Now, Futures in a Single-Serving Size
By DAN COLARUSSO
he E-mini future contract, tailored to the individual investor, is giving traders with modest capital a new way to speculate on stock indexes using leverage that magnifies their gains and losses.
The contracts are one-fifth the size of standard futures contracts and can be traded nearly 24 hours a day on the Globex electronic trading system of the Chicago Mercantile Exchange. The E-minis have become very popular with day traders — though the trimmed-down size has not eliminated the risk of using leverage in an unpredictable market.
"There's an allure of making leverage work for you," said Bill Bayer, a vice president at PTI Securities, a Chicago brokerage specializing in futures and options. "Some think they can use it to get it all and make a killing. They usually get themselves killed."
An E-mini contract for the Standard & Poor's 500-stock index costs as little as $3,938, compared with $19,688 for standard futures contracts, which are agreements to buy or sell a financial instrument or commodity at a particular price on a specific date. A one-point move in the underlying index changes the value of that E-mini by $50 and the standard one by $250. "You can't fall asleep at the wheel," Mr. Bayer said. "Whether it's $250 or $50 a point, you can still lose a lot of money."
Despite the risk, trading has soared on the four E-minis — the S.& P. 500, S.& P. Midcap 400, Nasdaq 100 and Russell 2000. Volume for the E-mini S.& P. 500 contract more than doubled, to 39.4 million contracts, from 2000 to 2001, making it the exchange's second-most-active contract after just five years; the E-mini Nasdaq 100 is third. (The Eurodollar futures contract is the most active.)
Like exchange-traded funds that let investors own shares based on the Nasdaq 100 index (often known by their stock symbol, QQQ) or the S.& P. 500 index, the E-mini futures are intended to appeal to people who want to play the broader market instead of trying to choose individual stocks. For many day traders, the leverage of the futures contracts is no small part of the allure.
"The leverage is amazing," said Mike Saul, a day trader in Manalapan, N.J. whose home office has six computers. "Even on choppy days, you can still make money trading the futures."
Because E-minis are traded electronically, costs are relatively low. "I pay roughly $5 per round trip," Mr. Saul said, referring to the purchase and sale of a contract. "So if I trade three contracts that move one point, I've made $150 minus $15 for commissions."
Doing that several times a day can be lucrative but dangerous. While Mr. Saul says he uses only "risk capital" to trade, others may not be so careful.
John Maloney of M & R Capital Management in New York, which does not use futures contracts, said: "The individual investor typically goes into futures to leverage a little bit of money into a lot of money. I think these things are absolute death for them. They don't get education or knowledge until after they get walloped."
Leverage has tripped up individual investors in the recent past. In the April 2000 market slide, for example, investors who had bought stock on margin, essentially borrowing from a broker to get a larger stock position, not only suffered individually but exacerbated the overall pressure on the market.
Leverage can be much greater in the futures market. Stock margin accounts require a deposit of 50 percent of the value of a position. By contrast, a futures buyer needs to deposit only a small fraction of the value of a contract, typically 10 percent or less.
"One of the risks is that futures don't require much margin," said Warren Naphtal, a money manager at P/E Investments in Boston, who has been trading E-minis for his clients since 1998. "You can take quite a bit of risk."
Mr. Bayer says clearing firms and brokers closely monitor contracts in futures accounts, in a process known as mark to market, to keep leverage under control. This is done extensively between 4:15 and 4:45 p.m., when trading on E-minis stops for the day.
To buy one E-mini S.& P. 500 contract worth $60,000, an investor could deposit $6,000 in her account — though the amount varies among brokers from the minimum $3,938 required by the exchange. If the index rises 20 points while she holds the E-mini, her account is credited $1,000. If the index falls 20 points, she must deposit additional funds with the broker to maintain the position. Otherwise, it is liquidated.
The larger danger would loom if the market made a sudden move, falling so far that the losses exceeded the total amount of the deposit. That is why many small traders prefer not to hold positions overnight. A political or financial shock in international markets could wipe out a trader's position while she sleeps.
The mercantile exchange has promoted E-minis through brokers and directly to investors through a campaign that has included full-page advertisements in newspapers and billboards along busy commuter routes. It has been careful to outline risks on its Web site, www.cme.com, stating: "A good rule of thumb is to use only funds that you can afford to lose without affecting your lifestyle. And only a portion of these should be devoted to any one trade." It adds, in boldface, "remember, you won't make money on every trade."
RICK REDDING, the exchange's managing director for equity products, said the daily mark-to-market process kept a lid on the danger that investors would get more leverage than they could handle. "It's a system of one-day exposure, not a situation like in equities," he said.
Institutional investors who trade E-minis to hedge positions in other products like stock baskets and standard futures have helped make the market more liquid, allowing individuals to get in and out of the market quickly. "One of the successes is that we have so many groups involved in trading these contracts," Mr. Redding said.
Fane Lozman, a former options and futures trader who is now chairman of ScanShift, a financial software business, said, "It shows the transition to a new type of market. In the old days, floor traders would use futures to hedge options positions. Now, anyone can hedge the QQQ with E-mini futures electronically and get filled instantly." |
