What happens when you buy or sell a futures contract

A futures contract is an agreement to buy or sell a specific amount of something — oil, wheat, gold, a stock index — at a price you lock in today, with delivery or settlement happening on a date months away. You do not own the thing itself yet. Instead, you control the right to buy it or the obligation to sell it at that fixed price, no matter what the market price becomes between now and then.

When you enter a futures contract, you put down a margin deposit — a fraction of the contract's total value, typically 5 to 20 percent depending on what you are trading. This deposit sits in your account as collateral. The exchange that runs the market holds it. If the price moves against you, your account balance shrinks. If it shrinks below a certain threshold, the broker automatically closes your position to protect themselves from larger losses.

Every day, the exchange marks to market your position. That means it calculates what your contract is worth based on that day's closing price and adds or subtracts the difference from your account. If you bought a contract at $100 and it closes at $102, you gain $200 (assuming a standard contract size). If it closes at $98, you lose $200 — when ready, that same day. You see real losses in real time, not just on paper.

Key Takeaways

  • A futures contract locks in a price today for something you will buy or sell months from now, but you do not own the underlying thing until settlement.
  • You deposit only a fraction of the contract value upfront as margin, which means small price moves create large percentage gains or losses on your deposit.
  • Your account is marked to market daily, so losses are deducted from your margin deposit when ready, and if the balance falls too low, your position closes automatically.
  • Most futures traders close their position before the delivery date by selling (or buying back) the contract, rather than taking physical delivery of the commodity.
  • Futures prices move based on supply, demand, and expectations about the future, and they can swing sharply in a single day.

How margin amplifies both gains and losses

Margin is the lever that makes futures trading different from buying a stock outright. If you buy 100 shares of a stock at $50 each, you spend $5,000 and own $5,000 worth of stock. If the price rises to $55, you gain $500, or 10 percent on your money.

With a futures contract on the same stock index, you might control $50,000 worth of exposure with a $5,000 margin deposit. If the price rises 10 percent, your gain is $5,000 — a 100 percent return on your deposit. But if the price falls 10 percent, your loss is also $5,000, which wipes out your entire deposit. A 5 percent move in the wrong direction can eliminate your margin entirely and force the broker to close your position.

This is why futures trading carries the risk of losing more than you deposit. If the market gaps sharply overnight — opens at a price far from where it closed — your account can swing into negative territory before you have a chance to close the position. You would then owe the broker the difference.

The role of the clearinghouse and daily settlement

Every futures trade passes through a clearinghouse, a central entity that sits between buyer and seller. The clearinghouse becomes the buyer to every seller and the seller to every buyer. This means you are never actually trading directly with another person; you are trading with the clearinghouse, which guarantees the trade will settle.

The clearinghouse requires both sides to post margin and then recalculates that margin every single day based on the closing price. If your position loses money, the clearinghouse deducts it from your margin account that evening. If it gains, the clearinghouse deposits the gain. This daily settlement is called variation margin. It is why you can lose money on a futures position even if you never close it — the losses are pulled from your account automatically.

This system protects the clearinghouse and the exchange from the risk that a trader will straightforward disappear and leave losses unpaid. By settling every day, they collect losses in small pieces rather than waiting until the contract expires and discovering a trader cannot pay a large bill.

How prices are set and what moves them

Futures prices reflect what traders believe the thing will be worth at delivery. If traders think oil will be scarce in three months, they bid up the price of the three-month contract. If they think there will be a glut, they bid it down. The price is not set by any single authority — it emerges from the bids and offers of thousands of traders on the exchange floor or through electronic systems.

Prices move based on real supply and demand, economic data, weather, geopolitical events, and trader sentiment. A drought can send wheat futures up. A report that oil inventories are higher than expected can send crude futures down. A central bank interest rate decision can move currency futures sharply. Because futures are leveraged, even a small percentage move in the underlying price creates a large percentage move in your account.

Futures also have a relationship to the current spot price — the price you would pay to buy the thing right now. If a futures contract is trading far above the spot price, traders can buy the physical commodity, store it, and sell the futures contract, locking in a profit. This arbitrage activity keeps futures prices tethered to reality. But the relationship is not exact; futures can trade at a premium or discount to spot depending on storage costs, interest rates, and how far away the delivery date is.

The difference between closing a position and taking delivery

Most futures traders never take delivery. Instead, they close their position before the contract expires by doing the opposite trade. If you bought a contract, you sell it. If you sold a contract, you buy it back. The difference between what you paid and what you received is your profit or loss. This happens days, weeks, or months before the delivery date.

Taking physical delivery is rare and usually happens only if you are a commercial user — a farmer selling wheat, an airline buying jet fuel, a gold refiner buying gold. For them, the futures contract is a way to lock in a price for something they actually need. For most traders, the contract is a financial instrument, and they exit before delivery becomes an issue.

As a contract approaches its expiration date, it becomes less liquid — fewer traders are willing to buy or sell it because they do not want to be stuck holding it at delivery. The bid-ask spread widens, meaning the difference between what you can sell for and what you can buy for grows larger. This is why most traders close positions well before expiration.

Contract specifications and standardization

Every futures contract is standardized. The exchange decides the size, the quality standards, the delivery location, and the expiration dates. You cannot negotiate these terms. A crude oil contract on the New York Mercantile Exchange (NYMEX) is always 1,000 barrels. A corn contract on the Chicago Board of Trade (CBOT) is always 5,000 bushels. A gold contract on COMEX is always 100 troy ounces.

This standardization is what makes the market liquid. Because everyone is trading the same contract, there are many buyers and sellers, and you can usually enter or exit a position quickly. If contracts were custom-made, each trade would be unique, and you might get stuck holding something you cannot sell.

The exchange also sets the minimum price movement, called a tick. For crude oil, a tick might be $0.01 per barrel. For gold, it might be $0.10 per troy ounce. This tick size determines the smallest profit or loss you can make on a single contract. A one-tick move on a crude oil contract (1,000 barrels) is a $10 gain or loss. On a gold contract (100 ounces), it is a $10 gain or loss.

How leverage and risk interact in real trading

The combination of margin and daily settlement creates a situation where small moves can have outsized effects. Suppose you deposit $5,000 as margin on a crude oil contract worth $50,000. Oil is trading at $80 per barrel. If the price rises to $81, you gain $1,000 — a 20 percent return on your deposit. But if it falls to $79, you lose $1,000. A $1 move, or 1.25 percent of the contract value, is a 20 percent swing in your account.

This leverage works both ways. It amplifies gains when you are right and losses when you are wrong. It also means that a position that looks small in dollar terms can create large daily swings in your account balance. Many new traders underestimate how quickly a position can move against them and how fast margin can be consumed.

The other risk is gap risk — the possibility that a market closes at one price and opens the next day at a very different price, with no chance to trade in between. If you are short a contract (you sold it, betting the price will fall) and the market opens sharply higher, you may face a loss larger than your margin deposit before you can close the position. This is why risk management — setting stop-loss orders, limiting position size, and understanding the volatility of what you are trading — is essential.

Frequently Asked Questions

Can I lose more money than I deposit in a futures account?

Yes. If the market gaps sharply overnight or moves faster than you can close your position, your losses can exceed your margin deposit. You would then owe your broker the difference. This is one of the largest risks in futures trading and is why position sizing and stop-loss orders matter.

What happens if I do not close my position before the contract expires?

The contract will settle on the expiration date. For most financial futures (stock indices, currencies), this means cash settlement — your account is credited or debited based on the final price. For commodity futures, it typically means you are obligated to take or make delivery of the physical commodity, which is why traders close positions well before expiration.

Why do futures prices sometimes differ from the current spot price?

Futures prices reflect expectations about the future, plus the cost of carrying the commodity (storage, insurance, interest) until delivery. If storage is expensive, futures trade at a premium to spot. If the commodity is in high demand now, futures might trade at a discount. The difference narrows as the delivery date approaches.

How much margin do I need to trade a futures contract?

Initial margin requirements vary by contract and exchange, typically ranging from 5 to 20 percent of the contract value. Your broker may require more. You also need to maintain a minimum balance — if your account falls below the maintenance margin level, the broker will close your position automatically.

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

A futures contract is an obligation to buy or sell at a set price. An options contract gives you the right, but not the obligation, to buy or sell. With futures, you post margin and face daily losses. With options, you pay a premium upfront and your loss is limited to that premium. Options are generally considered less risky for new traders, but they are also more complex to price.