A futures contract locks in a price today for something you'll buy or sell later

A futures contract is an agreement between two people: one promises to sell something at a set price on a set date in the future, and the other promises to buy it at that same price. You don't own the thing yet. You're not taking delivery today. Instead, you're both betting on what the price will be when that future date arrives. If the price goes up, the buyer wins. If it goes down, the seller wins. The contract itself trades on an exchange — you can buy it, sell it, or let it expire.

The reason futures exist is practical: a farmer wants to know in March what price they'll get for corn in September, so they can plan. A cereal maker wants to lock in that same price so their costs don't swing wildly. Both use futures to remove uncertainty. But most people trading futures today aren't farmers or cereal makers — they're speculators betting on price movement, using borrowed money to control large amounts of the underlying commodity or financial instrument.

Key Takeaways

  • A futures contract is a binding agreement to buy or sell something at a fixed price on a future date, and the contract itself can be bought and sold before that date arrives.
  • You control a large amount of the underlying asset with a small upfront payment called margin, which means your gains and losses are magnified compared to owning the asset outright.
  • Futures expire on set dates — you must either close your position, roll it forward to a later contract, or take physical delivery before expiration.
  • Prices move based on supply, demand, economic data, and speculation, and you can profit whether prices rise or fall depending on which side of the contract you hold.
  • Futures trading happens on regulated exchanges during set hours, and you need a brokerage account and enough capital to cover margin requirements.

How margin lets you control a large contract with a small deposit

When you buy a futures contract, you don't pay the full value upfront. Instead, you put down a fraction called initial margin — typically 5 to 15 percent of the contract's total value, depending on the commodity or instrument. This deposit sits in your account as collateral. The exchange and your broker hold it to cover potential losses if the price moves against you.

This is leverage: you control $100,000 worth of crude oil with $5,000 in your account. If the price rises 1 percent, your $5,000 doubles to $10,000 profit. If it falls 1 percent, you lose $5,000 and your account is wiped out. The exchange monitors your account daily and calculates your profit or loss based on the closing price — this is called mark-to-market. If your losses eat into your margin, you'll receive a margin call and must deposit more money or close positions immediately.

Prices move and settle every trading day

Futures trade on exchanges like the Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE) during set hours — most contracts trade during the day and some during evening sessions. The price changes constantly as buyers and sellers place orders. Unlike a stock, which you might hold for years, a futures contract has an expiration date: the last day you can trade it before it settles.

Settlement happens in two ways. Cash settlement means the exchange calculates the final profit or loss based on the closing price on the last trading day and deposits or withdraws the money from your account — no physical delivery occurs. Physical delivery means the seller actually ships the commodity (or the buyer receives it), though this is rare for most traders because they close their positions before expiration. Most people trading crude oil futures, for example, have no intention of taking delivery of 1,000 barrels of oil to their garage.

You can profit from prices rising or falling

If you believe a price will rise, you go long — you buy the contract. If the price rises before expiration, you sell the contract at the higher price and pocket the difference. If you believe a price will fall, you go short — you sell a contract you don't own (the exchange allows this). If the price falls, you buy it back at the lower price and keep the difference.

This is why futures are useful for hedging: a farmer who owns wheat can sell wheat futures to lock in a price, protecting against a price drop. But it's also why speculators use them: you can bet on direction without owning the underlying asset. The catch is that you're wrong about direction, your losses are magnified by leverage. A 5 percent price move against you can wipe out your entire margin deposit.

Contract specifications tell you exactly what you're trading

Every futures contract has a standardized specification set by the exchange. For crude oil (WTI), one contract represents 1,000 barrels. For corn, it's 5,000 bushels. For the S&P 500 E-mini contract, it's $50 times the index value. The specification also includes the expiration months available — crude oil trades contracts expiring in every month, while some agricultural futures expire only in certain months.

The contract symbol tells you what you're trading and when it expires. "CL" is crude oil on the CME; "CLZ24" means crude oil expiring in December 2024. The minimum price movement, called a tick, varies by contract — crude oil moves in $0.01 increments, so one tick is worth $10 per contract. Understanding these details matters because they determine your profit or loss per price movement and how much capital you need.

Rolling forward lets you extend your position past expiration

If you want to stay in a trade but the contract is about to expire, you can roll your position. You sell the near-term contract (the one expiring soon) and buy the next contract month simultaneously. This closes your old position and opens a new one, keeping your bet alive. The difference in price between the two contracts is your roll cost — sometimes you gain a few dollars, sometimes you lose a few, depending on market conditions.

Traders roll positions constantly. A speculator betting on rising oil prices might roll from the December contract to the January contract in late November, then to February in late December, staying in the trade for months or years. Each roll is a separate transaction with commissions and potential slippage, so frequent rolling adds up in costs.

You need a brokerage account and enough capital to start

To trade futures, you open an account with a futures broker — firms like Interactive Brokers, TD Ameritrade, or E-TRADE offer futures trading alongside stocks and options. You'll need to fund the account with enough money to cover initial margin for the contracts you want to trade, plus a cushion for mark-to-market losses. If you want to trade one crude oil contract, you might need $2,000 to $3,000 in your account to stay above margin requirements.

Brokers charge commissions per round-trip trade (buying and selling one contract) — typically $10 to $50 depending on the contract and broker. Some brokers offer lower commissions for high-volume traders. You'll also see bid-ask spreads (the difference between the price to buy and the price to sell), which can be tight for heavily traded contracts like crude oil or the S&P 500 E-mini, but wider for less liquid contracts.

Frequently Asked Questions

What happens if I don't close my position before expiration?

If you hold a contract to expiration, it settles automatically. For cash-settled contracts like stock index futures, the exchange calculates your final profit or loss and deposits or withdraws the money from your account. For physically delivered contracts like crude oil or agricultural futures, you're obligated to take or make delivery — which is why most traders close positions days or weeks before expiration to avoid this.

Can I lose more money than I deposited?

Yes, if the price moves sharply against you and you don't have enough margin in your account. The exchange will issue a margin call, and if you can't deposit more money immediately, your broker will close your positions at market prices to cover the loss. In extreme market moves, you could lose more than your initial deposit, though brokers work to prevent this by closing positions before losses exceed account value.

How is futures trading different from buying the actual commodity?

With futures, you control a large amount with a small deposit (leverage), you don't take physical possession, and your contract expires on a set date. If you buy actual crude oil or corn, you own it outright, pay the full price upfront, and can hold it indefinitely. Futures are faster, cheaper to enter, and allow you to bet on price direction without owning the thing — but the leverage cuts both ways.

What moves futures prices?

Supply and demand for the underlying commodity or instrument, economic data (interest rates, employment, inflation), geopolitical events, and speculation by traders. A drought reduces corn supply and pushes prices up. Rising interest rates push stock index futures down. A hurricane threatens oil production and pushes crude prices up. Speculators amplify these moves by piling into one side of the market.