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Futures basics: understand the contract, margin, leverage, and settlement before trading

Understand futures contracts, contract size, expiration, margin, daily gains and losses, cash or physical settlement, liquidity, leverage, and the difference between hedging and speculation.

Intermediate10 min
KEY TAKEAWAYS
  • A futures contract is a standardized agreement whose economic exposure can be much larger than the cash posted as margin.
  • Margin in futures is a performance bond and daily gains and losses can create additional cash requirements.
  • Contract size, tick value, expiration, settlement, and liquidity must be understood before the position is opened.
  • Hedging and speculation can use the same contract but have different objectives, sizing logic, and risk controls.
Current Rules

Contract specifications, margin requirements, trading hours, settlement procedures, and exchange rules vary by product and can change. Verify the current contract and broker requirements before trading.

Read the contract specification first

Identify the underlying asset, contract size, quotation unit, tick value, expiration cycle, last trading date, and settlement method. A small quoted price movement can represent a large dollar change once multiplied by contract size.

Understand margin and daily cash flow

Futures positions are marked to market. Losses can require additional cash, and leverage can create losses that are large relative to the amount initially deposited.

Plan the exit before expiration

Decide whether the position will be closed, rolled, or allowed to reach settlement. Physical-delivery and cash-settled contracts create different operational requirements.

Separate a hedge from a directional trade

A hedge is sized against an existing exposure. A speculative position seeks profit from price movement. In both cases, define maximum loss, liquidity, margin capacity, and the event that closes the trade.