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Greetings, and welcome to this week's lesson.
Mini-contracts verses full size contracts
When it comes to trading mini-sized futures contracts, the average trader
immediately thinks of the Chicago Mercantile Exchange's (CME) eMini
markets. Rarely do traders think of mini gold, mini silver or mini corn.
But not too long ago, these markets dominated the small trader landscape.
For 135 years, 1868 - 2003, the MidAmerican Commodities Exchange (MidAm)
operated as the only commodities exchange for everyday traders. When it
was absorbed by the Chicago Board of Trade (CBOT) in 2003, the MidAm corn,
oat, soybean, wheat, cattle, hog, gold and silver contracts became known
as the CBOT mini contracts and virtually disappeared from the mainstream
trading landscape. The contracts have received little attention from
retail traders, even though they still have the ability to make
commodities trading accessible to everyone once again.
A Shift Toward the Minis
While larger exchanges such as the CBOT and the CME offered
commodity contracts with margins in the thousands of dollars, the MidAm
offered commodity contracts for as little as $100, making it the great
equalizer of commodities trading. In other words, the MidAm made
speculators with a small amount to invest feel comfortable with the risk
of futures trading. But although this exchange has dissolved, the
advantage of mini futures remains.
For example, in 2003, when the MidAm became a part of the CBOT, gold had
reached a low of $322. But between 2003 and 2008, gold shot up to the
$1,000 level, and oil broke through the $100 per barrel barrier. With this
increase in value and volatility, the margins for full-sized commodity
contracts practically tripled - mini contracts, however, remained at
reasonable levels.
For example, to trade one full-size gold commodities contract in 2008
would require a margin of $4,725, while a mini-gold contract margin would
only be $1,121, less than one-quarter of the price.
| Contract |
Exchange |
Symbol |
Margin |
| Corn |
CBOT |
C |
$1,350 |
| Dow Jones |
CBOT |
DJ |
$7,005 |
| Gold (Pit) |
COMEX |
GC |
$4,725 |
| Silver (Pit) |
COMEX |
SI
|
$6,075 |
| Soybeans |
CBOT |
S |
$2,970 |
| Wheat |
CBOT |
W |
$6,075 |
| Figure 1: Margins for full-sized futures
contracts |
| Contract |
Exchange |
Symbol |
Margin |
| Mini Corn |
CBOT |
YC |
$270 |
| Mini Dow Jones |
CBOT |
YM |
$3,503 |
| Mini Gold |
CBOT |
YG |
$1,121 |
| Mini Silver |
CBOT |
YI |
$810 |
| Mini Soybeans |
CBOT |
YK |
$594 |
| Mini Wheat |
CBOT |
YW |
$1,215 |
| Figure 2: Margins for mini futures contracts |
When there is inflationary pressure on global commodities, it becomes very
expensive for small speculators to even attempt to participate in,
much less profit from, highly volatile markets. As such, trading the mini-CBOT
contracts is the best way to get involved without making a huge capital
commitment.
Right before the MidAm was acquired by the CBOT, a common complaint about
the mini-contracts were the twin problems of slippage and liquidity.
However, the current CBOT mini-contracts trade in an electronic
marketplace instead of in the trading pit. This minimizes slippage and has
increased the market's liquidity by opening it up to traders from around
the world. This has made buy and sell prices more reliable and has
established a significant level of trading confidence in the
markets.
Drawbacks of Minis
Even though mini-CBOT contracts are less expensive than
full-sized contracts and have more liquidity than they did in the past,
they do have a few practical drawbacks.
In the past, mini hog and cattle contracts were regularly traded on the
MidAm, but they never really found an audience in the electronic markets
and promptly were eliminated as contract offerings. This same problem
found its way into the mini-option market. When the MidAm traded, the
mini-option market was a vital component in helping traders develop
effective risk management strategies around hedging. The switch to the
CBOT eliminated the mini-options market and limited traders to using
full-sized options to protect themselves.
The lack of an actively traded mini-options market, along with the limited
number of available trading orders in the electronic market can make
mini-trading difficult. Those who decide to trade in the mini-markets are
best off day trading, or actively managing their positions. The lack
of the good-'til-canceled (GTC) orders makes it difficult to open a
position and forget about it. This forces traders to put in their stop or
stop limit orders every day before the market opens if they hope to have
the protection that a stop or stop limit order can provide. The lack of
this GTC order type makes it difficult for any trader to confidently
hold positions overnight.
The following charts show that both the full size December corn
contract (first chart) and the mini corn (electronic) contract (second
chart) show basically the same chart patterns and trends.

The notable difference, of course, is the point value
between the two and the lower open interest in the mini contract. This
lower open interest is the cause of more slippage in the mini verses the
full size contract.

Not all mini contracts are less active than the full size
contract. For instance, the mini S&P 500 has more volume and open
interest than the full size S&P 500 contract. Reason being more
traders can afford to trade the mini with its margin requirement around
$4,500.00 verses the full S&P 500 being $22,500.00.


Conclusion
In spite of a lack of mini-options and GTC
orders, the sheer cost-effectiveness of mini contracts far outweighs the
disadvantages for many traders. The mini markets are simply the best way
to test out new strategies, try out different commodities and try out
futures trading with a smaller required investment.
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Hello Archie
I just read your note below, and
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Hope you are having a blessed
Monday.
warm regards,
Reiner Oeste
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---------------------------------------------
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Member
--------------------------------------
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Regards
David B.
-------------------------------------
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C
Australia
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