Futures Contracts Explained: How They Work and Who Uses Them
How Futures Work
When you enter a futures contract, you agree to buy (long) or sell (short) an asset at a set price on a specific future date. No money changes hands at entry except for margin — a good-faith deposit that’s a fraction of the contract’s full value.
Every day, your position is marked to market — gains and losses are settled daily through your margin account. This daily settlement is a key difference from forward contracts, which settle only at expiration.
Anatomy of a Futures Contract
| Component | Description | Example (E-mini S&P 500) |
|---|---|---|
| Underlying Asset | What’s being bought/sold | S&P 500 Index |
| Contract Size | Quantity per contract | $50 × S&P 500 level |
| Tick Size | Minimum price movement | 0.25 points ($12.50) |
| Expiration | Settlement date | Quarterly (Mar, Jun, Sep, Dec) |
| Settlement | Physical delivery or cash | Cash-settled |
| Initial Margin | Deposit required to open | ~$12,000-15,000 |
Types of Futures Contracts
| Category | Examples | Key Exchanges |
|---|---|---|
| Stock Index Futures | E-mini S&P 500 (ES), Nasdaq 100 (NQ), Dow (YM) | CME |
| Commodities | Crude oil (CL), Gold (GC), Corn (ZC), Wheat (ZW) | CME, NYMEX, CBOT |
| Currencies | Euro (6E), Yen (6J), British Pound (6B) | CME |
| Interest Rates | 10-Year Treasury (ZN), Eurodollar (GE) | CBOT, CME |
| Micro Futures | Micro E-mini S&P (MES), Micro Gold (MGC) | CME |
Margin and Leverage in Futures
Futures offer significant leverage. The E-mini S&P 500 contract controls roughly $250,000 in notional value (S&P at 5,000 × $50) but requires only about $12,000-15,000 in initial margin — roughly 5-6% of the contract value. This is 15-20x leverage.
This leverage magnifies both gains and losses. A 1% move in the S&P 500 (50 points) produces a $2,500 gain or loss on one E-mini contract — about a 17-20% move on your margin deposit. Margin calls can require immediate additional deposits if losses reduce your account below maintenance margin.
Futures vs. Options
| Feature | Futures | Options |
|---|---|---|
| Obligation | Obligation to buy/sell | Right (not obligation) to buy/sell |
| Premium | No premium — margin only | Pay premium upfront |
| Max Loss (long) | Substantial (margin + potential calls) | Premium paid (for buyers) |
| Time Decay | None | Yes (theta erodes value daily) |
| Settlement | Daily mark-to-market | At exercise or expiration |
| Leverage | Very high (10-20x typical) | High (varies by strike/expiry) |
| Trading Hours | Nearly 24 hours (Sun-Fri) | Market hours (with some extended) |
Who Uses Futures and Why
Hedgers
A wheat farmer sells wheat futures to lock in a price before harvest — if wheat prices drop, the futures profit offsets the lower crop value. An airline buys crude oil futures to protect against rising fuel costs. Hedgers use futures to reduce business risk from price fluctuations.
Speculators
Traders take directional bets on commodities, indexes, or currencies using futures’ high leverage. A trader bullish on the S&P 500 goes long E-mini futures. A trader bearish on crude oil goes short CL contracts. Speculators provide liquidity and take on risk that hedgers want to shed.
Arbitrageurs
They exploit price discrepancies between futures and their underlying assets (basis trading), or between different contract months (calendar spreads). Arbitrage keeps futures prices aligned with fair value.
Key Takeaways
- Futures are obligations to buy or sell at a set price — unlike options, you must follow through.
- They trade on margin (5-10% of contract value), providing 10-20x leverage.
- Daily mark-to-market means gains and losses are realized every trading day.
- Futures cover commodities, stock indexes, currencies, and interest rates across global exchanges.
- The leverage makes futures powerful but dangerous — losses can far exceed your initial margin deposit.
Frequently Asked Questions
Can you lose more than you invest in futures?
Yes. Because futures are margined, your losses can exceed your initial deposit. If the market moves sharply against your position, you may owe more than you started with. This is the primary risk difference between futures (obligation-based) and buying options (right-based, where loss is capped at the premium).
Do futures expire?
Yes. Each futures contract has a specific expiration (settlement) date, typically quarterly for financial futures and monthly for many commodities. As expiration approaches, most traders roll their position to the next contract month rather than taking or making delivery of the underlying asset.
What’s the difference between futures and forwards?
Futures trade on regulated exchanges with standardized terms and daily settlement. Forwards are private, customizable contracts between two parties that settle only at maturity. Futures have lower counterparty risk (the exchange guarantees trades) but less flexibility than forwards.
How much money do you need to trade futures?
It depends on the contract. Micro E-mini S&P 500 futures require about $1,200-1,500 in margin. Full-size E-mini contracts need $12,000-15,000. Crude oil futures need about $6,000-8,000. Most brokers recommend having significantly more than the minimum margin to withstand normal price fluctuations.
Are futures better than ETFs for index exposure?
Futures offer more leverage, nearly 24-hour trading, and potentially lower costs for short-term traders. ETFs like VOO are simpler, don’t expire, don’t require margin management, and are better for long-term investors. Institutional traders often use futures; individual investors generally prefer ETFs.