Beginner's Guide To E-Mini Futures Contracts: E-Mini Characteristics
Certain characteristics help define the e-minis and make them attractive trading instruments.
Volume refers to the number of shares or contracts that are traded during a specified period of time. The average daily volume (ADV) is the number of shares or contracts that are traded, on average, during a particular time period. The e-mini S&P 500 is the world's most actively traded stock index futures contract, with over 2.2 million contracts traded on average per day. According to the CME Group's "Leading Products Q4 2011" publication, the average daily volume for e-minis during the last three months of 2011 included:
- ES = 2,594,450
- NQ = 279,373
- YM = 126,635
- EMD = 32,882
Figure 2 shows a comparison of the daily volume for the ES, NQ, TF and EMD. While the volume levels in the histogram may look similar across the contracts, note the actual volume figure in the bottom right corner of each chart. The ES dominates the volume with more than 2,000,000 contracts on certain days.
Figure 2: Price and Volume Charts
Market liquidity describes the ability to execute orders of any size quickly and efficiently without causing a substantial change in the price of a given instrument. Liquidity can be measured in terms of:
- Width - How tight is the bid-ask spread?
- Depth - How deep is the market (how many orders are resting beyond the best bid and best offer)?
- Immediacy - How quickly can a large market order be executed?
- Resiliency - How long does it take the market to bounce back after a large order is filled?
- Filled with minimal slippage
- Filled without substantially affecting price
SEE: Understanding Financial Liquidity
Volatility is a measurement of the amount and speed at which price moves up and down in a particular market. When a trading instrument experiences volatility, it provides opportunities for investors and traders to profit from the change in price - whether rising prices in an uptrend, or falling prices during a downtrend. Any change in price creates an opportunity to profit: it is difficult (if not impossible) to make a profit if the price remains the same.
Traders can use technical indicators to determine the average range in price over a specified period. One easy way to do this is to apply a standard moving average to a price chart (placing the moving average in the panel below the price panel works best). To find the average price movement over the last 10 trading days, for example, set the moving average length input to 10, and the Price input to High-Low (usually, the moving average uses Close - or the closing price - as the price input). This will calculate the average range (High-Low) over the last 10 trading sessions. Figure 3 shows this method applied to a daily chart of the TF.
Figure 3: Daily Chart TF
The average daily range is not static. We can see in Figure 3 that the TF traded with a higher range during December 2011, than throughout April of 2012. E-mini traders often keep an eye on this range to determine if their strategies are viable and appropriate for current market conditions. The average daily range of all of the e-minis is attractive to active traders hoping to exploit intraday price movements.
SEE: A Simplified Approach To Calculating Volatility
The e-minis trade virtually round the clock on all-electronic platforms. This is appealing to traders across time zones or who have obligations that would prevent them from trading during regular market hours (i.e. 9:30 am to 4:00 pm EST). Trading hours for the five primary e-mini index futures contracts are shown in Figure 4.
Figure 4: Exchange trading hours
Traders can gain exposure to the indexes without the financial commitment required to enter a position in a full-sized contract. The e-minis offer attractive margin rates, meaning that traders can enter positions with relatively small trading accounts. Different contracts have various margin rates, and these are adjusted frequently to reflect current volatility. The CME Group, for example, lowers margins in less volatile periods and increases margins during more volatile environments.
Initial margin is the margin that market participants must pay when initiating a position; maintenance margin is the level at which traders must maintain their margin over time. Depending on the margin requirement of the broker, one e-mini contract can be traded with as little as $500.
Long and Short Trades
Traders can enter long and short positions with equal ease in the e-mini markets. In a long position, a market participant buys to enter the trade, and sells to close the trade, hoping to profit as prices climb. In a short position, the trader sells to enter the trade and buys to close the trade, with the expectation that prices will fall. This means that the potential for profit exists in both rising and falling markets. While many investors and traders choose to only enter long positions, the e-minis are well suited for executing both long and short trades and profiting from any market moves. As long as there is volatility (changes in price), traders can theoretically make a profit.
SEE: Short Selling Tutorial Beginner's Guide To E-Mini Futures Contracts: E-Mini Specifications
A derivative that confers the right, but not the obligation, ...
A derivative contract through which two parties exchange financial ...
Making an investment to reduce the risk of adverse price movements ...
The movement of the price of a futures contract towards the spot ...
An auction market in which participants buy and sell commodity/future ...
The estimated volatility of a security's price.
A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>