Equity index futures are very popular in the futures markets, and the E-mini S&P 500 future is one of the most widely traded equity futures contracts. They are about the most efficient, liquid, and cost-effective ways to gain market exposure to the U.S. broad stock market index.
Not only are the E-mini S&P 500 futures contracts cash-settled but they also provide fund managers and investors with a viable way to hedge their exposure in the U.S. stock market. The contracts are favorite for equity index futures traders. Through those contracts, international investors can gain access to the U.S. stock market without really owning the individual company stocks.
|E-mini S&P 500 Futures Contract Specifications|
$50 x S&P 500 Index
March, June, September, December
Sun - Fri 5:00p.m. - 4:00p.m. CT with a trading halt between 3:15p.m. - 3:30p.m. Maintenance period is Mon - Thurs 4:00p.m. - 5:00p.m.
Last Trading Day
Third Friday of Contract Month
What Is the S&P 500 Index?
Also known by its full name, Standard & Poor’s 500 Index, the S&P 500 is a stock market index for the U.S. stock market. It is a market-capitalization-weighted index that includes the 500 largest publicly traded companies in the U.S. market. The index is one of the most commonly followed equity indexes and is usually considered the best representation of the U.S. stock market.
First calculated in 1926 as a 90-stock index computed by the Standard Statistics Company, the index became Standard and Poor’s Index when Poor’s Publishing merged with Standard Statistics Company to form Standard & Poor’s in 1941. The Index was expanded to its current 500 companies and was renamed the S&P 500 Index in March 1957. Now, it is published and maintained by the S&P Dow Jones Indices LLC.
Since the S&P 500 is a capitalization-weighted index, companies with larger market capitalizations contribute more to the index. In fact, the 10 largest companies in the index account for about 21.8% of the performance of the index.
The index is popularly used as an indicator of the direction of the U.S. stock market. Many financial products that track the S&P 500 Index have been created, such as index funds, exchange-traded funds, and futures contracts, including the E-mini S&P 500 futures.
What Are E-mini S&P 500 Futures?
Futures are financial contracts that obligate the buyer to purchase, and the seller to sell, the underlying asset, such as a physical commodity or a financial instrument, at a predetermined future date and price. A futures contract specifies the quality and quantity of the underlying asset. It is standardized to facilitate trading on a futures exchange. While some futures contracts may be settled by physical delivery of the asset, others are settled in cash.
The S&P 500 futures is an equity index futures in which the underlying asset is the S&P 500 Index. It is a cash-settled contract in which the trading parties make or receive payment of the value of the underlying index product on a future date, at an already agreed pricing model.
The E-mini S&P 500 futures are a type of the S&P 500 futures, which trade only on the Globex electronic trading platform and are worth one-fifth of the value of the standard S&P 500 futures contract. Obviously, the ‘E’ in the E-mini stands for electronically traded, while the ‘mini’ stands for a fraction of the standard contract. There are E-mini contracts for a variety of other equity index futures, such as the Russell 2000, Nasdaq 100, and the S&P MidCap 400.
A Smaller Contract
The E-mini S&P 500 was introduced on September 9, 1997, as most small traders found the value of the standard S&P 500 contract to be too large for their trading capital. With the E-mini contracts, futures trading became accessible to more traders. Now, the E-mini S&P 500 futures have become the primary vehicle for trading the S&P 500 futures — its daily trading volume surpasses that of the standard S&P 500 futures contracts.
In 2015, the exchange developed a different way of determining the official closing value of the S&P 500 Index, known as the Basis Trade at Index Close (BTIC). BTIC enables market participants to trade the contracts at a basis to the official closing value of the index ahead of the actual cash market close. Later on, they launched the Trade at Cash Open (TACO), which allows a trader to execute a basis trade on E-mini S&P 500 futures relative to the day’s official cash index opening level, ahead of the market opening auction.
Why trade E-mini S&P 500 futures
Traders play the E-mini S&P 500 futures market for the following reasons:
Portfolio diversification: Fund managers and big investors always try to diversify their portfolio across many asset classes in order to reduce their risk exposure. The S&P E-mini futures present an easy way to invest in an already diversified stock derivative product.
Speculation: The great majority of the traders in the equity index futures market are there for speculative reasons, and the E-mini S&P 500 futures has the type of liquidity and volatility that appeal to both institutional and individual traders.
Hedging: Institutional investors and fund managers can use the S&P E-mini futures to hedge their exposure in the U.S. stock market. For example, an investor whose portfolio of stocks closely resembles the S&P 500 Index may use the equity futures market to hedge his portfolio. With its smaller investment size, the E-mini S&P 500 futures are often preferred by investors.
E-mini S&P 500 Trading Strategies
Being the most liquid of all futures contracts, the S&P 500 futures are liquid enough for most trading strategies. In addition, it’s a great market to trade, with a lot of good edges for both daytrading and swing trading systems.
We ourselves have a lot of trading strategies for this market. The strategy on the image above is just one of all our daytrading strategies, showing that there definitely is a lot to find on this market!
If you’re interested in getting edges for the S&P 500 futures market and many other markets, we recommend that you check out our unique edge membership!
How Does the E-mini S&P 500 futures trade?
As with other futures contracts and E-minis, the S&P 500 E-mini futures trade on a futures exchange. So, the contracts are standardized, and trading is highly regulated to prevent any of the trading parties from defaulting. In fact, buyers and sellers are not in direct contract with themselves, but rather, each party is in contract with the clearinghouse of the exchange.
Exchanges where E-mini S&P 500 futures contracts trade
The S&P 500 E-mini futures are offered on the Chicago Mercantile Exchange (CME) Group’s Globex electronic trading platform, so the contracts can be traded from any part of the world. The market is open from Sunday to Friday, 6:00 p.m. to 5:00 p.m. Eastern Time (ET) the next day, and there is an hour break each trading day. Fridays are the only exception, as the market closes by 5:00 p.m. ET to reopen by 6:00 p.m. on Sunday.
Margins and leverage
The minimum deposit required to carry a contract is known as the margin. The margin is of two versions: the initial margin and the maintenance margin. The initial margin is required at the time a contract is initiated — it is the minimum amount a trader must have with the exchange to be able to open the contract. On the CME Globex electronic marketplace, the initial margin for S&P E-mini futures can range from 3% to 20 % of the total worth of the contract.
The maintenance margin is the least amount a trader’s equity must not fall below if he is to continue carrying the contract. In other words, if the trade is making losses, the trader must not allow his account’s equity to fall below a certain minimum amount, which is referred to as the maintenance margin. For the E-mini S&P 500 futures, the maintenance margin is $6,300. If the equity is getting to the maintenance value, the trader will be required to make additional deposits (often called margin top-up or variation margin) to keep his equity above $6,300.
Since the S&P E-mini futures trade on margin, they are said to be a leveraged instrument. Leverage is the factor by which a trader’s capital can be multiplied to get the total worth of the contract (Leverage = total worth of contract/trader’s capital). So, if the total worth of the E-mini S&P 500 is $162,900 ($50 x 3258.00), for example, and the required margin is $6,300, the contract is leveraged by a factor of 25.86 ($162,900/$6,300 = 25.86).
In other words, the trader is able to carry the contract with less than 4% of the contract’s total worth and can potentially make close to 26 times as much profit or loss as he would have made when trading without any leverage.
One contract of CME’s E-mini S&P 500 futures (ES) is equivalent to $50 multiplied by the prevailing value of the S&P 500 Index, so it is one-fifth of the size of the standard S&P 500 futures contract. The price quotation is in the U.S. dollar and cents. The minimum price fluctuation is as follows:
- Outright transactions —25 index points, which is equal to $12.50 per contract
- Calendar spread —05 index points, equivalent to $2.50 per contract
- All other spread combinations (BTIC and TACO) —05 index points, which is equal to $2.50 per contract
In addition to the E-mini contract, the CME also offers micro E-mini S&P 500 futures contracts. One contract of the micro E-mini S&P 500 is equivalent to $5 multiplied by the value of the S&P 500 Index. So, the micro E-mini contract is one-tenth of the E-mini contract and one-fiftieth of the standard S&P 500 futures.
There are quarterly contracts of March, June, September, and December cycle listed for five consecutive quarters. Traders are allowed to hold a limited position size at any point in time. The rule says that a trader shall not carry more than 20,000 Standard S&P 500 futures contracts, or its equivalent, net long or net short in all contract months combined. So, an E-mini trader shall not carry more than 100,000 E-mini S&P 500 futures contracts (since it is one-fifth of the standard contract).
On the last day of trading, which is the third Friday of the contract month, trading terminates by 9:30 a.m. ET. BTIC trading terminates at 4:00 p.m. ET on the Thursday before the third Friday of the contract month, while TACO trading terminates at 9:30 a.m. ET on the Thursday preceding the third Friday of the contract month.
The final settlement of the E-mini S&P 500 futures contract is done with cash in accordance with the relevant rules of the exchange. Traders who have open positions in the contract at the time of termination of trading shall make payment to or receive payment from the clearinghouse in accordance with normal variation performance bond procedures based on a settlement price equal to the final settlement price.
At the end of every trading day, each trader’s profits or loss is credited or debited from his account. Any trader whose equity is falling below the maintenance margin is required to top up his account to be able to continue carrying the trade. The settlement is done every trading day until the contract expires. Depending on whether the trade is in profit or loss, at expiration, the trader shall pay or receive payment from the clearinghouse of the exchange.
How to start trading E-mini S&P 500 futures
All you need to start trading E-mini S&P 500 futures is to create an account with the exchange through a futures broker and deposit the required margin. You don’t need to have the full dollar worth of the contract to start since it’s a leveraged instrument. However, be cautious about futures trading — while it can easily make you money, you can also lose more than you invested.
S&P 500 Futures Seasonality
Here is a Seasonal Chart of the S&P-500 Futures Market:
The Factors That affect E-mini S&P 500 Futures
Many factors can directly or indirectly affect the S&P 500 Index and, consequently, influence the pricing of the S&P 500 E-mini futures. These are some of the major ones:
Trade policies: Trade policies of any type — whether favorable or unfavorable — can affect the stock market. Hence, whenever there is any news of any changes in trade policies, stock prices tend to be more volatile.
Political events: Serious geopolitical events, such as wars, elections, and referendums, can have huge effects on stock prices and consequently on the value of the S&P 500 Index.
Interest rate changes: Changes in the Fed’s rates also affect stock prices and the value of the S&P 500 Index
Value of the U.S. dollars: When the USD is falling, stock prices tend to rise and so does the index. Conversely, when the USD is rising, stock prices and the S&P 500 Index tend to decline.
The E-mini S&P 500 futures provides investors and fund managers with a way to diversify their stock portfolio, as well as hedge their exposure in the U.S. stock market. It also provides traders an opportunity to speculate on the direction of the stock market. Just as the name implies, the contract is traded electronically on the CME Globex platform.
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