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CME Says Size Makes Micro-E-Mini Options Attractive

In this case, bigger is not necessarily better.

The Chicago Mercantile Exchange is now offering hedge funds, buysiders and active traders a new option, no pun intended, to trade with. The exchange will officially begin offering new options on Micro E-mini S&P 500 and Micro E-mini Nasdaq-100 Futures contracts, according to Tim McCourt, CME Group Global Head of Equity Index and Alternative Investment Products, discussing the contract in a conversation with Traders Magazine’s Editor John D’Antona Jr.

Tim McCourt, CME

Why offer yet another Micro E- Mini contract?

“Active traders who are looking for smaller contract size, as well as the buyside looking for a more precise way to allocate among its managed accounts or manage inflows and outflows have requested this,” McCourt explained. “Users had a need for smaller right-size contracts and exposure levels. This makes the Micro E-Mini a more approachable contract.”

Options on the new Micro E-mini S&P 500 and Micro E-mini Nasdaq-100 futures will be 1/10th the size of their E-mini options counterparts. The listing cycle for the new options will consist of five Friday weekly options, three end-of-month options and two quarterly options contracts.

“Offering Micro-sized options on futures on these two indices will provide our clients with even greater versatility to execute equity trading strategies, scale index exposure up or down or more precisely hedge existing equity portfolio positions,” McCourt said.

Micro E-mini futures were first launched last year for the S&P 500, Nasdaq-100, Russell 2000 and Dow Jones Industrial Averages and their success led CME to also introducing micro-sized options. Through June 10, 265 million cumulative contracts traded across all four indices – S&P 500, Nasdaq-100, Russell 2000 and Dow Jones Industrial Average – including 133 million Micro E-mini S&P 500 and 95 million Micro E-mini Nasdaq-100 futures contracts. Also, 954,000 contracts trade across all four products on average each day.

Micro E-mini Equity options will be listed by and subject to the rules of CME. Their final approval for usage is slated for Fall 2020, pending regulatory review. McCourt said that CME is still working on a few internal processes to enhance the contracts.

For comparison, he explained that classic E-Mini contracts using the S&P 500 as the underlying have a  $50 multiplier, while the May 2019 Micro-E-Mini S&P 500 contract is now $5, making it more affordable to trade.

“E-Minis have actually been around since the 1990s but the underlying index value has more than tripled – making the E-mini contract value go from $50,000 back then to $150,000 today,” McCourt said. “Taking into account the passive rise in asset values it has become more costly to trade. Without the Micro E-Mini, some participants would have to wait until they had accumulated $150,000 in assets to trade a single contract.”

So, CME appears to have taught an old dog a new trick. But will traders bite?

McCourt thinks so. By not only reducing the multiplier but also the amount of expirations – going to 10 maturities (five Friday expirys, three month-ends and two quarterlies – compared to other Micro E-Minis which can have up to 26 expirys, makes the contract a winner. This, he added, helps concentrate liquidity provision and helps traders digest the offerings – the sweet spot in terms of introducing the contracts.

“These new trading tools will build on the strength and liquidity of our Micro E-mini Equity futures contracts, which launched one year ago, and have rapidly become the most successful new product at CME Group,” he said. “More precision can provide additional control over the risk/reward ratio of an investor’s trading strategies.”