A futures contract is a binding agreement to buy or sell a specific asset at a set price on a set date in the future

When you buy a futures contract, you are not buying the asset itself right now. You are agreeing to buy it — or the seller is agreeing to sell it to you — at a price you both lock in today, even though the actual exchange happens weeks or months from now. The contract specifies exactly what you are trading (crude oil, wheat, the S&P 500 index), how much of it, what price, and what date the trade settles.

The person on the other side of your contract has the opposite position. If you agreed to buy 100 barrels of oil at $75 per barrel in three months, someone else agreed to sell you those barrels at that price. That seller profits if the price falls below $75 before the contract expires. You profit if it rises above $75. Neither of you owns the oil yet — you own the contract.

Futures trade on exchanges like the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). These are not over-the-counter deals between two people. The exchange itself stands in the middle, guaranteeing both sides will honor the contract, and it marks prices to market every single day — meaning your account gains or loses money based on how the contract price moves, even before the settlement date arrives.

Key Takeaways

  • A futures contract locks in a price today for an asset you will buy or sell on a specific future date, and the contract itself is what you trade, not the underlying asset.
  • You can profit whether prices rise or fall, because you can take either a long position (betting on a price increase) or a short position (betting on a price decrease).
  • Futures require margin — a deposit that is much smaller than the contract's full value — which means small price moves create large percentage gains or losses on your money.
  • Most futures contracts never result in physical delivery; traders close their positions before expiration by selling or buying an offsetting contract.
  • Futures are standardized contracts traded on regulated exchanges, which makes them more transparent than some other investments but also more complex than buying a stock.

Why traders use futures instead of buying the asset outright

Futures exist because they solve real problems for different kinds of traders. A wheat farmer might sell wheat futures in spring to lock in a price before harvest, protecting against the risk that prices will crash by fall. An airline might buy oil futures to lock in fuel costs months ahead, so a sudden price spike does not wreck their budget. These are called hedges — using futures to reduce risk in your actual business.

Speculators use futures for a different reason: leverage. You can control a contract worth $100,000 by putting down only $5,000 or $10,000 in margin. If the price moves 5 percent in your favor, your $5,000 becomes $10,000. But if it moves 5 percent against you, your $5,000 becomes zero and you owe money. That leverage is why futures can create outsized profits and outsized losses.

Futures also let you bet on prices falling. If you think oil will drop, you can short oil futures — sell a contract you do not own, agreeing to deliver it at a lower price later. You profit if the price falls. You cannot easily short a physical barrel of oil, but you can short the futures contract. This two-way betting is why futures attract traders who want to profit in any market direction.

How margin works and why it matters

Margin is the cash deposit you put up to open a futures position. It is not a loan — it is a good-faith deposit that the exchange holds to cover potential losses. The exchange sets a minimum margin requirement for each contract, and it varies by contract type and market conditions. Crude oil futures might require $5,000 in margin per contract; wheat might require $1,500.

Every day, the exchange recalculates your account based on the closing price of your contract. This is called marking to market. If you bought oil futures at $75 and the price closes at $76, your account gains $100 (one barrel times one dollar). If it closes at $74, your account loses $100. That loss comes out of your margin deposit when ready. If your margin falls below the maintenance level — usually 75 percent of the initial margin — the broker issues a margin call and you must deposit more cash within hours or your position is closed automatically.

This daily settlement is different from stocks, where you can hold a losing position indefinitely. With futures, losses hit your account every single day, and if you run out of cash, you are out of the trade. That is why leverage is dangerous: a 10 percent move against you can wipe out 100 percent of your margin deposit.

The difference between going long and going short

A long position means you bought a futures contract, betting the price will rise. You profit if the price goes up before expiration. You lose if it goes down. This is the straightforward bet most people understand: you think the price will be higher, so you buy.

A short position means you sold a futures contract you do not own, betting the price will fall. You profit if the price goes down before expiration. You lose if it goes up. To open a short, you straightforward click "sell" on the exchange. The exchange finds a buyer on the other side. You now owe a contract, and you will close it by buying it back at a lower price (you hope) before expiration.

Both positions require margin and both are marked to market daily. The mechanics are identical; only the direction of your bet changes. This symmetry is why futures are useful for hedging: a farmer who owns wheat can short wheat futures to offset the risk that prices will fall, locking in a floor price.

What happens when a futures contract expires

Every futures contract has an expiration date — the last day you can trade it. For crude oil, that might be the 20th of the month. For stock index futures, it might be the third Friday of the month. As expiration approaches, the contract price converges toward the spot price — the actual price of the asset right now in the physical market.

Most traders close their position before expiration by doing the opposite trade. If you bought one contract, you sell one contract. Your profit or loss is locked in, and you are out. The exchange matches you with another trader and the trade settles in cash. You never touch the underlying asset.

If you hold a contract all the way to expiration, the exchange will either cash-settle it (pay you the difference between your contract price and the final settlement price) or physically deliver the asset. Physical delivery is rare for most traders because it is expensive and complicated. Crude oil futures can result in delivery of actual barrels, but most traders close their positions weeks before that happens. Index futures like the S&P 500 always cash-settle because you cannot deliver an index.

How futures prices differ from spot prices

The spot price is what the asset costs right now in the physical market. The futures price is what traders agree it will cost on the expiration date. These are usually different, and the difference is called the basis.

If crude oil trades at $75 per barrel today but three-month futures trade at $76, the market is pricing in an expectation that oil will be more expensive in three months. This is called contango. If three-month futures trade at $74, the market expects oil to be cheaper — this is called backwardation. The basis narrows as expiration approaches, and on the expiration date, the futures price and spot price converge to the same number.

The basis reflects storage costs, interest rates, and market expectations. A commodity that is expensive to store (like crude oil) will usually trade in contango, because the futures price must be higher to compensate the seller for holding the physical asset. A commodity that is cheap to store or has when ready demand might trade in backwardation.

Common mistakes people make when trading futures

The biggest mistake is underestimating leverage. A trader sees a $5,000 margin requirement and thinks they are risking $5,000. In reality, a 10 percent move against them can wipe out the entire deposit and leave them owing money. Futures are not a way to turn $5,000 into $50,000 with low risk. They are a way to turn $5,000 into $10,000 or $0 very quickly.

The second mistake is holding a losing position hoping it will bounce back. With stocks, you can wait years for a recovery. With futures, margin calls force you out in days or hours. A trader who is down 50 percent on margin gets a call to deposit more cash when ready. If they cannot, the broker closes the position automatically, locking in the loss.

The third mistake is not understanding what you are trading. Futures contracts are standardized — one crude oil contract is 1,000 barrels, one wheat contract is 5,000 bushels. A one-cent move in wheat futures is worth $50 per contract. A one-dollar move in crude oil is worth $1,000 per contract. Traders who do not know these multipliers can be shocked by how fast their account moves.

Frequently Asked Questions

Can I actually take delivery of the asset if I hold a futures contract to expiration?

Yes, but it is rare and usually expensive. If you hold a crude oil futures contract to expiration, you can take delivery of 1,000 barrels. If you hold a gold contract, you can take delivery of 100 ounces. Most traders close their positions weeks before expiration to avoid this. Physical delivery requires arranging storage, insurance, and transportation, which costs far more than the profit most traders make.

Do I need a special account to trade futures?

Yes. Futures require a brokerage account registered for futures trading, and the broker must verify that you understand the risks. Some brokers require a minimum deposit (often $2,000 to $5,000) to open a futures account. You cannot trade futures through a regular stock brokerage account.

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

A futures contract is a binding 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, both sides must perform. With options, the buyer can walk away if the price moves against them. Options have a lower maximum loss (the premium paid) but require more complex pricing calculations.

Can I trade futures on my own, or do I need a broker?

You must use a broker. Futures trade only on regulated exchanges, and you cannot access those exchanges directly. Your broker handles the order, collects margin, and manages the daily settlement. The broker also handles regulatory compliance and record-keeping for tax purposes.

What happens if my broker goes out of business while I have an open futures position?

Your futures positions are protected by the Commodity Futures Trading Commission (CFTC) and the exchange. Even if your broker fails, your positions transfer to another broker and your margin is returned. Futures accounts have stronger protections than stock accounts because the exchange guarantees all trades.