Four Ways Active Traders Can Use Micro Futures

At a Glance

  • With millions of contracts traded in their first week, active traders are seeing advantages of smaller-sized equity index contracts

On Sunday May 5, micro contracts in the four major U.S. stock indices began trading. The S&P 500, Nasdaq-100, Dow 30 and Russell 2000 are now available to trade in 1/10 increments relative to current E-mini contracts.

A key characteristic of the new product is that they are fungible with their existing E-mini counterparts. This means that an appropriate number of micro contracts can be used to offset a position in the E-mini contract.

It’s clear that the advantages these products offer have struck a chord with retail traders. In the first five days of trading, more than 2.6 million micros transactions took place. Here are a few things I plan on using the new contracts for:

1) Testing the waters: I have not traded all equity index contracts.

Up to this point much of my focus in equities has been on S&P 500 and Nasdaq. Now I plan on using the Dow and Russell micros to get a feel for those products without putting as much capital at risk.

2) Adjusting deltas: Active traders can adjust options positions during swings created by proximity to expiration or price movements.

Option traders often deal with the risk of deltas – the ratio of the changing price of an asset to the change in price of its derivative – changing beyond what you anticipated. This is not always a bad thing because it’s just as likely to happen in your favor as it is to your detriment.  A good use of the micro contracts will be to more precisely adjust deltas in times when a trader wants to stick with the options positions or to lock in some profits in moments of illiquidity in certain options.

3) Precisely size positions: The third way I plan to use these contracts is to more precisely size positions when adding or taking off.

If a trader has two contracts on and sees the market moving in a favorable direction the only previous option for taking profit was to sell either half or all of the position. With the micro contract a trader has theability to adjust risk and take profit far more precisely.

 4) Widen time frames: Often, traders can get stopped out of a position due to quick market moves only to see the market move in the direction they anticipated after they were flat. The micro contracts allows a trader to put in trades with longer horizons and do so with the ability to control risk.

These are four advantages to using micro futures, but there are others. With only a week of trading under their belt, it’s clear active traders are seeing the promise of a new risk management tool.

 

Jim Iuorio is managing director of TJM Institutional Services and a veteran futures and options trader. Jim has spent his career brokering futures and options trades for large institutional clients in equity indexes, interest rate products, commodities and foreign exchange. His recommendations to clients blend macro-economic themes with technical analysis.

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