Using Micro E-minis for a More Precise Hedge on a Portfolio
At 1/10th the size of their E-mini counterparts, Micro E-mini futures can be used as a tool to more precisely hedge a portfolio of any size. To understand the significance of these contracts, let’s take a look at the history of index futures markets.
The Big S&P 500 Contract
In 1982, CME Group launched the pit-traded S&P 500 futures contract. As popularity in this contract grew and markets stayed relatively bullish through the 80’s and 90’s, with it grew the size of the S&P 500 futures contract, so the size of the notional value of the contract priced out many traders looking for a hedging option. Into the mid 90’s the standard S&P 500 futures contract is now a roughly $800,000 notional value product, so if you don’t have at least $800,000, you couldn’t use the product to hedge.
Enter E-mini Futures
As a result of the massive barrier to entry in the S&P 500 Index futures, CME Group launched the E-mini S&P 500 futures contract in 1997 and other E-mini futures products were soon to follow. At the time of launch, the E-mini S&P 500 had a notional value of around $60–80,000, making it a more suitable product for individual traders and a more realistic product to use in a hedging strategy. Since then, with the S&P 500 continuing on a bullish trajectory, the notional value has increased up to $180,000. Just as back in 1997, the margin requirements for the E-mini contract have now become cost-prohibitive for many traders. As a hedging tool, the notional value of the E-mini S&P 500 is simply too high for many.
The Era of the Micro E-mini
In 2019, the Micro E-mini S&P, along with other major micro-sized index futures markets were introduced. This brought the notional value of the newest and smallest S&P 500 futures contract to about $17,000, once again making it a suitable hedging instrument. Micro E-mini futures include all levels of investors independent of portfolio size. At just 1/10th the size of E-mini contracts, Micro E-mini traders of all levels can now achieve a more precise hedge.
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