S&P 500 mini futures

The S&P 500 mini is a highly followed and traded futures product. Because it is a mini futures contract, it is popular among smaller traders who cannot afford the risk of the full futures contract. It is also popular among bigger traders who want more flexibility by being able to purchase more contracts.

The Mini Contract

Mini contracts are similar to full futures contracts; however, they are worth a fifth of the value of the contract. Therefore, mini futures contracts have 20 percent of the profit and loss point value. In other words, buying five minis is the same as buying one full contact.

For every point the S&P 500 goes up or down, the contract will gain or lose $50 as opposed to $250 for the full contract. The margin requirements are as follows. For the E-mini S&P 500, the margin requirement to trade a single contract is $5,625. As for the full S&P 500 contract, the margin requirement to trade is $28,125. Notice that the margin requirement for the full contract is five times that of the mini (28,125/5,625=5).

The Risk

When you do the math and track the movements of the market on a daily basis, you are looking at a potentially very dangerous and risky trading vehicle. Just one full S&P 500 futures contract can swing, in terms of profit and loss, very easily, $2,500 a day, if not within the hour.

That's not all because futures contracts need to maintain a certain margin in the account at all times. If not, the account will have to be supplemented with additional money to make it whole to at least the level of the maintenance margin. The maintenance margin level for the E-mini S&P 500 is $4,500.

To understand, take, for example, the recent market collapse the second week of May 2010. That week is considered to have contained one of the most volatile trading days in market history. In one day, the index lost 36 points from open to close. That equates to a loss of just over 3%. That's not the end of the world, right? Well, imagine how that would fare in someone's future account that is being held on to. A 36-point loss equates to a full $9,000 loss in one day! For the mini, that would be a potential loss of $1,800.

That's not the worst of it because futures contracts are tracked for maintenance margin on an intraday basis. That means if the account started with the minimum initial margin in trading, the mini S&P 500, the account balance would fall to $3,825 by the end of the trading day. If not replenished to $5,625, the account would pay a penalty each week the margin call is not met with additional funds.

It gets riskier yet because, during the intraday, from open to low, the S&P 500 actually lost 99 points. During these hours, nearly an entire mini S&P 500 account would be lost. This kind of situation creates panic and problems of having to keep the margin level up during extreme market conditions.