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 are not buying the asset itself right now. You are agreeing that on a specific date — say, three months from now — you will complete that transaction at a price you lock in today. The contract itself is what you buy and sell, not the corn, oil, wheat, or currency underneath it.
Most futures traders never take delivery of the actual commodity. Instead, they close out their contract before the delivery date by selling it to someone else, or they roll it forward into a later contract. The profit or loss comes from the difference between what you paid for the contract and what you sold it for.
Futures trade on exchanges — the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE), and others — not over the counter. Every contract is standardized: the same size, the same quality specifications, the same delivery location. That standardization is what makes them liquid and tradeable.
Key Takeaways
- A futures contract locks in a price today for delivery of a commodity or financial asset months in the future, but most traders close the contract before delivery date.
- You control a large position with a small upfront payment called margin, which means your gains and losses are magnified compared to owning the asset outright.
- Futures prices move based on supply, demand, weather, geopolitics, and expectations about future conditions — not just the spot price today.
- Losses can exceed your initial margin deposit, and exchanges can force you to close positions if your account falls below minimum requirements.
- Futures are used both for hedging (protecting against price swings) and speculation (betting on price direction), and the mechanics are identical for both.
How margin lets you control a large position with a small deposit
You do not pay the full value of the contract upfront. Instead, you deposit margin — a percentage of the contract's total value, typically 5 to 15 percent depending on the commodity and the exchange. That deposit holds your position open.
If you buy one crude oil futures contract (1,000 barrels), you might deposit $5,000 to $7,000 rather than paying $50,000 or more for the oil itself. If the price moves $1 per barrel in your favor, you make $1,000 on your $5,000 deposit — a 20 percent return. If it moves $1 against you, you lose $1,000 and your deposit shrinks to $4,000 or $6,000.
This leverage cuts both ways. A small price move can wipe out your entire margin deposit. If your account balance falls below the maintenance margin — the minimum the exchange requires you to hold — you receive a margin call. You must deposit more money immediately, or the exchange will close your position automatically, locking in your loss.
Why futures prices differ from spot prices
The spot price is what you pay to buy the commodity right now, today. The futures price is what the market expects it to cost three months, six months, or a year from now. Those are often different numbers.
If a drought is forecast, wheat futures for next harvest may trade well above today's spot price because traders expect scarcity. If a new oil field is coming online, crude futures may trade below spot because traders expect oversupply. Geopolitical events, weather, production reports, and currency movements all shift futures prices independently of what the commodity costs today.
The difference between spot and futures price is called the basis. As the delivery date approaches, the basis shrinks and futures prices converge toward spot price. On the delivery date itself, they are the same.
The difference between hedging and speculation
A farmer who plants wheat and wants to lock in a selling price six months from now is hedging — using futures to reduce uncertainty. A trader who has no wheat but buys wheat futures because they think the price will rise is speculating — betting on price direction for profit. The mechanics are identical; the intent and the person's relationship to the underlying commodity are different.
Hedgers reduce risk. Speculators take on risk in hopes of profit. Both are necessary: hedgers need someone to take the other side of their contract, and speculators provide that liquidity. Without speculators, hedging would be far more expensive or impossible.
What happens at the delivery date
If you hold a futures contract until the delivery date, you are obligated to take delivery of the commodity (if you are long, meaning you bought) or deliver it (if you are short, meaning you sold). For physical commodities like oil or wheat, that means arranging storage, transportation, and inspection. For financial futures like stock index or currency contracts, settlement is usually cash-based.
Most traders close their positions weeks or months before delivery to avoid these complications. You simply sell your contract to someone else, or buy an offsetting contract to cancel your position. The exchange matches buyers and sellers; you never interact with the other party.
If you do hold to delivery, the exchange specifies where and how the commodity must be delivered, what quality it must meet, and what documentation is required. These details are spelled out in the contract specifications published by the exchange.
How to read a futures price quote
A futures quote shows the contract month, the price, and the change from the previous close. For example: "ZWZ24 at 523.50, up 2.25" means December 2024 wheat futures are trading at 523.50 cents per bushel, up 2.25 cents from yesterday's close.
The letter at the end (Z in this case) is the contract month code: F is January, G is February, H is March, and so on through Z for December. The number (24) is the year. Different commodities have different contract sizes — one wheat contract is 5,000 bushels, one crude oil contract is 1,000 barrels, one gold contract is 100 troy ounces — so you must know the contract size to calculate your profit or loss per tick (the smallest price movement).
Exchanges publish open interest (how many contracts are currently held) and volume (how many contracts traded that day). High volume and open interest mean the contract is liquid and you can enter and exit easily. Low volume means wider bid-ask spreads and harder execution.
Risks specific to futures trading
Leverage magnifies losses. A 10 percent move against you can wipe out 100 percent of your margin deposit. Margin calls can force you to deposit more money on short notice, and if you cannot meet the call, your position closes automatically.
Futures markets are volatile and can gap — jump from one price to another with no trades in between — especially around news events or at market open. You may be unable to exit at the price you expected.
Counterparty risk is minimal because the exchange itself is the counterparty and guarantees performance, but operational risk exists: system failures, broker errors, or miscommunication can result in losses that are difficult to recover.
Liquidity varies by contract. Contracts near their delivery date and contracts for less-traded commodities can be hard to exit quickly without accepting a poor price.
Frequently Asked Questions
Can I lose more money than I deposited?
Yes. If the price moves sharply against you and you cannot meet a margin call, the exchange closes your position at market price. If that price is worse than you expected, your loss can exceed your initial deposit. You would owe the difference to your broker.
What is the difference between futures and options?
A futures contract is an obligation to buy or sell at the set price. An option gives you the right, but not the obligation, to buy or sell. With futures, you must meet margin calls and can lose more than you invested. With options, your maximum loss is the premium you paid upfront.
Do I need a special account to trade futures?
Yes. You must open a futures account with a broker registered with the Commodity Futures Trading Commission (CFTC). The broker will ask about your experience, income, and net worth. Some brokers have minimum deposit requirements, typically $2,000 to $10,000.
How are futures profits taxed?
Futures contracts are taxed under Section 1256 rules in the United States. Sixty percent of gains are taxed as long-term capital gains and 40 percent as short-term, regardless of how long you held the contract. This is often more favorable than stock trading, where holding period determines the rate.
What time of day do futures trade?
Most commodity futures trade nearly 24 hours a day, five days a week, with brief closures for maintenance. Stock index and currency futures also trade extended hours. Trading volume and liquidity are highest during regular U.S. market hours, typically 9:30 a.m. to 4:00 p.m. Eastern Time.