculators with a small amount to invest feel comfortable with the risk of futures trading. But although this exchange has dissolved, the advantage of mini futures remains.

For example, in 2003, when the MidAm became a part of the CBOT, gold had reached a low of $322. But between 2003 and 2008, gold shot up to the $1,000 level and oil broke through the $100 per barrel barrier. With this increase in value and volatility, the margins for full-sized commodity contracts practically tripled - mini contracts, however, remained at reasonable levels.

For example, to trade one full-size gold commodities contract in 2008 would require a margin of $4,725, while a mini-gold contract margin would only be $1,121, less than one-quarter of the price.

Contract Exchange Symbol Margin
Corn CBOT C $1,350
Dow Jones CBOT DJ $7,005
Gold (Pit) COMEX GC $4,725
Silver (Pit) COMEX SI $6,075
Soybeans CBOT S $2,970
Wheat CBOT W $6,075
Figure 1: Margins for full-sized futures contracts
Contract Exchange Symbol Margin
Mini Corn CBOT YC $270
Mini Dow Jones CBOT YM $3,503
Mini Gold CBOT YG $1,121
Mini Silver CBOT YI $810
Mini Soybeans CBOT YK $594
Mini Wheat CBOT YW $1,215
Figure 2: Margins for mini futures contracts

When there is inflationary pressure on global commodities, it becomes very expensive for small speculators to even attempt to participate in, much less profit from, highly volatile markets. As such, trading the mini-CBOT contracts is the best way to get involved without making a huge capital commitment.

Right before the MidAm was acquired by the CBOT, a common complaint about the mini-contracts were the twin problems of slippage and liquidity. However, the current CBOT mini-contracts trade in an electronic marketplace instead of in the trading pit. This minimizes slippage and has increased the market's liquidity by opening it up to traders from around the world. This has made buy and sell prices more reliable and has established a significant level of trading confidence in the markets.

Drawbacks of Minis
Even though mini-CBOT contracts are less expensive than full-sized contracts and have more liquidity than they did in the past, they do have a few practical drawbacks.

In the past, mini hog and cattle contracts were regularly traded on the MidAm, but they never really found an audience in the electronic markets and promptly were eliminated as contract offerings. This same problem found its way into the mini-option market. When the MidAm traded, the mini-option market was a vital component in helping traders develop effective risk management strategies around hedging. The switch to the CBOT eliminated the mini-options market and limited traders to using full-sized options to protect themselves.

The lack of an actively traded mini-options market, along with the limited number of available trading orders in the electronic market can make mini-trading difficult. Those who decide to trade in the mini-markets are best off day trading, or actively managing their swing positions. The lack of the good-'til-canceled (GTC) orders makes it difficult to open a position and forget about it. This forces traders to put in their stop or stop limit orders every day before the market opens if they hope to have the protection that a stop or stop limit order can provide. The lack of this GTC order type makes it difficult for any trader to confidently hold positions overnight.

The Bottom Line
In spite of a lack of mini-options and GTC orders, the sheer cost-effectiveness of mini contracts far outweighs the disadvantages for many traders. The mini markets are simply the best way to test out new strategies, try out different commodities and try out futures trading with a smaller required investment.

comments powered by Disqus
Related Articles
  1. The Basics of Options Profitability
    Options & Futures

    The Basics of Options Profitability

  2. Want to Day Trade? Try Binary Options ...
    Options & Futures

    Want to Day Trade? Try Binary Options ...

  3. Curious About Stock Index Futures? Read ...
    Options & Futures

    Curious About Stock Index Futures? Read ...

  4. Selling Premium As Small Caps Play Catch ...
    Options & Futures

    Selling Premium As Small Caps Play Catch ...

  5. Three Ways to Profit Using Call Options
    Options & Futures

    Three Ways to Profit Using Call Options

Trading Center