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Trading Mini Contracts As Opposed to Full Size

1-18-2004

This question popped up at the commodity forum and we thought the answer, provided by Brian Trout, was worth sharing.

Question:

Is it worthwhile for the newer, smaller trader to trade the mini contracts (corn, wheat, soybeans, gold, silver)? Or are you best sticking with the big ones? Can you make any money with the mini's?

Answer:

Nothing wrong with a mini contract in and of itself, but you may want to look at some of the particulars. What's the volume like? Many of the minis are pretty thin. Some, like the E-mini S&P or the mini Dow are very tradable with plenty of volume.

Also, consider the relationship between your expected move and what part of that move it takes to cover a commission. Commissions on mini contracts are generally the same price as a full sized contract.

Just as an example, let's say you pay $35/rt commission, all fees included. Now, let's say you're looking at trading a full sized corn contract. Your analysis says you can expect a $300 move, and for the sake of the example, let's say Corn indeed makes a $300 move for you. You've made $300 minus $35, or $265. Profit to cost ratio is about 7.5:1 Not too shabby.

Now, change to a mini contract. Instead of your Corn contract making you $300, you're now trading a mini contract, which is 1/5 the size. So instead of making $300, you've made $60. Profit to cost ratio is about 1.7:1

Yes, mini contracts can be traded. But a contract like Corn is not the place for the minis, in my opinion. It's like adding another hurdle for you to overcome, like there aren't enough already.

A market like the E-mini S&P is another animal altogether. The mini contract there brings trading into a range where a lot more traders can afford to trade. The margin on the full sized S&P contract is something on the order of about $20,000, way more than most traders out there have to trade. Volume is excellent and fills are fast. THAT'S the place for a mini contract, again, in my opinion.

There are a few markets that are not that high of margins for the full contracts. (Numbers from Refco, others may vary a bit...) Corn - $540, Sugar - $560, Bean Oil - $743, EuroDollar - $945, Wheat (CBOT) - $979

That being said, there are some people such as Tom Loge' who could probably help you to learn about some strategies such as the bull call spread or bear put spread that may offer the potential of some lower risk trades to help you build an account. I would truly think of that type of strategy before I'd head for the mini contracts in markets like Corn or Wheat, but again, just my opinion.

Thanks Brian. Great answer!

-Erich

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