Mini contracts: a full guide to this futures market asset

Mini contracts are smaller versions of the financial instrument known as the futures contract. Futures contracts are traded by investors who want to buy and sell assets whose prices are established in accordance with a specific expiration date.

During their term, the futures’ value fluctuates due to supply and demand, which results in gains or losses for their investors. Futures contracts derive from commodities, indices, currencies and interest rates and always have a future expiration tied to the transaction.

Don’t worry! If you didn’t understand the definition, keep reading. We will detail each of these concepts until the advantages and risks of mini contract transactions on the Exchange become clear.

What are mini contracts?

These are a smaller version of the standard contract, which means they are lower-priced, to be precise one fifth (or 20%) of the reference asset. Let’s look at an example of an index contract, in this case the Ibovespa:

On the futures market, investors commit to buy or sell an asset that replicates the Ibovespa through a previously agreed quotation or number of points.

If the traditionally sized contract fixed the Ibovespa at 120,000 points, it will have an expiration value of BRL 120,000 (BRL 1 per 1 index point).

This means participants need a lot of capital to trade the asset, as on the futures market there is a margin mechanism with a mark-to-market daily adjustment of gains and losses according to the end-of-day price, to prevent buyers or sellers from accumulating large losses that they will be unable to cover.

And what about those who do not have BRL 120,000 to buy Ibovespa futures? That’s where the Ibovespa mini futures contract comes in.

It has the same mechanism as the standard-sized asset, except in this case it has been reduced so each Ibovespa point has the value of BRL 0.20 (20% of the full-sized contract), which also diminishes investors’ exposure, leverage, and margin deposits.

Let’s suppose that you buy a WIN (the ticker of the Ibovespa mini contract at B3) contract at 100,000 points and on its expiration date sell it at 110,000 points. The gross result of your transaction will be BRL$ 2,000, by the following calculation: (110,000 – 100,000) x 0.20 = 2,000. In other words, you receive 20% (0.20) the profit (BRL 10,000) of a full-sized contract.

As mentioned above, between the purchase and the sale, the prices of the futures contracts (mini or full-sized) will be reassessed daily to reflect new market conditions, expressed in the respective closing prices of the trading session.

During the last half hour or fifteen minutes of trading (depending on each contract), the mark-to-market mechanism to adjust the day’s gains and losses comes into effect, so that all of the outstanding positions can be settled.

This means that the risk of default is limited to one day, covered by the margin that both futures contract buyers and sellers must post.

If you buy the mini Ibovespa contract at 100,000 points and on that day the market closed at 101,000 points, there is a difference of 1,000 points, or 0.2 x 1,000 = BRL 200. In this case, the seller will have to credit BRL 200 into the buyer’s account. The brokerage houses pay the day’s results.

The same is true for the mini U.S. Dollar futures contract, which is the smaller version (equivalent to 20% of the value) of the full-sized contract. In this futures modality, if you buy U.S. Dollars in a three-month maturing contract and that currency appreciates up until expiration, there will be a gain on the transaction, as the dollars were acquired at a lower quotation.

As with every futures contract, you do not have to wait until the expiration date to close the position. Thanks to the good daily liquidity of the mini contracts, you can sell them and make the gain on the same day (day trade) or some days later (swing trade). When interrupting the trade “in the middle of the journey” another person will take on the agreement from where you left it, with a readjusted maturity.

In summary, those who trade futures contracts are trading today the price of determined asset on a future date, but with the daily adjustment of gains and losses, in accordance with how the quotation fluctuates.

Futures contracts are considered derivatives, in other words securities that derive from other assets such as the Ibovespa, U.S. Dollar, commodities etc. Derivatives are financial instruments that are used a lot for arbitrage, hedging and speculation.

Some of the advantages and disadvantages of trading with mini contracts

Advantages

• These are high-liquidity assets that allow investors to open and close positions, at a lower risk.
• B3 only needs the investor to have the corresponding margin value to deposit daily, rather than keep all the capital in its account in reference to the volume of the contract.
• Diversification is one of the strong points of mini contracts, as there are several financial instruments in this asset category.

Disadvantages

• Equity asset prices are very volatile in a market that is susceptible to expectations, political and economic news and global events.
• Futures contract prices are readjusted daily. If you have a position in an asset whose daily adjustment has been very sharp, there may be considerable losses in a single trading session.
• To trade smoothly there must be agile and efficient order transmission systems. While trading platforms are ever more secure and technologically advanced, all of them are subject to internet fluctuations, energy drops etc.

What are the costs of investing in mini contracts?

Intermediary financial institutions charge brokerage fees on orders sent to the Exchange. The brokerage houses often exempt the investors in this asset or charge in accordance with the volume of contracts traded such as, for example, a brokerage cost of BRL 0.25 for each U.S. Dollar or Ibovespa mini contract traded during that session.

B3 charges two fees on day trades in mini futures contracts: exchange and registration fees. These fees are charged on each contract traded, in other words they are considered both when opening and closing positions.

Income Tax on Mini Contracts

As with other investments, when you profit from mini contract transactions you have to pay Income Tax and in the following year you will have to declare your gains and losses in the annual filing of returns with the Federal Revenue Service.

You must therefore pay attention as these are two different situations: the need to file returns annually and the payment of tax every time you make gains throughout the year.

Income tax is paid over the year via the Federal Revenue Service’s DARF document. The level depends on the type of transaction: if you day trade (buy or sell the asset on the same day), the government will take 20% of gains.

In the case of transactions carried out over different trading sessions, the income tax rate will be 15% on the gain. Most brokerage houses offer clients a spreadsheet with the earnings of their transactions to facilitate this work.

In the annual adjustment statement, you must use the program provided by the Federal Revenue Service, where you must list both outstanding contracts and those that were effectively transacted during the financial year.

Please note that if the investor has a loss from trading mini contracts, it may be compensated by gains in other equity transactions.

How to trade mini contracts in four steps

• Step 1: Choose an institution that will intermediate your transactions. For this you need an account at an investment brokerage firm.
• Step 2: Choose an asset for the mini contract transaction. A tip: you can train with investment simulations to discover what suits you best.
• Step 3: On the brokerage firm’s platform, free the margins required for trading and select the home broker, volume and type of contract that you intend to trade.
• Step 4: You’re ready: you just need to start buying and wait for the asset to gain enough to make a profit.