How does e-minis work?

Question

Please give an example of how the pricing of an e-mini works. Let's just say we have 1 ES e-mini @ 1240 and the S&P goes to 1241. How much did the contract cost and now how much is it worth? Thanks for any help.

Answer 1

First, an e-mini is a futures contract. Minis are contracts that are on a smaller size than the "normal" contract. One type of e-mini is on the S&P 500.

The usual contract is for $250 times the index. The E-Mini is for $50.00 times the index.

The way that futures work is that you buy at one price. At the end of each day, the difference between the price of the contract and the price you have is calculated & money is moved into or out of your account. Let's look at an example:

If you bought the contract for 1240 and the contract price closes at 1241, then the difference is 1.00 -- so $50.00 (one point times fifty dollars) is moved into your margin account. Your contract is reissued with a contract price of 1241.

Contracts are priced at zero when you buy them (not counting transaction costs or the money you have to keep in your margni account). This is because the present value of your possible losses is equal to the present value of your possible gains.

The next day, the index drops and the new contract price is 1239. This is two points below your contract, so $100 is moved from your account (two points times $50). Your contract is rewritten with a price of 1239.

The next day is a great day, and the price moves up to 1250.50. This is 11.50 points above the contract price. That means that 11.50 times fifty dollars ($575) is moved into your account -- and the contract is rewritten so you now have a contract to buy at 1250.50.

Finally on expiration date, the change from the final day of trading is multiplied by $50 and that is taken from or added to your account.

Notice that I said "contract price" rather than "index value." They are not the same. The index value is determined by S&P. The contract price is the price that people agree to pay for the value of an index at a future date. This will be close to the index value -- but usually will only equal the index value at expiration.

Why is this? If I wanted to buy the index at a future date, I could either enter into a contract to do so -- or I could replicate it myself now. I could borrow enough money to buy the index now and agree to pay it back on the expiration date of the contract. This means that I borrow the current value of the index, but agree to pay back the current value of the index plus interest. So -- if the index value is now 1241, the contract price will usually be greater than that -- say 1255. These prices get closer together as the contract gets closer to expiration.