How Micro Futures Could Help Trade Around Earnings Season

At a Glance

  • Contracts one-tenth the size of the E-mini could enable more futures traders to hedge an upbeat or disappointing earnings report  
  • New product comes as participants look to capture higher moves in equity indexes.

Each quarter, earnings reports can be a make-or-break for many investors.  Upbeat reports and positive future guidance can push shares higher while an earnings miss and lower guidance can send shares plummeting. There are typically many surprises which can be positive or negative for an individual stock and, depending on its weighting or correlation to the overall market, can impact the entire market.

As the markets continue to push higher making new all-time highs, active traders may be searching for the best methodologies to either capture moves higher and/or hedge the 15 percent rise we have seen in the S&P 500 Index so far in 2019. And earnings season is just another factor of the overall market environment which includes many macro issues and geopolitical risks, such as the U.S.-China Trade War, the Fed, Brexit and slowing global growth, to name a few.

A Nimble Approach to Earnings

The newest product available from CME Group, Micro E-mini futures, launched on May 6.  These futures allow an active trader to participate in strategies to capture market moves or to hedge more precisely.  Micro E-mini futures are available on four major indices; S & P 500, Russell 2000, Nasdaq 100 and the Dow Jones Industrial Average, and can be completely hedged with the regular E-mini futures contracts  – but at one-tenth the size.  We covered more about their features in my post about trading these contracts around economic reports.

Since earnings season can be one of the largest and most volatile market moving periods of the year, Micro futures may be one of the most appropriate derivatives for an active trader to use to take advantage of these moves.

Because of the size of this product, a trader may have the opportunity to scale in and out of positions using less capital.  For example, a trader who may only be able to trade one E-mini contract due to cost and margin requirements can now trade ten Micro E-mini contracts for the same exposure.

Stocks That Move The Market

An example of how to use this contract for an earnings situation could be with AAPL.  Apple is obviously a market moving stock.  And, when reporting earnings or some other major announcement, it has the ability to move the needle on the overall market.  Rather than buying or selling stock in a company like AAPL, an investor could use the Micro E-mini Dow Jones contract, Nasdaq 100 contract or S&P 500 contract to take advantage of a market changing move in either direction.  If an active trader wanted to trade 100 shares of AAPL stock, the cost would be approximately $20,000.  The cost of using a Micro E-mini contract would be considerably less.

Though they have only begun trading, Micros are more than a typical new futures product. They allow more people to enter the market and those in the market to trade in new ways.  When you think about the impact of earnings on all futures market participants, Micros can behave as a field-leveler. Retail traders can place round the clock positions following a big earnings report, the same way traders of bigger contracts have been doing for years.  Earnings are a mainstay of market activity. They will move the market sooner or later. Having a new resource for trading around these frequent reports is a benefit to all futures traders.

Scott Bauer graduated with honors from the University of Illinois Business School, Urbana Champaign, in 1988 with a B.S. in Finance. Bauer began floor trading in 1991 and formed BOTTA Capital Management in 1995. Scott traded equity options, S&P options at CME and was employed by Goldman, Sachs & Co. as Vice-President, Equities Division. He is currently CEO of Prosper Trading Academy and appears regularly on CNBC, Bloomberg Financial and Fox Business as a guest commentator.

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