A futures contract is a binding agreement to buy or sell a specific asset at a set price on a set date in the future

You agree today to exchange something — oil, wheat, gold, a stock index — at a price you both lock in now. The exchange happens on a date you both agree to, which might be three months away or a year away. Neither party can back out without penalty. The price is fixed regardless of what that asset actually costs when the contract expires.

Futures trade on organized exchanges like the Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE). The exchange acts as the middleman: it guarantees the contract, sets the rules, and ensures both sides show up with the money or the goods. You do not negotiate directly with the other trader.

The core reason futures exist is price certainty. A farmer can lock in the price for next year's corn harvest today. An airline can lock in the price of jet fuel months ahead. A trader betting the price will move can profit if they guess the direction correctly.

Key Takeaways

  • A futures contract obligates you to buy or sell an asset at a set price on a set future date, and you cannot cancel without taking a loss.
  • Futures trade on regulated exchanges that may provide the contract and hold both parties accountable through daily settlement and margin requirements.
  • You control a large amount of the underlying asset with a small amount of money upfront, which magnifies both gains and losses.
  • Prices move daily, and your account is settled every day — you pay losses immediately and receive gains immediately, not when the contract ends.
  • Futures are used both by producers and consumers who need price certainty and by traders who bet on price direction for profit.

How leverage works in futures trading

You do not pay the full value of the contract upfront. Instead, you post margin — a fraction of the total contract value. For example, a crude oil futures contract represents 1,000 barrels. At $80 per barrel, that is $80,000 of value. Your broker might require only $5,000 in margin to control that contract. You are borrowing the rest.

This is why futures are called leveraged instruments. A small move in the price of oil creates a large percentage gain or loss on your $5,000. If oil rises $1 per barrel, you make $1,000 — a 20% return on your margin. If oil falls $1, you lose $1,000. The leverage cuts both ways.

Margin requirements vary by contract and by broker. They also change based on market conditions. During volatile periods, exchanges raise margin requirements to reduce the risk that traders cannot cover their losses.

Daily settlement and how you pay or receive money

Futures do not wait until expiration to settle. Every day the market closes, your contract is marked to market. The exchange calculates the profit or loss based on that day's closing price and moves the money in or out of your account immediately.

If you bought a contract at $80 and it closes at $81, you have a $1,000 gain (1,000 barrels × $1). That money appears in your account overnight. If it closes at $79, you lose $1,000 and that money leaves your account. This happens every single day until you close the position or the contract expires.

If your account balance falls below the maintenance margin — the minimum you must keep on deposit — your broker will force you to close the position or deposit more money immediately. This is called a margin call. You cannot ignore it.

The difference between futures and owning the asset outright

When you buy a futures contract, you are not buying the physical asset. You are buying the right to buy it (or the obligation to buy it) at expiration. Most traders close their position before expiration and never take delivery of oil, wheat, or gold.

If you hold the contract until expiration, you must either take delivery of the physical goods or cash-settle depending on the contract type. Most financial futures (like stock index futures) cash-settle. Most commodity futures allow physical delivery, but the logistics are complex and most traders avoid it.

Owning the asset itself — buying 1,000 barrels of oil and storing it — requires capital upfront and storage costs. A futures contract requires only margin and lets you profit from price movement without holding the physical thing. That is the trade-off: lower capital requirement, but you cannot use or consume the asset.

Who uses futures and why

Producers and consumers use futures to lock in prices. A wheat farmer sells wheat futures in spring to may provide the price they will receive at harvest. A bakery buys wheat futures to may provide the price they will pay. Both reduce uncertainty.

Traders use futures to bet on price direction without owning the underlying asset. They profit if their prediction is correct and lose if it is wrong. Some traders hold positions for seconds or minutes (scalping). Others hold for days or weeks (swing trading). Some hold for months.

Portfolio managers use futures to hedge other investments. If you own a large stock portfolio and worry the market will fall, you can sell stock index futures. If the market falls, your futures gain offsets your stock loss. If the market rises, your stock gain offsets your futures loss.

Contract specifications and expiration dates

Every futures contract has a standardized specification set by the exchange. It defines the asset, the quantity, the quality standards, the delivery location, and the expiration date. You cannot negotiate these terms — you take them as written or trade a different contract.

A crude oil contract on the CME represents 1,000 barrels of West Texas Intermediate crude. A gold contract represents 100 troy ounces. A corn contract represents 5,000 bushels. These quantities are fixed.

Expiration dates are set by the exchange and occur monthly or quarterly depending on the contract. The front-month contract (the nearest expiration) usually has the most trading volume and the tightest bid-ask spread. As expiration approaches, traders close their positions or roll them into the next month's contract.

Risks specific to futures trading

Leverage magnifies losses. A 10% move against you wipes out your entire margin and forces a margin call. You can lose more than your initial deposit if the market moves far enough and fast enough.

Liquidity risk exists if you cannot close your position when you want to. Less-traded contracts or contracts near expiration may have wide bid-ask spreads or few buyers. You might have to accept a worse price to exit.

Basis risk occurs when the futures price and the spot price (the current market price) diverge unexpectedly. If you are hedging with futures, this gap can leave you partially unprotected.

Overnight gaps happen when markets close and reopen at a different price. If you hold a position overnight and the market gaps against you, you cannot close it at the previous close price. You are stuck with the new price.

Frequently Asked Questions

Can I lose more money than I put in?

Yes. If the market moves far enough against you before you close the position, your losses can exceed your margin deposit. Your broker will issue a margin call, and if you cannot pay, they will close your position at whatever price the market offers. You remain liable for any shortfall.

Do I have to take physical delivery when the contract expires?

Most traders close their position before expiration and never take delivery. If you hold until expiration, the contract terms determine what happens. Financial futures usually cash-settle. Commodity futures may require physical delivery, but you can roll your position into the next month's contract instead.

What is the difference between a futures contract and an options contract?

A futures contract obligates you to buy or sell at expiration. An options contract gives you the right, but not the obligation, to buy or sell. With options, your maximum loss is the premium you paid upfront. With futures, your loss is theoretically unlimited.

How much money do I need to start trading futures?

Margin requirements vary by contract and broker, but typically range from $1,000 to $10,000 per contract. Some brokers have account minimums of $2,000 to $5,000. You should have additional capital beyond margin to cover potential losses and margin calls.

Are futures traded only during market hours?

Most futures trade during regular exchange hours, but many also trade in after-hours sessions. The CME offers nearly 24-hour trading on many contracts. Liquidity and spreads are tighter during regular hours. Check your broker's platform for the specific trading hours of the contract you want to trade.