Futures
Standardised contracts with an expiry date. Margin here means something different from margin on a stock.
11 min read · intermediate · lesson 5 of 6
What this covers
- Explain what a futures contract obliges
- Distinguish a performance bond from borrowed money
- Convert a tick into a currency amount for a specific contract
- Account for expiry, settlement style and the roll
- Identify the exchange-level controls that have no equivalent in forex or crypto
A standardised obligation
A futures contract is an agreement to transact a fixed quantity at a fixed price on a fixed date. Everything except the price is standardised by the exchange: quantity, quality, delivery, expiry.
That standardisation is what makes the market work. Both sides trade one variable, so the book is deep and the contracts are interchangeable. It also means the contract size is not negotiable. One contract is one contract, and the smallest position available is set by the exchange rather than by the account.
Most major contracts now have a smaller sibling, typically a tenth of the standard size, introduced because the full contract puts too much notional behind a single unit for most accounts. Where one exists, it is usually the correct starting point.
Margin is a performance bond, not a loan
Equity margin is borrowed money, and interest accrues on it. Futures margin is a good-faith deposit that both sides post against the obligation, and nothing is borrowed.
Two figures matter. Initial margin is what opening the position requires. Maintenance margin is the lower level the account must stay above to keep it. Fall below maintenance and the broker demands funds or closes the position.
The practical consequence: positions are marked to market daily and gains or losses settle in cash each day. A position moving against you draws down the account continuously rather than on close.
Ticks, and what one is worth
IllustrativeContract specifications are published by the exchange. Check them for the specific contract before sizing; the figures below are illustrative of the shape of the problem rather than a reference table.
A tick is the smallest price increment a contract trades in. Tick value is what one tick is worth on one contract, and it is fixed by the specification rather than derived from the price.
The S&P 500 contract moves in quarter-point ticks, with a point worth 50 dollars, so one tick is 12.50 dollars. The crude oil contract moves in one-cent ticks on 1,000 barrels, so one tick is 10 dollars.
Those two tick values are close together, and that tells you almost nothing about the risk of holding one of each. What decides that is how many ticks the contract travels, which differs by contract and is not derivable from the price or from the tick value.
This is why a contract count carried from one instrument to another is meaningless. Size is computed from the stop distance in ticks multiplied by that contract's tick value, every time.
Size per contract, every time
A position size carried over from one instrument to another is not the same risk. One contract of a volatile energy future and one contract of an index future are not comparable positions.
This is the most common and most expensive error made by traders arriving from equities, where one share is a broadly comparable unit across names. Here the unit is defined per contract and the differences are large.
Expiry, settlement and the roll
A futures position does not continue indefinitely. Each contract expires, and liquidity migrates to the next month before it does.
How it expires differs. Index contracts settle in cash: the position closes against a final settlement price and nothing changes hands but money. Physical contracts oblige delivery of the actual commodity, which is not a theoretical risk for a retail account holding one into expiry.
Holding a longer-term view means rolling: closing the expiring contract and opening the next. The two trade at different prices, and which is higher is a property of the market rather than a forecast. When later months trade above nearer ones, rolling costs money each time; when they trade below, it pays. Over a long hold that accumulates and can dominate the outcome.
A chart stitched across contracts contains the roll gaps, so a continuous chart is a construction rather than a traded series. Levels read from one need checking against the contract actually being traded.
Controls that other markets do not have
Futures trade on a regulated exchange, which brings structure absent from currency and crypto markets.
Daily price limits cap how far a contract can move in a session. Reaching one halts or restricts trading, which protects against disorderly moves and also means a position cannot be exited while the limit holds.
A clearing house sits between both sides of every trade, so counterparty risk is mutualised rather than carried against an individual firm. Volume and open interest are consolidated and published, unlike in forex where no complete figure exists.
Position data by participant category is published weekly for these markets, which is what makes institutional positioning measurable here rather than inferred.
What PecuDesk covers
Eight CME contracts: ES (S&P 500), NQ (Nasdaq 100), YM (Dow), GC (Gold), SI (Silver), HG (Copper), CL (Crude Oil) and NG (Natural Gas).
Three index contracts, three metals and two energy contracts, which between them span most of the volatility range available in this class.
Key takeaways
- A futures contract standardises everything but price, including the size you must trade.
- Margin is a performance bond. Nothing is borrowed, and positions settle daily.
- Tick value is fixed by the specification. Size against the specific contract every time.
- Equal tick value does not mean equal risk. What a contract travels is a separate figure to check.
- Contracts expire. Index contracts settle in cash; physical contracts oblige delivery.
- Rolling has a cost or a credit that accumulates over a long hold.
Common mistakes
- Carrying a contract count from one future to another as though the risk is comparable.
- Reading a stitched continuous chart as though it were one continuously traded instrument.
- Holding a physically settled contract toward expiry without intending delivery.
- Using the standard contract where a smaller sibling would size the position properly.
Knowledge check
OptionalRelated
- Indices and commoditiesAsset Classes
- Leverage and marginMarket Foundations