What Is the E-mini S&P 500?

An E-mini S&P 500 is 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 enables them to hedge their bets or speculate on the price moves 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.

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 a common benchmark used 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. They detail the quality and quantity of the underlying asset and are standardized for 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 smaller 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:

• Indexes: S&P 500, Dow Jones Industrial Average, 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).

To trade E-minis, investors must open an account with a brokerage firm. Because they can be traded almost round the clock and have low volatility, margin rates, liquidity, and greater affordability, many active traders view the E-mini S&P 500 as their preferred trading instrument for the index.

Most 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-mini's 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 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).

Specifics About the E-mini S&P 500 Contracts

The E-mini S&P 500 trades on CME Globex under ticker ES. It has standard 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 noted, 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 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 number, or $625,000.

This was aimed at large institutional investors who used the standard contract as a hedge or a speculative tool. However, 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 if they were affordable.

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 functioned the same. 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 were essentially the same as those of the regular-sized contract, though they differed slightly because of rounding. This meant a position with five E-mini S&P 500 futures contracts had the same financial value as one full-sized contract in the same contract month before the full-sized version ended in 2021.

Example of an E-mini S&P 500 Trade

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

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

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

You're not required to buy the full contract, valued at $148,525 ($50 × 2,970.50) at the time. Instead, you have to put up a margin. If you only hold the position for the day, you must only post a day-trading margin. With some futures brokers, this can be as low as $400. In this case, you could lose $525 on the trade plus commissions, so if the margin is $400, you would want to have at least $925 plus the cost of commissions in your account.

Pros and Cons of the E-mini S&P 500

The E-mini S&P 500's primary advantage lies in its affordability compared with now-defunct traditional S&P 500 contracts. The E-mini S&P 500 also offers market efficiency, which can lead to more accurate pricing and increased liquidity. In addition, it is very adaptable to different of investment strategies, and you can also use it to respond quickly to changing market conditions, making it an attractive choice for many.

On the flip side, the E-mini S&P 500 also carries certain risks that must be considered carefully. The same leverage that can significantly magnify gains can amplify losses. When the S&P 500 index's market value drops, investors face substantial financial setbacks. Therefore, despite its numerous advantages, the E-mini S&P 500 requires a comprehensive understanding of the market, calculated trading strategies, and careful risk management because of these inherent risks.

The Bottom Line

The E-mini S&P 500 boasts several advantages, including affordability, ease of trading, and liquidity. It's a potent tool for hedging and speculating on the S&P 500 index's movement. However, it's not without its downsides. The leverage that can magnify gains also has the potential to increase losses. Despite these risks, the E-mini S&P 500 remains an accessible and appealing investment option, offering a balance of benefits for informed investors.

Correction—Jan. 18, 2024: This article has been corrected to state that the E-mini S&P 500 is the most actively traded futures contract in the world.