What are Futures Contracts?

A futures contract is a standardized legal agreement to buy or sell a specific asset at a predetermined price on a future date. Think of it as a binding promise between two parties: one agrees to sell, the other agrees to buy, at terms set today for delivery at a later date.

Beginner Note: Futures contracts are not shares of stock — they are agreements with obligations. Don't worry if delivery sounds confusing: most traders close their contracts before expiration and never take delivery. Many contracts are also cash-settled.

Key Insight: Unlike buying a stock, where you immediately own shares, a futures contract is an obligation that doesn't settle until the contract's expiration date.

How the Basic Mechanism Works

The Agreement Structure

Every futures contract has specific details that define exactly what you're trading:

What will be traded: Crude oil, Gold, E-mini S&P 500 index, NASDAQ Futures, Bond Futures, Corn Futures, Cattle Futures, etc.
Standard Quantity: 1,000 barrels of crude, 100 ounces of gold, $50 per index point, etc.
Delivery Date: Specific month and date, or cash-settled.
Price: Your purchase (long) or sell price (short)
Quality: 99.5% pure gold, Sweet Crude oil, Chicago Wheat, etc.
Long and Short: You have the ability to profit from being Long (anticipating price increases) or Short (anticipating price decreases).

Not all contracts are deliverable, such as those on NASDAQ, E-mini S&P. They have a cash settlement date.

Simple Example: Micro S&P 500 Futures

A trader in January might buy (long) a March Micro S&P 500 futures contract when the index is at 6,000 points. Each contract controls $5 worth of value per index point, so they're controlling $30,000 worth of market exposure (6,000 × $5 = $30,000). This is the notional value.

If the S&P 500 futures rose during the day to 6,010, you profit: 10 points × $5 = $50 gain. If the index falls to 5,990, you incur a loss: 10 points × $5 = $50 loss. The contract locked in your market exposure at the 6,000 level.

Key Insight: Futures let you control a large notional value with a small margin deposit, creating both opportunity and risk. Day traders may get even lower margins (hold larger number of futures contracts) as long as they close their positions before the end of the session.

What Makes Futures Contracts Unique

Standardization

Unlike private contracts between individuals, futures contracts are identical and interchangeable. Every Micro S&P 500 contract represents the same $50 a point multiplier, tracks the same index, and expires on the same dates.

This standardization creates liquidity—you can easily buy or sell because every contract is the same in terms of points and ticks.

Exchange Trading

Futures trade on regulated exchanges such as the CME Group, rather than being privately between parties. The exchange effectively acts as the counterparty to every trade through its clearinghouse, eliminating concerns about whether the other party will fulfill their obligation.

Two-Way Obligation

Both buyers and sellers have binding obligations. The buyer must purchase at the agreed price, the seller must deliver at that price. Neither party can simply walk away (unlike options, where you can choose not to exercise).

The Three Categories of Underlying Assets

Category	Examples	Settlement Type
Physical Commodities	Energy (Crude Oil, Natural Gas), Metals (Gold, Silver, Copper), Agriculture (Corn, Wheat, Soybeans, Cattle, Coffee), Currencies (Euro, Yen, British Pound), Interest Rates (Treasury Bonds, Notes)	Physical delivery, though most traders close positions before expiration.
Financial Instruments	Stock Indices (S&P 500, Nasdaq-100), Micro Stock Indicies, Micro Gold, Micro Crude Oil	Cash-Settled
Digital Assets	Cryptocurrencies (Bitcoin, Ethereum futures)	Cash-settled (no delivery possible)

For detailed contract specifications across these categories, see our Contract Specifications and Values guide.

Why Futures Contracts Exist

Price Discovery

Futures markets reveal what participants collectively believe assets will be worth in the future. These "forward-looking" prices help everyone from farmers to manufacturers plan their businesses.

Risk Transfer

Futures allow those who face price risk (farmers - crop prices, airlines - fuel costs, manufacturers - raw material costs) to transfer that risk to those willing to bear it (speculators, hedge funds). This risk transfer function is economically valuable.

Liquidity and Access

Futures provide an efficient way to gain exposure to commodities, currencies, and indices without the complexities of physical ownership or direct market access. Micro contracts make this access available even to traders with smaller account sizes.

Market Participants and Their Roles

Commercial Users (Hedgers)

Producers (farmers, oil companies) hedge against falling prices
Consumers (airlines, food processors) hedge against rising prices
Portfolio managers hedge against market declines

Financial Participants (Speculators)

Individual traders seeking profit from price movements
Hedge funds implementing sophisticated strategies
Prop trading firms providing market liquidity
Retail traders using micro contracts for capital-efficient exposure

Both groups are essential—hedgers transfer risk, speculators provide liquidity and assume risk.

Key Trading Concepts

Leverage Through Margin

You don't pay the full contract value upfront. Instead, you post "margin"—typically a percentage of the contract value—as a performance bond. This creates leverage, amplifying both gains and losses. Micro contracts require proportionally smaller margin deposits, making futures accessible to more traders.

For complete margin mechanics, see our Understanding Futures Margins guide.

Contract Expiration

Every futures contract has a specific expiration date. As expiration approaches, you must either close your position or prepare for delivery/settlement.

Learn the complete expiration process in our Futures Contract Expiration guide.

Daily Settlement

Your account is marked to market daily. Profits and losses are realized each day, not just when you close the position.

Technology and Market Access

With Optimus Futures, traders access professional-grade platforms including Optimus Flow, Optimus Web, Optimus Mobile and TradingView integration without additional platform fees. Micro contracts offer day trading margins as low as $50, making futures accessible even for smaller accounts while maintaining professional execution standards.

Frequently Asked Questions

What's the difference between futures and stocks?

Stocks represent ownership in a company with no expiration date. Futures are temporary contracts with specific expiration dates that represent agreements to trade assets, not ownership of those assets.

Are futures contracts risky?

Yes, futures trading involves substantial risk due to leverage and volatility. You can lose more than your initial investment. However, with proper education, risk management, and position sizing, many traders attempt to manage these risks. Always start with small positions and never risk more than you can afford to lose.

What is the smallest futures contract I can trade?

Micro futures contracts are the smallest, typically 1/10th the size of standard contracts. For example, Micro S&P 500 futures require significantly less margin than regular E-mini contracts. With brokers like Optimus Futures, traders can access Micro contracts with day trading margins as low as $50.

Do I have to take delivery of the underlying asset?

No. Most futures contracts (over 95%) are closed before expiration. Financial futures like the Micro S&P 500 are cash-settled anyway, so physical delivery isn't possible.

Who regulates futures contracts in the U.S.?

The Commodity Futures Trading Commission (CFTC) oversees futures markets, while the National Futures Association (NFA) regulates futures brokers and ensures compliance. Optimus Futures is an NFA member firm (NFA ID: 0515570), maintaining strict compliance standards and segregated customer funds for trader protection via its FCMs.

Why are futures contracts standardized?

Standardization creates liquidity. When every contract is identical, traders can easily buy and sell without negotiating terms. This makes markets more efficient and liquid.

How much money do I need to start trading futures?

This depends on the contracts you want to trade and your broker's requirements, although Micro contracts have made futures more accessible. The minimum amount required to open an account with Optimus Futures is $500 to trade Micros and $2,000 to trade E-minis or standard contracts.

What happens when a futures contract expires?

Most traders close their positions before expiration. If held to expiration, financial futures like stock indices are cash-settled automatically, while commodity futures may require physical delivery arrangements. You have the obligation to exit before expiration dates on physical commodities (Optimus Futures may provide dates).

Next Steps in Your Futures Education

Master the Fundamentals:

✅ Futures contracts basics (covered in this article)
How margin and leverage work → Understanding Futures Margins
Contract specifications → Contract Specifications and Values

Apply Your Knowledge:

Order types available → Futures Trading Order Types
Essential risk management → Risk Management Fundamentals
Contract expiration process → Futures Contract Expiration

Explore Specific Markets:

Stock Index Futures for equity market exposure
Commodity Futures Products for physical goods
Currency Futures Products for forex exposure

Risk Disclaimer

The content of this guide is the opinion of Optimus Futures.

Futures and options trading involves substantial risk and is not suitable for all investors. Past performance is not necessarily indicative of future results. Examples provided are for illustrative and educational purposes only and should not be construed as specific trading advice or recommendations.

Trading on margin and with leverage carries a high level of risk, as it can amplify both gains and losses.

The placement of contingent orders such as "stop-loss" or "stop-limit" orders will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. Risk management techniques discussed (such as stops, stop-limits, or bracket orders) cannot eliminate risk.

You should only trade with risk capital—that is, money you can afford to lose without affecting your lifestyle or financial security. There are no “proven” methods or guaranteed systems for making money in futures trading. It is a challenging process that requires ongoing learning, discipline, and adapting to changing market conditions. Traders must carefully consider their financial condition, risk tolerance, and trading objectives before engaging in futures or leveraged markets. It is important to note that most traders do lose money trading futures.