What are Mini Futures?
Mini futures are securities that allow you to make money in both upward and downward movements. If you have an idea of how a stock, index, commodity, or currency will perform, a Mini Future can give you leverage on your investment.
The leverage effect is made possible by the fact that when you trade a Mini Future, it requires less capital than if you were to buy the underlying asset directly. You can therefore benefit from the corresponding return that the underlying asset exhibits with less invested capital.
How do Mini Futures work?
A Mini Future can be divided into five components:
- Underlying asset
- Type of Mini Future
- Capital investment
- Financing level
- Stop-loss level
The performance of a Mini Future is linked to the performance of an underlying asset, such as a commodity, an index, or a stock.
Type of Mini Future
If you believe that the price of the underlying asset will rise, you can make money by buying a Mini Long. A Mini Long increases in value when the price of the underlying asset rises. If you believe that the price of an underlying asset will fall, you can make money by buying a Mini Short. A Mini Short increases in value when the price of the underlying asset falls.
Price of the Mini Future
The construction of a Mini Future can be compared to buying a house consisting of a down payment and a loan portion. The capital investment corresponds to the value of the Mini Future, and therefore its price. Several Mini Futures may be required to control an underlying asset. This is called parity or multiplier, and indicates how many "Minis" are required to control the underlying asset, such as a stock.
The loan portion of a Mini Future finances the difference between the capital investment and the price of the underlying asset, and is called the financing level. Just like a mortgage, you pay interest on the loan portion of the Mini Future. This interest is paid by an owner by raising the financing level every day with the prevailing interest rate. The financing of interest differs between a Mini Long and Mini Short and is regulated daily by the issuer. For a Mini Long, you pay interest on the financing level and for a Mini Short, you receive interest on the sum of the capital investment and the stock price. This can be likened to a credit balance with the issuer.
Stop loss level
With an investment in a Mini Future, you can never owe more money than you have invested. This is because the issuer has built in a stop-loss function that guarantees that the value of a Mini Future can never be negative. One can compare it to if the price of your house fell by the same amount as your down payment, the bank might have forcibly sold the house at that level so that you wouldn't owe any money if the house price continued to decline. In the same way, a Mini Future is "force-sold" if the stop-loss level is touched. The stop-loss level is variable, and the issuer establishes the current level each month based on the prevailing financing level (loan portion).
When can Mini Futures be a good investment option?
With Mini Futures, an investor can gain exposure to relatively inaccessible markets, such as commodities or currencies. Mini Future is also an excellent option when you want to protect or create leverage in an existing investment.
What risk does trading Mini Futures entail?
Trading Mini Futures involves high risk. The leverage effect works both ways, and you can lose your entire invested capital, but never more.
How do I trade Mini Futures?
You can trade Mini Futures through your bank or broker.