Why Trade E-Mini Futures

Why have so many professional day traders have given up trading anywhere except the Chicago Mercantile Exchange (CME)


The S&P 500 e-mini contract is extremely liquid. It has a high degree of volume and trading action. A lot of volume means you can enter and exit very quickly, in as little as 1 second. When trading first began in 1997, the e-mini contract trading volume averaged 7,000 contracts / day. Today, it is not uncommon to see 3 to 4 million contracts trading daily.

This means that $15 to $20 Million dollars in contracts is traded daily. That is almost a half billion dollars a month.

Electronic Environment

The e-mini trades in a totally electronic environment. There are no Market Makers on the CME who might refuse to fill your trade like there are on the NYSE or NASDAQ. The CME book is FIFO (first in first out). That makes trading on the CME a level playing field for all traders, whether you are trading 1 contract or 100.

Round Trip Commission Structure

Commission for e-mini Futures is based upon “Round Trip” instead of in-and-out. The broker used by Delta generally charges less than $5.00 per completed trade. A round trip is either a contract buy then sell. Or sell then buy.

The Buy/Ask Spread

The spread is the difference between the Bid price (the highest price that a buyer is willing to pay for a contract) and the Ask price (the lowest price that a seller is willing to sell a contract for). With the E-Mini, the spread is just one “Tick” on the CME.

(The minimum price movement between the Bid and Ask is known as a Tick. The Emini S&P 500 trades in 25 cent increments. 1 Tick = 25 cents. 4 ticks = 1 point. If you gain 1 tick in your trade, the reward is $12.50, with 4 ticks = $50.

Compare a 1 tick — Bid / Ask spread that has no Market Maker with trading securities where the difference between the Bid and Ask can be significant, especially if quoted by a Market Maker who is making his living on the spread difference.)

Minimal Analysis to Track

Trading an e-mini Futures Contract means that you only have to watch 1 chart, the same chart, every day, day in and day out. Might you become a really proficient trader if you only had to watch 1 chart?

Stock traders generally watch a basket of stocks at the same time. That means they need to watch multiple charts, flipping the charts back and forth for fear of missing some action.

Minimal Fundamental Analysis

There is basically no research to do every evening. Remember, you’re trading all “500 stocks at once.” You won’t have to research this stock and that stock, worrying about pre-announcements, quarterly reporting, whisper numbers, and accounting minefields.

Just Two Price Action Conditions with Futures Traders

Option traders must be able to correctly handle 4 conditions in order to be consistently profitable: underlying price, strike price, volatility, and time decay. Option traders can be right and still lose on their trade because time was not on their side and the option expired worthless before they could profit. Futures traders are only concerned about 2 conditions: an advancing market or a declining market. Time decay is not an issue for Futures traders.

Favorable Margining

Margins are very favorable to Futures traders. You can trade 1 S&P 500 e-mini contract for as little as $400 / contract on margin. To trade stocks, at a minimum you’ll need to buy a lot of 100 shares. An average stock is $25/share, or $2500 to get in the door.

Day Trading Advantages for E-mini Futures

The SEC defines a day trade as a transaction that opened and closed within the same trading day. A “pattern day trader” is anyone who executes 4 or more day trades within a 5 day period.

In other financial instruments, to day trade, you must have in your brokerage account at least $25,000 (or your account will be frozen for 90 days if you are caught day trading.                                                                                                                                                                                                                                                                                                   Day trading Futures has no such restrictions. A brokerage account requires far less capital. Most Futures brokers allow you to open an account with just $2,500. This opens the trading Market to even small investors.

Short or Long Set Ups

You can trade the e-mini futures long (hoping the contracts will go up) and you can trade the futures short (hoping the contracts will go down). Lately, there have been bans put on short selling financial stocks, bans on naked short selling including the 1,000 top stocks, bans on short selling stocks that are less than $5, etc.

There are no restrictions on short selling e-mini Futures Contracts. Why? Because these are contracts, not shares of a particular stock. As traders, we want to take full advantage of the Market’s volatility. If we cannot short, then half of trading is lost to us. We have to wait until the Market swings back up in order to enter a trade. On days when the Market is down 200 points, that might be a long wait.

Trading short is especially important with a Bear Market. There are sharp up and down moves in the S&P, DOW, and NASDAQ, perhaps more so than ever before, giving traders ample opportunities throughout the day to profit. Now is not the time to be stopped by Short selling restrictions.

Saving Account Trade Timing Advantages

If you want to trade with an IRA or 401k account, once you exit a trade, you won’t have to wait for the trade to settle before you can use that same money for the next trade. One second after you exit your current trade, that same money is available to you for another trade. With stock trading, once you exit a trade, you may wait as long as 3 days for your money to settle before you can use that money to trade with again.

Long-term Capital Gains Status

Because you are trading Futures, rules that were originally intended for commodity trades also apply to e-mini Futures trades. There is a 60/40 split on taxes (US): 60% of your trade is considered long term (15% tax bracket) and 40% of your trade is considered short term (28% tax bracket). Compare this to stocks. If you hold stock less than 1 year, it is considered a short term trade. You must hold the stock for over a year in order to qualify for long term capital gains. With Futures, all your trading is broken down by the 60/40 rule, even if your average trade is 2 minutes.

At the end of the year, your Futures broker will send you a 1099-b. This is a 1 liner, a net number of all your trading, not each individual trade. Say you made $50,000. The 1099-b will show $50,000. That is all it shows. Now you can claim $30,000 as long term capital gains and $20,000 as short term (60/40 split).

Doing your taxes is much easier. Since your broker gives you the net entry, you will make just 1 entry on your tax return. If you trade stocks, you are required to identify every trade you made. If you are a day trader and trade multiple stocks, it can take hours to enter all those transactions. With Futures trading, you are done in a jiffy.

Market Action

Futures trade virtually 24/6. The only day you cannot trade Futures is Saturday. Many stocks do not trade off hours, and if they do, it is very light trading. The S&P 500 e-mini is traded all over the world. Depending upon the time of day, we can see heavy trading on the e-mini. For example, at 2:00am EST, the Japanese trade the e-mini. At 5:00am EST, the Europeans trade the e-mini. If you have insomnia or cats that get you up in the middle of the night to go out, e-mini trading is definitely for you.

One Exchange

Unlike stocks that may trade on different exchanges and have different Bid/Ask prices, there is only 1 exchange/1 book for e-mini Futures and that is on the CME. That means for e-mini Futures contracts, there is only one price – the posted price. With large cap stocks, they can trade on multiple exchanges, with each exchange offering a slightly different price.

Trade Fills

Your fills are guaranteed. If you are in a trade, for example, and the e-mini price goes through your offer, you get filled. No questions asked. This is a major problem for smaller Forex traders. You may be in a trade waiting to exit. You have an offer to sell. The Forex contract goes right by your price and does not fill you. Then you read in fine print on your Forex Brokers contract that they do not guarantee fills.

The CME Clearing House for trades acts as the guarantor to each of its clearing members, thus ensuring the integrity of all trades.

Automatic Rollover on Expiration

When contracts expire on the 3rd Friday of the contract month, they do not expire worthless. Your money rolls over to the new contract, unlike Options that expire worthless.