I. CME E-Mini Stock Index Futures: Section 3 of 4

Instead of trading shares, with E-mini stock index futures you are technically trading "contracts" - legal agreements to buy or sell a specific product, at a specific price, and before a specific expiration date. Typically, the most liquid stock index futures contracts are the ones with the nearest-term expiration dates.

If you do choose to hold them until expiration, E-minis are settled in cash. They are not redeemable for actual shares or stock certificates.

Taking a short E-mini position isn't quite the same as shorting stocks, because you don't borrow anything from your broker, nor are you paying interest on what you’ve borrowed. That’s because when you sell an E-mini stock index contract short, technically all you are doing is selling before you buy. In other words, you're agreeing to settle your short position in cash at some future date or offset (buy back) your position before expiration.

Futures traders have traditionally used performance bonds - good faith deposits - rather than buying or selling contracts at full cost. This is because many futures contracts are quite large. The practice is somewhat like buying a house with a small down payment.

Your initial good faith deposit can range from 5-20% of the total contract value, in contrast to stocks, where the margin is usually 50%. The amount required for each product varies, according to historical price volatility, current and anticipated market conditions, and other factors.

Note: CME sets initial performance bond levels, but your broker may require additional funds.

At the end of each trading day that your position remains open, your account is credited or debited based on that day's trading session. So you don't have to wait three business days to settle your trades, as you do with stocks.

If your account falls below a minimum maintenance level, you are required to add additional funds. Of course, if your position generates a gain, you can withdraw any excess funds from your account.

In addition, as the price and volatility of your position fluctuate, the performance bond your broker requires you to maintain may fluctuate as well.

Futures commissions are usually "round-turn" - you pay a single fee for entering and exiting your position, whereas you typically pay a separate commission on each side of the transaction when buying and selling a stock.

Since the initial capital requirement to trade E-mini stock index futures is relatively small compared to the contract's total value, you can achieve differentially higher returns and differentially higher losses, as compared to other investment vehicles. The power of leverage means that gains and losses may be multiples of your initial investment. Thus, as with other financial tools, there are risks associated with trading CME E-minis, including the potential for losses greater than your initial capital outlay.