Ultimate Guide on Futures: Contract Size, Leverage and More

Ultimate Guide on Futures: Contract Size, Leverage and More

Futures trading is a way to buy or sell something at a set price on a future date. That “something” could be oil, gold, coffee, a stock index, or even Bitcoin. Instead of buying the actual item now, traders agree to buy or sell it later — at a price they lock in today.

What Are Futures Contracts?

A futures contract is a legal agreement between two parties — one agrees to buy, and the other agrees to sell — an asset at a specific price on a future date. These contracts are standardised and traded on exchanges, which means the terms (like size and expiry date) are fixed by the exchange, not the trader.

You don’t always need to wait until the contract expires. Most traders buy and sell contracts to make money from price changes before expiry.

Key Terms You Should Know

Here are some basic terms that you’ll often hear in futures trading:

• Underlying Asset: The item being traded — for example, oil, gold, or a stock index.
• Contract Size: The amount of the asset the contract represents. For example, one gold futures contract may represent 100 ounces of gold.
• Expiration Date: The date when the contract ends.
• Long Position: When you agree to buy the asset in the future.
• Short Position: When you agree to sell the asset in the future.
• Margin: A deposit you must put down to open a trade — usually just a small part of the contract’s full value.
• Leverage: The ability to control a large position with a smaller amount of money. This can lead to bigger gains — or losses.

How Futures Trading Works

Futures trading may sound complex, but the process is straightforward once you understand the parts involved. It’s all about agreeing on a price today for something that will be delivered (or settled) later.

The Role of Buyers and Sellers

In every futures contract, there are two parties involved, the buyer and the seller.

• The buyer expects the price of the asset to go up and agrees to buy at today’s price in the future.
• The seller expects the price to go down and agrees to sell at today’s price in the future.

Neither party needs to actually own the asset. Most people are just speculating — they open a position and close it later for profit or loss, without waiting for the contract to expire.

How Prices Are Decided

Prices in the futures market move based on supply and demand, just like in any other market. But they are also influenced by:

• The price of the actual asset (called the spot price)
• Interest rates
• Storage costs (for commodities like oil or grain)
• Time left until expiry 

Traders also look at news, economic reports, and technical charts to predict where prices might go next.

Margin and Leverage Explained

To open a futures trade, you don’t need to pay the full contract value. You just put down a margin, which is like a security deposit. This could be as little as 5–15% of the full contract price.

Because of this, futures trading uses leverage. You control a large position with a small amount of money. But this cuts both ways — profits can be large, but so can losses.

For example, let’s say a crude oil futures contract controls 1,000 barrels. If oil is $80 per barrel, the full contract value is $80,000. With a 10% margin, you only need $8,000 to trade one crude oil futures contract.

If oil moves up $1, your position gains $1,000. If it drops $1, you lose $1,000.

Expiry Dates and Settlement

Every futures contract has an expiry date, which is the last day it can be traded. At expiry, there are two ways the contract is settled:

1.Cash Settlement – No asset changes hands. You simply pay or receive the profit or loss.

2.Physical Delivery – The actual commodity (like oil or gold) is delivered. This is rare for retail traders.

Most traders close their positions before expiry to avoid settlement.

Types of Futures Contracts

Futures contracts can be based on many different things — from physical goods to financial instruments. Traders choose contracts based on what they want to trade, hedge, or speculate on.

Commodity Futures: These are the oldest and most well-known futures. They cover raw materials and natural resources. Some of the common examples of commodity futures are crude oil, natural gas, gold and silver, and agricultural produces like corn, wheat and soybeans.

Farmers and producers hedge against price drops by taking positions with commodity futures. Buyers (like airlines or food firms) lock in prices in advance with futures contracts, while traders speculate on price changes.

Financial Futures: These involve financial instruments rather than physical goods. They’re often used by investors and institutions. Such instruments include interest rate futures (eg, US treasury bonds), stock index futures (eg, S&P 500, FTSE 100), and single stock futures (on individual company stocks like APPL, TSLA).

Investors usually hedge their stock portfolio using financial futures contracts. Traders also bet on interest rate movements and trade broad market trends without buying actual stocks.

Currency Futures: Also called FX futures, these are contracts to exchange one currency for another at a fixed rate on a future date. Some of the popular currency pairs with available futures contracts are EUR/USD, GBP/USD, and USD/JPY.

Exporters, importers, and banks use currency futures to protect against currency swings. Speculators also trade these currency futures to profit from exchange rate changes.

Index Futures: These futures contracts trade a whole stock index like S&P 500, NASDAQ-100, DAX, and Nikkei 225. These futures contracts allow traders to take a position on the broader market without buying individual stocks.

Crypto Futures: Cryptocurrency futures work the same way but are based on digital assets. However, futures contracts of only some top cryptocurrencies by market capitalisation, like Bitcoin and Ethereum, are available.

Crypto futures are traded on platforms like CME or crypto-specific exchanges. They are popular among those who want to trade digital assets without holding them directly.

Where to Trade Futures

Futures aren’t traded just anywhere. They are bought and sold through regulated exchanges and licensed brokers. These platforms ensure fair pricing, proper settlement, and risk management.

Futures Exchanges

Futures are traded on large, centralised exchanges. These exchanges set the rules, standardise the contracts, and handle settlement. Some of the top global futures exchanges are:

• CME Group (Chicago Mercantile Exchange) – the biggest in the world; handles oil, gold, S&P 500, crypto futures, and more.
• ICE (Intercontinental Exchange) – trades energy, agriculture, and currency futures.
• Eurex – Europe’s main futures exchange.
• Tokyo Commodity Exchange (TOCOM) – handles metals and energy in Asia.

These exchanges provide transparent pricing and act as the middleman between buyers and sellers.

Online Futures Brokers

Brokers offer traders and other interested parties access to futures markets, where they can trade these instruments. To access the futures exchanges, you must open an account with a futures broker.

The characteristics of a good futures broker are:

• Direct access to futures markets
• Low commissions and margin rates
• Fast, reliable trading platforms
• Risk management tools (like stop-loss orders)
• Charting and market data

Thus, to trade futures, you need two things:

1.A trading account with a futures broker

2.Access to the exchange where your chosen contract is listed

Costs of Trading Futures

Before you start trading, it’s important to know the real cost. Some costs are clear, like commissions, but others are hidden — and they can add up fast if you don’t plan ahead. The main costs involved with futures trading are:

1.Brokerage Fees: This is the fee your broker charges for each trade you make. Brokers can charge fees primarily with two structures:

• Per-trade fee – a fixed amount per contract (e.g. $1.50 per side)
• Volume-based fee – charged based on how many contracts you trade

These vary depending on the broker, your trading volume, and the contract type.

2.Exchange Fees: These are set by the futures exchange (like CME or ICE), and they apply to every trade. You’ll see these listed separately in your trade breakdown. They’re usually small but not negligible, especially for active traders.

3.Margin Interest: Futures trading uses margin, and while initial margin is usually interest-free, you may be charged:

• If you hold positions overnight
• If you go below the maintenance margin
• If you use the extra leverage provided by your broker

Not all brokers charge this, so check the terms carefully.

4.Market Spread: This is the difference between the buy (ask) and sell (bid) prices. While not a direct fee, it’s a cost you pay every time you enter a trade.

Tight spreads (common in liquid contracts like S&P 500) mean lower cost. Wide spreads (in less-traded contracts) increase your cost.

5.Platform or Data Fees: Some brokers also charge monthly fees for access to premium trading platforms and even for real-time data from exchanges. Although these fees are usually waived for active traders (based on the volumes), you must not neglect them.

6.Slippage: Slippage happens when your trade is executed at a worse price than expected, especially during volatile markets. It’s not a fixed fee, but it can eat into profits or increase losses.

7.Hidden Costs: There can be many hidden fees charged to futures traders, which may include inactivity fees (if you don’t trade for a while), withdrawal fees (some brokers charge for moving funds), and currency conversion (if you deposit in a different currency than the contract is traded in).

It is strongly advised that traders must always read the fee schedule before opening a futures trading account. A cheap-looking broker can be expensive once you add up hidden costs.

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