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Trading E-Mini Dow Futures


When trading futures, one popular method among traders is using E-mini Dow futures, a smaller but equally effective variant of standard Dow futures. E-mini Dow futures provide a direct, efficient way to gain exposure to the 30 blue-chip companies of the Dow Jones Industrial Average (DJIA) in a trading environment. This discussion explores the use of options on these futures, detailing contract sizes and illustrating with examples how options can be strategically used in trading.

E-Mini Dow Futures Trading Utilizing Options on Futures

E-mini Dow futures are a type of financial contract traded on the Chicago Mercantile Exchange (CME). Each contract represents a fraction of the full-sized Dow Jones Industrial Average futures contract. Specifically, the E-mini Dow futures contract is valued at $5 times the DJIA. Therefore, if the DJIA is trading at 30,000 points, the E-mini Dow contract would have a value of $150,000 (30,000 x $5).

The smaller size of E-mini Dow futures makes them accessible to a broader array of traders, including individual investors who might find the full-sized contracts too capital-intensive. This accessibility does not diminish their utility; E-mini Dow futures are a powerful tool for managing risk and speculating on the future values of the U.S. stock market’s leading blue-chip index.

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Options on E-Mini Dow Futures

Options on futures are derivatives that give the holder the right, but not the obligation, to buy or sell a specific futures contract at a predetermined price at a future date. These options come in two forms: calls and puts. A call option gives the holder the right to buy the underlying future, while a put option gives the right to sell it. These options provide additional leverage and flexibility, allowing traders to hedge positions or speculate on future movements with a predefined risk level.

The contract specifications for options on E-mini Dow futures are directly tied to the futures contracts. Each option contract corresponds to one E-mini Dow futures contract. Thus, with the DJIA at 30,000 points, an option would control an E-mini Dow future representing $150,000 in value.

Trading Strategies Using Options on E-Mini Dow Futures

To illustrate how options on E-mini Dow futures can be utilized, consider the following strategies:

  • Protective Put: This strategy involves buying a put option to hedge against potential declines in a long position in E-mini Dow futures. For instance, suppose a trader holds a long position in E-mini Dow futures with the DJIA at 30,000 points. Concerned about potential short-term declines but not wanting to liquidate their position, the trader could buy a put option with a strike price slightly below the current index level, say 29,500. This option acts as an insurance policy, limiting the downside risk if the market falls.
  • Covered Call: If a trader expects the market to remain stable or grow only marginally, they might sell a call option at a higher strike price while holding a long position in the futures contract. This strategy generates income through the premium received for selling the call, with the risk being limited to the difference between the futures price and the strike price of the call, minus the premium received.
  • Bull Call Spread: This involves buying a call option at a lower strike price and simultaneously selling another call option at a higher strike price. Both options have the same expiration date. This strategy can be used when a moderate rise in the market is expected. The profit is capped at the difference between the two strike prices, minus the net cost of entering the position.
  • Bear Put Spread: Conversely, if a decline in the market is anticipated, a trader could employ a bear put spread by buying a put option at a higher strike price and selling another put option at a lower strike price. This strategy limits both potential loss and gain, making it suitable for moderately bearish outlooks.

Practical Examples

Let’s consider practical examples to understand these strategies better:

  • Example 1 (Protective Put): With the DJIA at 30,000, a trader buys an E-mini Dow future and simultaneously purchases a put option with a strike price of 29,500 costing $500. If the DJIA drops to 28,000, the loss on the futures contract would be substantial, but the put option would increase in value, offsetting some of the losses.
  • Example 2 (Covered Call): A trader buys an E-mini Dow future with the DJIA at 30,000 and sells a call option with a strike price of 30,500, receiving a premium of $400. If the DJIA stays below 30,500, the trader keeps the premium, adding to any gains or offsetting any losses on the futures position. If the DJIA rises above 30,500, the gains on the futures are capped, but the premium received cushions the blow.

Options on E-mini Dow futures offer traders versatile tools for managing market exposure and leveraging investment positions. Whether for hedging, speculation, or income generation, these options can enhance trading strategies in various market conditions. By understanding and utilizing the strategies discussed, traders can better navigate the complexities of the futures markets and optimize their trading outcomes.

Ready to start trading futures? Call US 1(800)454-9572 – Int’l (310)859-9572 email and speak to one of our experienced, Series-3 licensed futures brokers and start your futures trading journey with today.

Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors.  Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.

Important: Trading commodity futures and options involves a substantial risk of loss. The recommendations contained in this writing are of opinion only and do not guarantee any profits. This writing is for educational purposes. Past performances are not necessarily indicative of future results. 

**This article has been generated with the help of AI Technology. It has been modified from the original draft for accuracy and compliance.

***@cannontrading on all socials.

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