The History of Mini Contracts
Rise of the E-Mini S&P
Virtually everyone involved in the futures markets has heard of the iconic E-Mini S&P. Launched in September of 1997, it has had a stratospheric rise in popularity, and many new traders can’t even conceive what it must have been like before this popular contract.
Even before the E-Mini, or “ES” as so many now call it, there was only one open outcry S&P contact and it was large. $500 x the index led to a contract size over $500,000 and overnight margin was often over $20,000. It was a heavy hammer of a contract meant for the big boys of the market, but as a consequence of its growth it was made inaccessible to the countless other, smaller market participants.
The E-mini offered an accessible alternative to the large price and size of S&P contracts. This contract was 1/10 the size of its bigger sibling ($50 x the index) and it was traded electronically. The movement of the underlying index, coupled with affordable margins and cutting edge execution, made it an instant hit. The rest, as they say, is history. It is interesting to note that, eventually, even the larger S&P contract was cut in half to a $250 multiplier.
Mid-America Commodity Exchange
If many can’t imagine a world without the ES, what even fewer traders will likely recall is that there actually were mini contracts before the ES. In fact, there was an entire exchange dedicated to the trading of mini contracts. It was called the Mid-America Commodity Exchange (Mid-Am). From Markets Wiki:
“The exchange traces its roots back to 1868, and was incorporated as the Chicago Open Board of Trade in 1880, assuming the Mid-America name in 1972.
Mid-Am affiliated with the Chicago Board of Trade in 1986, but remained a separate legal entity and exchange. It merged with the Chicago Rice & Cotton Exchange in 1991.
The Mini-Contracts were one-fifth the size of those on other exchanges, and included wheat, corn, oats, soybeans, live cattle, live hogs, silver, gold, platinum, soybean meal futures, options on gold, foreign currencies and other derivatives. Volumes reached 2.4m contracts in 2000, ranking 37th among global exchanges.
Mid-Am, with lower membership prices than its bigger neighbors, the CBOT and CME, attracted newcomers to its trading floor, a number of whom became very successful (e.g., Richard Dennis and others) and went on to trade at other exchanges.”
In 2001, the CBOT dissolved the Mid-Am and took over many of its contracts.
Why trade the mini-contracts?
Now that we know the credibility of their history, let’s consider what makes mini contracts appealing.
In short, minis are a smaller sized contract that trades virtually the same as the regular contract. Since they are a fraction of the size, they require less margin. When trading the mini contract you are involved in the same underlying market and you experience virtually the same price movement as the regular contracts. However, your profit and loss reflects the smaller contract size. This provides you with accessibility and flexibility with your trading approach.
Perhaps more than anything else, trader’s need to address the following two things: Risk and Reward.
Risk and Reward
Asking yourself how much are you willing to risk compared to what you are attempting to gain will help you to decide if your trade idea would be better served by a mini contract. Traders need to find the proportionate balance that is comfortable to them. Remember, with less risk comes less reward. If you are comfortable with that, then the mini contract is something to explore.
When considering a particular trade idea, it is recommended that you do so in the context of your entire account. A good place to start is to ask these four questions:
- How big is the contract size? Would it be beneficial to use less capital via the mini-contract?
- What are the margins associated with that contract? Would the mini-contract be more prudent based on my account size?
- How volatile has this market been recently? Would the mini-contract give me the staying power to allow the trade idea to develop?
- What is my overall assessment of my risk vs. reward parameters? Would the mini-contract make me more comfortable being involved?
When to trade the mini-contract: The mini contract allows involvement in the markets through smaller contract size. Below are a few examples of times when the mini contract may be beneficial to you.
- You have a trade idea, but you are not comfortable with the risk of a regular contract.
- You are new to the market, but you would like to be involved.
- Margin requirements prohibit holding the contract overnight, but you want to be involved longer than a day trade.
- The regular contract is just too big for your account, but you like the trade idea.
- You have been paper trading for a while now, and you are ready to place real trades.
- You would like to place trades in a few different markets for diversification, but margins, account size and/or risk levels prohibit your thought process.
When trading the mini-contract, you are trading a fraction of the size of the regular contract. This allows you to take your initial trade idea and enter the market on a smaller scale. Then, you can re-evaluate your thought process as the trade develops. If the market moves in your favor, you now have three choices moving forward:
- Take profits (relative to contract size)
- Add contracts on to your position (cost averaging)
- Hold on to your position to see further market price action.
Conversely, if the market moves against you, you have three similar courses of action:
- Take the loss (relative to contract size)
- If you still like the idea, you can add contracts on to your position (cost averaging)
- Hold for further developments.
When you add or remove contracts to your position while the market moves either for or against you, it is termed “scaling in” and “scaling out” of your position.
You may use this less leveraged approach however you see fit. There are two primary thought processes regarding risk when trading the mini-contract.
First, you can give the market the same amount of room as you would if you were trading the regular contract, but obviously with less potential risk and less potential reward. Basically, you want the same room but with less potential risk. For example, you would like to risk a 1.00 move against you in the Crude market. Using the mini-Crude contract and a 1.00 stop, you would be risking $500.00 vs. $1,000.00 if you had used the standard contract.
Second, you can set your initial risk parameter in terms of capital and give the market more room to breathe with the same potential risk. For example, you would like to risk $500.00 on a trade in the Corn market. So, by using the mini-Corn contract, your stop will be 50 cents away vs. 10 cents away had you used the standard sized contract.
What started at the Mid-Am exchange and caught on with the E-Mini S&P has grown to an even wider array of mini contracts available to today’s trader. Here is a list of viable mini contracts for you to trade:
However you choose to use the mini-contract is ultimately up to you. Whether you are new to the markets, looking for a less leveraged approach to the markets during volatile times, or you just enjoy trading smaller contracts sizes, my opinion is that the mini-contract has many benefits for all types of traders and is something worth exploring.
Mini-POWER! – Webinar Archive
Watch this webinar to gain valuable insight into the increasingly popular mini-contracts. Discover what they are, contract sizes and how/when they can be used to potentially benefit your trading. As traders continue to flock to the mini-contracts, join us during this previously recorded event to explore mini-contracts and find out if they are right for you. Register now for immediate access.