E-mini S&P 500: Definition, Trading, and Example

What Is the E-mini S&P 500?

The term E-mini S&P 500 refers to an electronically-traded futures and options contract on the Chicago Mercantile Exchange (CME). Launched by the CME in 1997, the E-mini S&P 500 is open to all investors. It allows them to hedge their bets or speculate on the price movements of the S&P 500 index. The contract is cash-settled and is priced at $50 times the value of the S&P 500. Its value is one-fifth of the now-delisted standard-sized S&P 500 futures contract.

Key Takeaways

  • The S&P 500 E-mini is a futures contract that is based on the S&P 500 index.
  • It was the first E-mini index futures contract launched by the CME in 1997.
  • The E-mini S&P 500 is priced at $50 times the value of the index.
  • It offers ease of trading, low volatility and margin rates, liquidity, as well as greater affordability
  • Investors and traders can use these contracts as a hedge or a way to speculate on the index's movement.

Understanding the E-mini S&P 500

The S&P 500 index tracks the 500 largest U.S. publicly traded companies by market value and is one of the most common benchmarks for the broader U.S. equity markets. Futures are financial contracts that obligate the trader to buy or sell an asset at a predetermined price by a set date. Futures contracts detail the quality and quantity of the underlying asset and are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash.

The CME developed a series of standard contracts that were typically only available to institutional investors. With more investors seeking alternative investment options, the exchange launched a smaller set of futures contracts called E-mini. They make futures trading accessible to a variety of traders, including retail investors.

E-mini contracts are traded on the CME and other international exchanges. They cover a variety of assets, including:

  • Indexes: S&P 500, Dow Jones Industrial Average (DJIA), Nasdaq 100, Russell 2000, FTSE 100, Hang Seng
  • Commodities: Oil, wheat, copper, gold, soybeans, natural gas, corn
  • Currencies: Euro

The contract size of an E-mini is the value of the contract based on the price of the futures contract times a contract-specific multiplier. The E-mini S&P 500 has a contract size of $50 times the value of the S&P 500. So if the S&P 500 is trading at 2,580, the value of the contract would be $129,000 ($50 x 2,580).

In order to trade E-minis, investors must open an account with a brokerage firm. As noted above, traders often use the E-mini S&P 500 to hedge their bets on the index or to speculate on movements. And because they offer round-the-clock trading, low volatility, margin rates, liquidity, and greater affordability, many active traders view the E-mini S&P 500 as an ideal trading instrument for the index.

The E-mini S&P 500 is the most actively traded E-mini contract in the world.

Special Considerations

All futures strategies are possible with E-minis, including spread trading. This is a strategy that investors and traders can use to speculate on financial markets. A spread is the difference between a buy and sell price. The smaller the spread, the cheaper the trade. Conversely, a larger difference between prices indicates a more expensive trade.

E-mini trading volumes eclipsed those of the standard contract when it was delisted, indicating the E-minis popularity among individual and institutional investors alike. Both favored the E-mini for its high liquidity and the ability to trade a substantial number of contracts.

The S&P 500 E-mini can move quickly, especially during high-impact news releases, so it's always recommended that traders have significantly more than the minimum required day trading margin in their account to help avoid margin calls or having positions liquidated by the broker.

Many traders suggest that only 1% to 2% of account equity should be risked on any single trade. In this case, the trader is risking $525. Therefore, if they want to keep the risk to 1% to 2% of their account balance, they should have at least $26,250 to $52,500 in their account ($525 x 50 and $525 x 100).

E-mini S&P 500 Contract Specifications

The E-mini S&P 500 trades on CME Globex under ticker ES. It has standardized specifications, which allows for easy trading. Electronic trading takes place between 6 p.m. Sunday and 5 p.m ET. Friday with a daily maintenance break between 5 p.m. and 6 p.m. ET.

Contracts are available quarterly with March, June, September, and December expiry dates. They are financially- or cash-settled contracts, which means traders receive a cash credit or debit based on the contract's settlement price. As such, the S&P index or stocks don't need to be delivered if the contract is held until expiration.

As mentioned in the previous section, the value of the contract is $50 x the S&P 500 index value. What matters to most traders is the minimum price fluctuation and tick value, as this is what determines profit or losses on the contract. The E-mini moves in 0.25 point increments, and each one of those increments equates to $12.50 on one contract. Therefore, a one-point move, which is four ticks, means $50 is gained or lost.

History of the E-mini S&P 500

The CME introduced the standard-sized stock index futures contract in 1982. This first contract was based on the S&P 500 and traded on the CME under the Globex ticker SP. The price for the full-sized contract was $250 times the value of the S&P 500. This means if the index value was 2,500, the contract was worth $250 times that amount, or $625,000.

This was great for large, institutional investors who used the standard contract as a hedge or a speculative tool. But the value of the full-sized S&P 500 contract was too large for most small traders, many of whom were interested in these contracts as alternative investments.

In response to this demand, the CME launched the first E-mini contract in September 1997. Like the standard-sized contract, the first E-mini was based on the S&P 500. Its value was one-fifth that of the full-sized contract.

Both contracts functioned in the same fashion. Investors and traders used them both for hedging and speculating. The E-mini just opened up the landscape for smaller investors to take part.

The daily settlement prices for the E-minis are essentially the same as those of the regular-sized contract, though they may differ slightly because of rounding. This means that a position with five E-mini S&P 500 futures contracts has the same financial value as one full-sized contract in the same contract month.

The CME delisted the standard- or full-sized contracts for S&P 500 futures and options in September 2021.

Example of an E-mini S&P 500 Trade

Let's assume that the S&P 500 is trading at 2,965 and a trader seeks a breakout above the 2,970 on the E-mini S&P 500 where a short-term resistance area has formed. They believe that if the price can break above that level, it will travel to 3,000.

When the price moves above 2,970, they purchase one contract. Assuming they get a price of 2,970.50, they place the following:

  • A stop loss at 2,960, resulting in a risk of 10.5 points. Each point is worth $50, so the risk to the trader is $525 ($50 x 10.5).
  • A limit order to sell at their target level of 3,000. If the target is reached, the profit is $1,475 ($50 x (3,000 - 2970.50).

The trader is not required to buy the full contract, which has a value of $148,525 ($50 x 2,970.50) at the time of purchase. They must instead only put up a margin. If the trader only holds onto the position for the day, they are only required to post a day trading margin. With some futures brokers, this can be as low as $400.

In this case, the trader could lose $525 on the trade, plus commissions, so if the margin is $400, the trader would want to have at least $925 plus the cost of commissions in their account.

How Does the E-mini S&P 500 Work?

The E-mini S&P 500 is a derivatives contract based on the S&P 500 index. It is open to any type of investor, including individual and institutional investors. The contract allows investors to hedge or speculate on the movement of the index. Contracts are priced at $50 times the value of the S&P 500 and are available quarterly. E-mini index futures are cash-settled, which means you receive a credit or debit rather than delivery of the underlying asset.

How Can I Trade E-mini S&P 500 Futures?

In order to trade E-mini S&P 500 futures, you must open an account with a brokerage firm. Once you do that, choose your trading strategy and monitor the market until the contract's expiration date.

What Is the Size of the E-mini S&P 500 Futures Contract?

E-mini S&P 500 futures contracts are valued at $50 times the S&P 500. So if the S&P is trading at 2,000, the contract value is $50 x 2,000, or $100,000.

Article Sources
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