E-mini

What Is an E-mini?

The term E-mini refers to an electronically-traded futures contract that is a negligible part of the size of a standard contract. E-minis are used to trade a variety of assets, like commodities and currencies, however the most regularly traded assets utilizing E-minis are indexes.

The Chicago Mercantile Exchange (CME) launched the first E-mini futures contract in 1997 to give individual investors, for whom standard contract sizes were often too expensive, access to the futures market. Like other futures contracts, E-minis are traded on the CME and other exchanges, and allow investors to hedge their bets or speculate on the price movements of the underlying asset.

Understanding E-minis

All futures are financial contracts that obligate the holder to buy or sell an asset, like a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset and are standardized to facilitate trading on a futures exchange. Some futures contracts might call for physical delivery of the asset, while others are settled in cash.

Futures contracts were typically simply accessible to institutional investors because of their size, which was often too large for small investors. The CME launched the first E-mini contract in 1997 to draw in average traders who were keen on partaking in this alternative investment. This first E-mini contract allowed traders to trade S&P 500 futures. Its value was set at one-fifth of the standard contract.

The E-mini immediately became a success and led to other comparative contracts. There are presently E-mini contracts that cover a variety of assets, including:

• Indexes: S&P 500, Dow Jones Industrial Average (DJIA), Nasdaq 100, S&P MidCap 400, and Russell 2000
• Commodities: Oil, wheat, corn, soybeans, gold, copper
• Currencies

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

Just like other futures contracts, traders can use a single E-mini contract to hedge or speculate on broad market moves. Because they are traded electronically, E-mini futures contracts trade very nearly 24 hours daily between Sunday and Friday. Investors are required to open an account with a brokerage firm to begin E-mini futures trading.

The CME delisted the standard-sized S&P 500 index futures and options (on which the E-mini contract was based) in September 2021. This contract was worth $250 times the value of the S&P 500 Index. So in the event that the index was 2,100, the contract would be worth $525,000.

E-minis versus Regular Futures

E-mini contracts aren't that vastly different than regular futures contracts. These smaller contracts additionally allow investors to hedge or speculate on price movements of the underlying asset, whether it's an index, commodity, or currency.

Accordingly, investors can achieve their trading strategies with E-minis, including spread trading. Also, E-minis are well known to the point that their trading volumes eclipse those of standard futures contracts.

E-mini S&P 500 Futures Contract Specifications

As noted above, the E-mini contract was created to be one-fifth of the size of the standard-sized contract. The contract size is the value of the contract based on the price of the futures contract times a contract-specific multiplier.

For instance, the E-mini S&P 500 has a contract size of $50 times the value of the S&P 500. Assuming that the S&P 500 trades at 2,580, the value of the contract is $129,000 ($50 x 2,580). This means that a 0.25 point change in the S&P 500 index has a monetary value of $12.50.

The E-mini S&P 500 trades under the Globex ticker ES. As noted above, it is available on the CME nearly 24/7 from Sunday to Friday, 6 p.m. to 5 p.m. ET with a temporary trading halt between 5 p.m. furthermore, 6 p.m. ET. Contracts are quarterly (March, June, September, December) and are listed for nine consecutive quarters as well as three extra December contract months.

IRS Form 6781 stipulates that any gains from futures contracts traded on a U.S. exchange, foreign currency contracts, dealer equities options, dealer securities futures contracts, or non-equity options contracts are taxed at a combination of the long-term and short-term capital gains rates. 60% is treated as long-term gain and 40% is treated as short-term gain regardless of the length of the contract.

Advantages and Disadvantages of E-minis

Advantages

E-minis are ideal trading instruments for active traders because they offer nonstop trading, low margin rates, volatility, liquidity, and greater affordability than standard contracts.

Another benefit is that the fees associated with trading E-minis are typically lower than those linked to the buying and selling of regular securities.

Disadvantages

Likewise with any financial instrument, E-minis additionally have their downsides. For example, because of their nonstop and electronic trading component, the price of E-minis can move very rapidly.

Another downfall to these alternative investments is their limited scope. The selection of available e-mini contracts can be limited and doesn't necessarily span as wide a variety of assets as, say, a exchange-traded fund (ETF) or mutual fund.