Micros: A New Way to Trade Futures Around Economic Reports

At a Glance

  • New Micro E-mini contracts add precision for trading around non-farm payrolls and FOMC releases.
  • Futures on the Dow, S&P 500, Nasdaq and Russell 2000 indexes are made more affordable to retail traders

Trading in and around popular economic reports like non-farm payrolls, GDP and Federal Reserve announcements is a hallmark of day-to-day market fundamentals.  For retail traders, making trades around the results of these reports is the execution point of a carefully planned strategy.

When it comes to equity indexes, that strategy is usually planned around the use of E-mini equity index contracts, some of the most liquid futures contracts on earth. They were revolutionary for smaller traders when introduced in 1997 – an electronically traded contract that is one-tenth the size of the original S&P futures. For 22 years, E-minis have been the most precise instrument to trade equity index futures.

One-Tenth The Size

That changed this week when CME Group launched Micro E-mini futures on four major indexes; S&P 500, Russell 2000, Nasdaq-100 and the Dow Jones Industrial Average. These contracts give traders another way to approach the scheduled economic reports that are so much a part of the market.

For example, in the S&P 500 E-mini futures contract, the tick value is $12.50. For each 0.25 (one tick) of movement, your profit or loss will fluctuate by $12.50, per contract.  With the Micro E-mini futures contract, your profit or loss will fluctuate by $1.25 per contract ($12.50/10).

Trading FOMC with Micros

Let’s use the example of trading an FOMC policy announcement.  These decisions come out at 1 pm Central Time.  Shortly before 1 p.m., an investor may decide to buy one E-mini S&P at 2935.00 and potentially exit five points higher at 2940.00.  That would be a profit of $50*5 = $250.  Alternatively, an investor could buy 10 Micro E-mini futures at that same 2935.00 price but instead of exiting the entire position at 2940.00 the opportunity presents itself to possibly scale out of the position by selling one micro at 2940.00 and nine more at each higher level (2941.00, 2942.00, etc.).  A trailing stop strategy can potentially be employed to realize an average profit five points higher while having no more capital at risk.

Why is this launch significant?  Because an active trader will be able to more precisely manage risk for less cash and less margin.  There also will be more opportunities to scale in and out of positions for the same amount of capital at risk.

Traders love  benchmark E-mini contracts because of the extremely high liquidity.  There is virtually no slippage.  While Micro E-mini futures won’t be at that level of liquidity right away, they are most assuredly a powerful new tool for traders.

And when it comes to the daily trickle of economic reports that often drive markets, even the most savvy traders can use all the tools they can get.

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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