When a futures quote says 5,000, that number alone tells me almost nothing. I still need the multiplier, tick size, expiry month and settlement method. Without them, I cannot calculate the exposure, profit or loss, or what happens at expiry.
A futures contract is a standardized agreement traded on an exchange. It gives one side a long position and the other a short position in a defined underlying market. The contract either ends through cash settlement or requires delivery under its terms.
Most traders do not hold a contract to that point. They close the position by placing an equal and opposite trade in the same contract month.
What is a futures contract?
Every futures contract defines:
- the underlying index, financial instrument or commodity;
- the amount represented by one contract;
- how the price is quoted;
- the smallest permitted price change;
- the expiry or delivery month;
- the last trading day and any notice dates;
- whether settlement is in cash or by delivery.
These terms are set in advance. Traders negotiate the price, not the contract specification.
If I buy one contract, I am long. I gain when its price rises and lose when it falls.
If I sell one contract without owning it first, I am short. I gain when its price falls and lose when it rises.
Both sides take on an obligation. This is different from buying an option, where the buyer pays a premium for a right but does not have to exercise it.
A complete futures contract example
I’ll use a hypothetical equity index future so the arithmetic stays useful even when real contract specifications change.
Assume the contract has these terms:
| Contract term | Value |
| Futures price | 5,000.00 index points |
| Contract multiplier | $5 per point |
| Minimum tick | 0.25 points |
| Initial margin | $2,000 |
| Maintenance margin | $1,800 |
| Settlement | Cash |
Notional value
The notional value is the market exposure represented by one contract:
Notional value = Futures price x Contract multiplier
5,000 x $5 = $25,000
The trader does not pay $25,000 to open the position. The required initial margin is $2,000 in this example. But profit and loss are calculated from the $25,000 exposure, not from the margin deposit.
Tick value
The minimum price movement is 0.25 points:
Tick value = Minimum tick x Contract multiplier
0.25 x $5 = $1.25 per contract
Four ticks equal one full index point, so a one-point move is worth $5 per contract.
Profit and loss
Assume I buy one contract at 5,000 and close it at 5,018:
Profit = (Exit price – Entry price) x Multiplier x Contracts
(5,018 – 5,000) x $5 x 1 = $90
If I close at 4,982 instead:
(4,982 – 5,000) x $5 x 1 = -$90
The same 18-point move produces the same dollar result in either direction. Fees and slippage would reduce the final result.
One contract, four numbers
Illustrative index future. Real specifications and margin requirements differ.
- Quote
- 5,000.00
- Multiplier
- $5 / point
- Minimum tick
- 0.25
- Initial margin
- $2,000
Margin is collateral, not a loss limit. The full $25,000 exposure drives profit and loss.
How a futures trade works
A listed futures trade normally involves several separate systems:
- The trader submits a long or short order for a specific contract month.
- The broker or futures intermediary checks permissions, available margin and risk limits.
- The exchange uses its order book to match compatible buy and sell orders.
- The clearing organization becomes the central counterparty and manages the financial obligations between clearing members.
- Open positions are marked to a settlement price, with gains and losses credited or debited.
The trader on the other side of the original order may later close their position. That does not close mine. Once cleared, each position is managed through the clearing system.
The life of a futures position
Execution, daily settlement and expiry are separate parts of the same contract.
Trader
Selects the contract month, direction, order type and size.
Broker
Checks permissions, margin and account-level risk controls.
Exchange
Matches compatible buy and sell orders under one rulebook.
Clearing
Manages the obligations and margin between clearing members.
The contract specification decides the final path. The broker may set an earlier deadline for closing a deliverable position.
Daily mark-to-market
Futures profit and loss does not wait until the position closes.
The clearing process uses a daily settlement price to calculate the change in each open position. Profits are credited and losses are debited through variation margin. Some providers also calculate risk and request funds during the trading day.
Using the same $5 multiplier:
| Day | Settlement or exit price | Daily move | Daily P&L | Cumulative P&L |
| Entry | 5,000 | – | – | $0 |
| Day 1 | 5,012 | +12 points | +$60 | +$60 |
| Day 2 | 4,994 | -18 points | -$90 | -$30 |
| Close on Day 3 | 5,008 | +14 points | +$70 | +$40 |
The position made $40 before costs:
(5,008 – 5,000) x $5 = $40
The daily transfers do not mean that the contract was closed and reopened each day. They settle the change in value while the position remains open.
This matters to hedgers as well as traders. A hedge can make economic sense over three months and still require cash today if the futures leg moves against it. The final hedge result and the daily funding need are different problems.
How futures margin works
Futures margin is collateral for the position. It is not a down payment, and the broker is not lending the contract’s full notional value. Margin is also not the maximum possible loss.
There are three figures to understand:
- Initial margin: the amount required to open or carry a new position.
- Maintenance margin: the minimum account equity required to keep the position open.
- Variation margin: the funds transferred because of changes in the position’s value.
The exchange or clearing organization sets base requirements. A broker can require more. Requirements can also increase when volatility or concentration rises.
A margin call example
Return to the hypothetical contract:
- initial margin: $2,000;
- maintenance margin: $1,800;
- multiplier: $5 per point.
Assume the account contains exactly $2,000 and has no other positions. A 50-point move against the trade produces a $250 loss:
50 points x $5 = $250
$2,000 – $250 = $1,750 account equity
Equity is now below the $1,800 maintenance requirement. Depending on the broker’s agreement and timing, the trader may need to add funds, reduce the position or face liquidation. A margin call is not a promise that the broker will wait. Positions can be closed when risk limits are breached.
This is why I do not use minimum margin as a position-sizing rule. Margin answers, “Can this position be opened?” Risk sizing asks, “What could this position cost if the market moves against me?”
The contract specification matters more than the contract name
Two futures on the same market can have different multipliers, tick values, expiries and settlement procedures.
Before trading, I read the specification and record:
| Item | Why it matters |
| Exact symbol and month | A different month is a different contract with a different price and liquidity |
| Multiplier or contract size | Converts the quoted price into notional exposure and P&L |
| Minimum tick and tick value | Shows the smallest possible price and account movement |
| Trading hours | Identifies session breaks and periods of thinner liquidity |
| Initial and maintenance margin | Shows the current collateral requirement |
| Last trading day | Tells me when normal trading ends |
| First notice day | Can matter for physically delivered contracts before the last trade date |
| Settlement method | Determines whether an open contract ends in cash or delivery |
| Daily price limits | Can restrict trading and make an exit harder during a sharp move |
The front month often has the most activity, but not always. Liquidity can migrate into the next contract as expiry approaches. I check volume, open interest and the bid-ask spread for the exact month I plan to trade.
How a futures position ends
There are four common paths.
Close the position
To close one long September contract, I sell one September contract of the same specification. To close a short, I buy it back.
The offsetting trade removes the open position. Buying a different month does not close it.
Roll into a later month
A roll combines two trades:
- close the current contract;
- open a new position in a later month.
The later contract may trade above or below the near contract. A roll can involve two bid-ask spreads, commissions and slippage. The difference between contract prices is not automatically a loss; it may reflect storage, financing, income, supply conditions or expectations at the two maturities.
A continuous futures chart joins several contract months for analysis. It is not one tradable contract. Some charts also adjust old prices to remove the gap between months, so I check the actual contract prices before judging a roll.
Cash settlement
For a cash-settled contract, no underlying asset changes hands. The remaining open position is settled using the contract’s final settlement procedure.
Equity index futures often use cash settlement because an index cannot be delivered. The final settlement price may be calculated differently from the last price shown on the screen.
Physical delivery
Some commodity and financial futures can end in delivery of an asset or delivery instrument. Traders usually close or roll before that process, but the exact last trading day, notice period and broker deadline still need to be checked. A broker may set an earlier deadline than the exchange.
Why do people use futures?
Futures serve two main purposes: transferring an existing price risk and taking a new market view.
Hedging
Assume a food producer expects to buy wheat in three months. A long wheat futures position may gain if wheat prices rise, partly offsetting the higher physical purchase price.
The hedge will rarely match perfectly. Grade, location, date and quantity may differ. The difference between the cash and futures price is called basis, and changes in it create basis risk.
Hedging replaces one uncertain price exposure with a combination of exposures. It does not make the commercial transaction risk-free.
Speculation
A trader can buy a future when expecting the contract price to rise or sell one when expecting it to fall.
The ability to short without borrowing the underlying asset is useful. The leverage is also unforgiving: a small market move can produce a large change in account equity.
Spreads
A futures spread holds related long and short positions, such as two expiry months of the same commodity. It shifts the exposure toward the price difference between the legs, but it adds curve, execution and liquidity risk. A spread is not automatically conservative.
Which markets have futures?
Futures cover equity indices, government debt, short-term rates, currencies, energy, metals, agriculture and some digital assets. Equity index contracts usually settle in cash because an index cannot be delivered. Commodity, currency and bond contracts may use cash or delivery.
Futures vs forwards vs options
| Feature | Futures | Forwards | Options |
| Where traded | Exchange | Usually OTC | Exchange or OTC |
| Terms | Standardized | Can be customized | Standardized or customized |
| Obligation | Both long and short have obligations | Both parties have obligations | Buyer has a right; seller has an obligation if exercised |
| Upfront payment | Margin collateral | Depends on agreement and collateral terms | Buyer pays a premium; seller may post margin |
| Daily cash settlement | Standard feature of listed futures clearing | Depends on agreement and clearing | Depends on the contract and margining method |
| Expiry outcome | Close, roll, cash settlement or delivery | Cash settlement or delivery under the agreement | Exercise, assignment, cash settlement or expiry without exercise |
The costs of futures trading
The quoted commission is only one cost.
I include:
- broker commission;
- exchange and clearing fees;
- bid-ask spread;
- slippage;
- market-data charges;
- currency conversion where relevant;
- the cost of closing or rolling;
- any platform or account fee.
I compare each cost with the tick value. A $2.50 round-trip charge equals two ticks when the tick value is $1.25. The trade must earn those ticks before break-even, even before slippage.
The main risks of futures
Leverage
The notional exposure can be much larger than the margin deposit. Losses are based on the position, not on the amount posted as margin. Depending on the account, product and local rules, losses may exceed the initial deposit.
Margin changes and liquidation
Margin requirements can increase. A broker may also apply higher house requirements or liquidate a position when account equity falls below its limits.
Gaps, slippage and price limits
A stop order does not guarantee its execution price. The market can gap through it. Some contracts use price limits or trading halts, which can delay an exit.
Liquidity
Liquidity differs by product and contract month. A quote on the wrong expiry may have a wider spread and less depth than the active contract.
Expiry and delivery
Missing a broker deadline can leave the trader in a cash-settlement or delivery process they did not intend to enter.
Basis and roll risk
The futures price and spot price do not always move by the same amount before expiry. A later contract can also trade at a different price from the expiring one.
Operational risk
Incorrect symbols, duplicate orders, stale market data, connectivity problems and misunderstood order types can create losses even when the market view was reasonable.
What to check before opening a futures account
Platform design matters less than the legal and operating details behind it. I check:
- the legal entity and its authorization for futures activity;
- how customer funds are held and protected;
- the exchanges, clearing relationships and products available;
- commissions, exchange, clearing and data fees;
- initial, maintenance, overnight and intraday margin rules;
- liquidation, expiry and delivery policies;
- real-time account equity, order behavior and outage support.
A demo account can help with order entry. It cannot prove that live fills, queue position, slippage or liquidation behavior will be identical.
