What a futures contract is

A futures contract is an agreement to buy or sell a specific amount of something — oil, wheat, gold, a stock index — at a set price on a set date in the future. You do not own the thing itself. Instead, you own the contract, which is a promise that the transaction will happen.

The contract locks in a price today for delivery or settlement months from now. If you buy a crude oil futures contract for December, you are agreeing right now to pay a specific price per barrel in December, no matter what the actual market price is by then. If the price goes up, you profit. If it goes down, you lose money.

Futures trade on exchanges — the Chicago Mercantile Exchange (CME) handles most U.S. futures — and each contract has a standardized size. One crude oil contract, for example, represents 1,000 barrels. One corn contract represents 5,000 bushels. You cannot buy half a contract or a custom amount.

Key Takeaways

  • A futures contract is a binding agreement to buy or sell a commodity or financial instrument at a fixed price on a specific future date.
  • Futures are standardized by the exchange — you cannot negotiate the size, expiration date, or quality of what you are trading.
  • You control a large position with a small upfront payment called margin, which means your gains and losses are magnified.
  • Most futures traders close their position before the contract expires and never take physical delivery of the underlying commodity.
  • Futures prices move based on supply, demand, weather, geopolitics, and expectations about future conditions — not just the current spot price.

How margin and leverage work in futures

You do not pay the full contract price upfront. Instead, you put down a margin — a percentage of the contract value, typically 5 to 15 percent depending on the commodity and the broker. This small deposit gives you control of a much larger position. If a crude oil contract is worth $60,000 and the margin requirement is 10 percent, you put down $6,000 to control the full contract.

This is called leverage, and it cuts both ways. A small move in the price of oil can double your money or wipe out your margin deposit. If oil rises $1 per barrel, your $6,000 margin might become $7,000 or more. If oil falls $1 per barrel, your margin shrinks. If the price moves far enough against you, your broker will force you to close the position or add more money to keep it open — this is called a margin call.

Leverage is why futures are considered high-risk. You can lose more than you put in if the market moves sharply against you and you do not close the position in time.

Expiration dates and contract cycles

Every futures contract has an expiration date — the last day you can trade it. After that, the contract settles. For most commodities, settlement means the price is locked in and the contract ends. For some contracts, like those on physical commodities, settlement can mean physical delivery of the underlying good, though this is rare for individual traders.

Contracts expire on a schedule. Crude oil futures expire on the 20th calendar day before the month of delivery. Corn futures expire on the 15th day of the contract month. Gold futures expire on the last business day of the contract month. Each commodity has its own rules, and your broker will tell you the exact dates.

Most traders close their position — sell what they bought, or buy back what they sold — before expiration. They do this to avoid settlement complications and because the contract becomes less liquid (harder to trade) as expiration approaches. Rolling a position means closing the near-term contract and opening a new one for a later month.

The difference between futures and spot prices

The spot price is what something costs right now in the physical market — the price of a barrel of oil today, or a bushel of wheat today. The futures price is what traders expect it to cost at the contract's expiration date, plus or minus a premium for storage, interest, and risk.

Futures prices and spot prices are related but not identical. If crude oil is $75 per barrel today and traders expect it to be $78 in three months, the three-month futures contract might trade at $77.50. The difference reflects the cost of storing oil for three months and the interest cost of the money tied up in the contract.

When a futures contract expires, its price converges to the spot price. On the last day of trading, the futures price and the spot price are nearly the same. Before expiration, they can diverge by significant amounts, especially if expectations about supply or demand change.

Who trades futures and why

Hedgers use futures to protect themselves against price swings. A farmer might sell wheat futures to lock in a price before harvest. An airline might buy oil futures to protect against fuel price increases. A gold miner might sell gold futures to may provide a price for next year's production. Hedging reduces risk but also caps upside gains.

Speculators trade futures to profit from price movements. They have no interest in the underlying commodity and close their positions before expiration. A speculator might buy oil futures because they believe prices will rise, or sell corn futures because they expect a large harvest to push prices down. Speculation adds liquidity to the market — it makes it easier for hedgers to find someone to trade with — but it also introduces risk.

Some traders use futures as part of a broader portfolio strategy, betting that futures prices will move differently than stocks or bonds. Others use them to gain exposure to commodities without buying physical gold or oil.

How futures prices are set

Futures prices move based on supply and demand for the contract itself, not just the current spot price. If a drought threatens the corn crop, corn futures prices rise because traders expect lower supply. If a new oil field comes online, oil futures fall because traders expect higher supply. Weather, geopolitics, economic data, and even rumors can move prices.

The bid-ask spread — the difference between what buyers will pay and what sellers will accept — tells you how liquid a contract is. Contracts close to expiration and contracts on major commodities like crude oil and corn have tight spreads. Contracts far from expiration or on less-traded commodities have wider spreads, which means it costs more to enter and exit a position.

Futures prices also reflect what traders think will happen to interest rates, storage costs, and the broader economy. A contract expiring six months from now prices in all of that information. As the expiration date approaches and new information arrives, the price adjusts.

Risks specific to futures trading

Leverage magnifies losses. A 5 percent move in the underlying commodity can wipe out your entire margin deposit or more. You can lose money faster in futures than in almost any other investment vehicle.

Liquidity can disappear. If you need to close a position in a thinly traded contract, you may have to accept a much worse price than the last trade. This is especially true for contracts far from expiration or on obscure commodities.

Gaps can occur. If a market closes and reopens with major news — a geopolitical event, an economic report — the price can gap past your stop-loss order, leaving you with a larger loss than you planned for. This is called slippage.

Margin calls force you to act. If your position moves against you, your broker will demand more money to keep it open. If you cannot pay, they will close the position automatically, often at a bad price.

Frequently Asked Questions

Do I have to take physical delivery when a futures contract expires?

No. Most individual traders close their position before expiration and never take delivery. If you hold a contract until expiration, your broker will typically settle it in cash based on the final price, or they will close it automatically. Physical delivery is possible but rare for retail traders and usually only happens if you specifically request it and meet the exchange's requirements.

Can I trade futures with a small amount of money?

Yes, because of margin and leverage. You can control a $60,000 contract with $6,000. However, this also means a small account can be wiped out quickly. Many brokers set minimum account sizes of $2,000 to $5,000 for futures trading, and some require more. Start small and understand the risks before committing significant capital.

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

A futures contract is a binding obligation to buy or sell at the set price. An options contract gives you the right, but not the obligation, to buy or sell. With options, you can walk away if the price moves against you — you only lose the premium you paid upfront. With futures, you are locked in and can lose far more than your initial margin.

How do I know which futures contract to trade?

Start with the most liquid contracts on major commodities: crude oil, natural gas, corn, wheat, soybeans, gold, and stock indices like the S&P 500. These have tight spreads and high volume, which means you can enter and exit easily. Avoid thinly traded contracts until you have experience. Your broker's platform will show you volume and open interest for each contract.

What happens if I cannot pay a margin call?

Your broker will close your position automatically, usually at the current market price. If the market is moving fast, you may get a worse price than you expected. This is why risk management — using stop-loss orders and never risking more than you can afford to lose — is critical in futures trading.