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The new ‘micro’ crude oil contract was listed this week on the CME. So far so good it seems.
The micro is not a different style of futures contract from other futures. It simply refers to the contract size. They are smaller. The upside is smaller, downside is smaller, and comms are smaller.
A Bit of History:
It started with the mini. The emini S&P500 was introduced in 1997. It was a smaller dollar value than the regular S&P contract at the time. The big contract, which still trades today, is worth $250 per index point. Big bickies!
The emini is 1/5th that. It is worth $50 per point. For years after it came out, it was a great size for smaller traders. It was also hugely successful for the exchange and brokers – and it still is.
As the market grew however, the contract isn’t as small as it used to be, in volatility terms. While the tick size has not changed, the higher prices of indices means ranges are higher. The percent volatility could stay the same, but it’s the dollar value of that volatility that has increased.
Instead of changing the tick size of the contract, the exchange has introduced micros.
In 2009, micro FX hit the market. Only a few years ago, we saw micro S&P and micro contracts in other indices.
Now we have Crude Oil. A not so risky forecast is we will see other micro contracts introduced.
For private traders, they are exciting because they introduce a world of strategies and possibilities. They also allow trading with lower risk.
It is 1/10th of the regular size contract.
It’s a 100 barrel contract (v 1000 barrels).
For every dollar move in crude oil, the contract moves $100 ($1000 for the biggie).
The tick size is 1 cent. That’s worth $1 ($10 for the big contract).
The initial margin is $530.
Well first up, just for trading directional positions, it’s a great size for new traders. You can take a position and not risk a heck of a lot. The average range in crude oil now is about $1.80 per day.
For the big contract, that’s $1800, but for the micro, it’s only $180.
For scalpers such as those in our DOM Bootcamp, trading strategies such market making, averaging and highly active intraday trading, it is perfect. For those new to these strategies, moving from the simulator to a live account is far easier when it is not a big jump in risk.
The Spread Market:
Yes, there is an exchange spread market and so far liquidity in there is pretty good too. You will see fewer actual trades than the outright futures, but market making bots are keeping enough on the bid and ask to make it liquid enough for us.
For those spread traders, the smaller contract allows you to carry longer term positions without the big day to day risk. In our spread course, we look at various spread strategies we can apply to seasonal data.
So it works for both short and long term strategies.
For now, you are not going to see this one trading more than the big daddy. That’s fine though. It’ not the trades that provide the liquidity, it’s the bid/ask spread and bid/ask volume (aka depth).
The big ask spread in the big contract is very rarely not 1 tick. In the micro, it is ranging between 1 and 3 ticks. That’s OK. To be honest it’s small enough not to worry about.
The market depth is clearly showing market making bots are in there keeping the bid/ask tight enough. For as long as there is arbing against the big contract, that liquidity will remain.
Tips for traders:
OK, here are some ideas to get started or think about:
- Watch the full contract – both charts and DOM. Micro for execution only. The reason being is the big contract will is trading more often (for now). That means levels and other technical readings will be more reliable from the big contract.
- Work limit orders. There’s no need to pay up on the spread, but if you do it doesn’t matter given $1 per tick. While the market develops however, don’t feel the need to rush your execution.
- Watch deferred contracts as they develop (for spreading).
- Make sure your broker has reduced commissions for micros and SPAN margins.
Brokers & Comms
Your broker should be offering reduced commissions for all micro contracts. Rule of thumb is to look for less than one tick value in total commission. That’s for micros at least. For larger sized contracts, the proportion is far smaller.
Learn More About Scalping and Spreading?
Check my courses at MasterClassTrader.com. This market can be used in both the DOM Bootcamp and advanced spread course.
Check out the special page for a current bundled deal.
Also check out my new Telegram chat group subscription for spreader and scalps. The link is below. It’s a deliberately small group for active traders, all there talk about trades and help each other.
Coming up, well next month we have micros in the treasuries, which I think will be fantastic. We’ll talk more about it when they launch.
Until then, good trading.