- 1998: Volume 7, No. 5 Mini Value Line: Alternative Small Stock Index Future

In the past year, the proliferation of smaller-sized stock index futures has become one of the hottest developments in the industry. The E-mini S&P 500, Dow Jones Industrial Average and other contracts have been introduced to investors, making stock index trading more accessible to the individual. But one product in this market, the Mini Value Line, has been trading for 15 years and offers an interesting alternative to the new listings.

Mini Value Line futures were launched at the Kansas City Board of Trade on July 29, 1983, with a multiplier to serve as an investment tool designed specifically for the individual investor. While not as well-known or as heavily traded as its newer counterparts, the Mini Value Line offers a number of unique opportunities and some advantages compared with other retail-targeted stock index products.

To begin with, the "Mini" is based on the Value Line Arithmetic Index, a market measure of around 1,650 blue-chip, mid-size and small-cap issues traded on the New York Stock Exchange, the NASDAQ, the American Stock Exchange and on Canadian exchanges. This means that it takes a much broader view of the market than the blue-chip S&P 500 and DJIA. But perhaps most important, the Value Line is equally-weighted, with each stock having an equal influence on index movement regardless of price, size, or capitalization. This makes the Value Line perform differently than the S&P 500 and DJIA, which are capitalization- and price-weighted, respectively, and thus may result in some stocks having a disproportionate impact on index direction.

Because of these differences between the makeup of the Value Line Arithmetic and other indexes, the Mini Value Line is in a unique position in the smaller stock index futures marketplace. Investors interested in trading the broad market, not just a narrow market segment, can do so through outright positions in Mini Value Line futures and options. And the differences in index composition between the Value Line and other measures make the Mini Value Line an excellent candidate for spread trading between markets.

A recent study by Moore Research Center Inc., Eugene, Ore., identified numerous seasonal spread strategies between the Mini Value Line and the S&P 500 and New York Stock Exchange Composite contracts based on hypothetical trading scenarios. While the DJIA futures contract does not have a long enough history to draw upon for study purposes, it also is likely that numerous spread opportunities exist between that market and the Mini Value Line because of the radically different composition of the two indexes.

The equal weighting of the Value Line Arithmetic Index also can make it less volatile, as it is not as subject to wide price swings based on changes in one or even a handful of stocks. This reduced volatility, according to some traders and market observers, can make the Value Line fall less than other indexes in a down market, and rise less in an up market. That characteristic in turn can make the Mini Value Line contract suited for the newer trader looking for a contract to use to test theories and build a record in the market.

The tendency for reduced volatility with the Mini also translates into lower margins, often some of the lowest around for index futures contracts.

Yet another advantage with the Mini Value Line in comparison with another small-sized contract is its open outcry trade. With the electronically traded E-mini S&P 500 contract on the Chicago Mercantile Exchange, the electronic trading platform limits the number of order types that traders can place. Comparatively, with the Mini Value Line traders are not limited by order types. Limit, stops and other orders are all accepted and encouraged.

In hedging situations, the Mini Value Line also may be more suited to an individual with a broad-based stock portfolio, rather than a contract representing a narrow market segment.

Ten-minute delayed quotes on the Mini Value Line can be found at www.kcbt.com, and prices are also available in the Wall Street Journal, Barron's and on the KCBT's information hotline at 800-821-4444.

For investors interested in both outright and spread trading in stock index futures, the Mini Value Line offers unique opportunities.

Michael Braude is president of the Kansas City Board of Trade.