Futures Overview

What are futures?

A futures contract is a standardized agreement to buy or sell an underlying asset at a set price on a future date. These contracts trade on futures exchanges, which set consistent terms, including the quantity and, where applicable, quality of the underlying asset.

Futures can be traded long or short as traders use futures to seek profits from price movements or help manage risk. Positions can be closed early or held through expiration. If held through expiration, contracts settle dependent on the contract’s rules.

What does it mean to go long or short a future?

A long position benefits when the contract price rises and loses value when it falls. A short position benefits when the price falls and loses value when it rises. Both directions involve risk.

How do futures differ from stocks, options, and event contracts?

Traditional futures let you trade an underlying asset’s price movements without owning it directly. They have a set expiration date and leverage built into the contract, which magnifies gains and losses. Losses can exceed the funds deposited.

Other investments work differently:

• Stocks represent ownership in a company and generally have no expiration date.

• Options expire, with payoffs that depend on the underlying asset’s price relative to a strike price. Buyers pay a premium for a right, while sellers take on an obligation if assigned.

• Event contracts let you trade on a specific outcome. They are paid for in full upfront and generally settle at $1 or $0, giving each purchase a defined maximum gain and loss.

What is the difference between a speculator and a hedger in futures markets?

A hedger uses futures to reduce the risk of price changes in something they already own, produce or plan to buy. For example, a farmer might sell corn futures to lock in a price for an upcoming harvest.

A speculator has no underlying exposure to protect. They take positions to profit from expected price moves and accept the risk that comes with that.

How does leverage affect futures trading?

Futures let you control a contract’s full notional value by providing a smaller amount of required margin. Gains and losses reflect the full position size, so this inherent leverage increases both potential returns and potential losses.

What is notional value?

Notional value represents the full market exposure of your futures position. Margin is the amount of money required to open or maintain that position, usually a fraction of its notional value.

For example, a contract with a $200,000 notional value might require $10,000 in margin. Your gains and losses are based on the full $200,000 exposure, so a 1% price move would result in a $2,000 gain or loss, excluding fees.

What are the general risks of futures trading?

Leverage, adverse price movements, changing margin requirements, and limited liquidity can lead to significant losses or forced liquidation. Losses may exceed the amount deposited in your futures account.