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E-Minis & ETFs
The Smart Profits Report: Issue #230
Tuesday, August 2, 2005
E-Minis & ETFs: “Trade” E-Minis With Less Risk Using ETFs
By Lee Lowell
The E-mini Futures on ETFs like the S&P 500 (ES) and the Nasdaq (NQ) have completely taken over as favorite vehicles for day traders and short-term swing traders.
It’s easy to see why: great movement, ease of entry and exit, completely electronic, and relatively low commissions.
It’s fun, exciting, and simple to trade. I didn’t say “simple to make a profit,” I said simple to trade. There’s a difference.
Easy to Trade, Harder to Profit
The smallest-tick movement on the S&P E-Mini (ES) is 1/4 of 1 point.
For example, as of this writing, the September S&P 500 E-Mini Future (ESU5) is trading at 1234.50. The next possible trade could be 1234.25 or 1234.75, 1/4 point either way.
That 1/4-point movement is the equivalent of $12.50. In the NQ E-Mini Futures, the smallest tick is 1/2-point and that equals $10. The current price of the September Nasdaq E-Mini Future (NQU5) is 1605.00 and the next trade could either be 1604.50 or 1605.50.
Those small dollar movements are enticing to many traders because they will try to scalp anywhere from a quarter-point to 1 point on many contracts, many times during the day. Sounds easy, but it isn’t for some. I’ve tried it and it never works for me. I put in my dues and realized that this was not the market for me.
How to Mirror E-Mini Performance With Increased Safety
For people who would like to get into the game of E-mini Futures trading, but are afraid of the size and dollar value, there are a few alternatives. The two most common ETFs (exchange traded funds) are the SPYs and QQQQs.
These two ETFs mimic the movement of the S&P 500 and the Nasdaq Composite Index throughout the day. ETFs trade just like stocks and can be bought and sold all day long in any amount of shares.
The good thing about ETFs is that you can figure out the equivalent amount of shares it takes to duplicate the E-mini Futures, and you don’t have to open up a separate futures trading account, as you would when trading E-mini futures.
You can trade ETFs right from your stock brokerage account. The current price for the SPY is $123.50 and the current price for the QQQQ is $39.40.
Based on the equivalent ratios, I calculated that 500 shares of the SPY equals 1 ES E-mini future, and 800 shares of the QQQQs equal 1 NQ E-mini Future. That’s a great thing because now you can tailor your trading size based on those ratios.
If you’re comfortable trading smaller amounts of shares, you now know that 250 SPYs would equal 1/2 of an ES E-mini future, or that 200 QQQQs would equal 1/4 of an NQ E-mini future. This way you’re not stuck just trading the E-minis, and you can lower your risk levels when you don’t feel as confident in your market bias.
I’ve also calculated the equivalent point ratios. Ten full ES points equals 1 full SPY dollar. For instance, if the ES were to move from 1234.50 to 1224.50 (10 points), the SPY would approximately move from 123.50 to 122.50. So if you were trading 1 ES E-mini future, that move of 10 points would equal $500, and the full dollar move in the SPY would also equal $500 if you were trading 500 shares.
For the NQ E-mini future, 40 full NQ points equals 1 full QQQQ dollar. A move in the NQ from 1605 to 1565 would equal $800 on 1 contract, as would a move in the QQQQ from 39.40 to 38.40, assuming you are trading 800 shares of the QQQQ.
E-minis and ETFs - Perfect for Options Traders
The last great thing about the E-mini Futures and ETFs is that many of them now have options associated with them. The QQQQs, SPYs, ES and NQ all have options trading available. This is a great thing because you can really tailor your risk/reward levels to an even greater degree - using LEAPS, covered calls, etc. - plus you get all the leverage associated with options trading.
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Today’s Smart Profits Cribsheet
- There are many more E-mini futures contracts and ETFs available other than the ones I’ve discussed here. One of my favorites is the $5 Mini Dow Futures and Options. These trade under the symbol of YM. The equivalent of the Mini Dow is the DIA. This is another ETF based on the movement of the Dow Jones Industrial Index.
- To get an idea of just how many other E-mini futures and ETFs are available, go to www.cme.com and www.amex.com to see the lists of other products offered. There’s probably one for almost every sector out there today and your choices are huge. Take a look. You’ll be pleasantly surprised.
- Log onto our handy Smart Profits Glossary if you’d like more information on any terms used in today’s report, like “ETFs” or “futures.”
Good Luck…
Lee
Related Articles:
- Index Options - A Billionaire’s Trading Tool Anyone Can Use
- Trading Index Options - Two Ways to Profit
- Deep-In-The-Money Covered Calls - How to Beat Stocks with Way Less Risk
