What Is a Futures Contract? Futures Explained for Beginners

A futures contract is a standardized agreement, traded on an exchange, to buy or sell a fixed quantity of an asset at a fixed price on a fixed future date. The exchange writes the terms, and a clearing house stands between the two sides.

This page covers what the contract is, what the exchange fixes, how margin and daily settlement work, who is on each side, how contracts end, and why a long futures chart is a chain of separate contracts. The worked numbers are hypothetical. It is descriptive throughout.

What a futures contract is

A futures contract is a promise with a date on it. One side agrees to deliver a fixed quantity at an agreed price at an agreed time; the other agrees to take it and pay.

What separates it from a private deal is the exchange and the clearing house: once a trade is agreed, the clearing house becomes the counterparty to both halves, so neither party depends on the other's credit. It is also why selling one contract in the month you are long closes the position.

What "standardized" actually means

The exchange fixes every term except the price: contract size, delivery month, tick size (the smallest increment the price is allowed to move in), and the grade and location of the goods. March, April and May are separate contracts with separate prices, and because every March contract is identical, one is a perfect substitute for another.

Crude oil shows why size matters: one standard light sweet crude contract covers 1,000 barrels. Suppose the March contract is quoted at 70.00 dollars a barrel: the notional value is 70,000 dollars and the one cent tick is worth 10 dollars. A move of 1.50 dollars a barrel looks small against a 70 dollar price, but it is 1,500 dollars on one contract. The quoted number is the price of one barrel, and one contract covers 1,000 of them.

Margin and daily settlement

Initial margin is a performance bond posted with your broker, not a deposit toward a purchase. Nothing has been bought yet; the money is collateral against a day's adverse move.

At each session's close the exchange publishes a settlement price, marks every open position against it, and credits gains or debits losses in cash that same day. Profit and loss moves through the account daily.

Maintenance margin is the lower balance the account has to stay above once the position is open. With hypothetical numbers: one crude contract, initial margin 6,000 dollars, maintenance margin 5,400 dollars, opened long at 70.00. The next session settles at 68.50, so 1,500 dollars is debited and 4,500 dollars is left, under the maintenance level. The broker then calls for enough to bring the balance back to the initial 6,000 dollars, a call of 1,500 dollars. A futures margin call restores the initial margin, not the maintenance level, so the amount owed is larger than the shortfall below maintenance. A few thousand dollars of deposit sits against 70,000 dollars of notional value: the leverage is built into the contract.

Who is on each side

Futures markets exist because some participants already carry a price risk they did not choose. A farmer has a crop in the ground; an airline has fuel to buy next quarter. Hedgers use futures to fix a price now for exposure they already hold, so when the physical position gains the futures position usually loses. The other side may be another hedger with the opposite exposure, a refiner selling to the airline that is buying, or a participant with no physical exposure at all who is willing to carry the risk.

That split is why positioning data exists: the U.S. Commodity Futures Trading Commission collects large positions and publishes them weekly by category of participant, the file behind COT net long positioning. The count of contracts still outstanding, open interest, is tracked separately from volume, because open interest counts positions still on the books while volume counts how much changed hands.

Settlement and expiry

Every contract has a last trading day. Physically settled contracts end in real delivery: crude into a pipeline hub, grain into a licensed warehouse. Cash settled contracts, including stock index futures and short term rate contracts such as SOFR futures, move no goods; the exchange computes a final value from a reference price and pays the difference. Not every rate contract works that way: US Treasury futures end in delivery of an actual note or bond.

Physically settled contracts also have a first notice day, often earlier than the last trading day, from which a short can tender a delivery notice and the clearing house assigns it to someone still holding a long position. Almost no financial participant wants that, because delivery means storage, transport, inspection and exchange paperwork. They close the position or move it to a later month first, and many brokers apply liquidation-only rules near expiry.

Rolling and the continuous chart

Because each contract expires, there is no single instrument called "crude oil" with one price history. A long chart is spliced: it tracks one contract until a roll date, then switches to the next delivery month.

The spliced prices are not the same price. April and May crude usually settle at different levels, and the pattern of those differences is the futures curve, which is what contango and backwardation describe. Kresmion publishes a free futures curve tool showing each delivery month's price for a commodity.

Now the trap. Suppose the front contract's final settlement is 70.00 and the next delivery month trades at 73.00 the same day. An unadjusted continuous series records 70.00, then 73.00, and reports a one day change of about 4.3 percent. Nobody earned that 4.3 percent; the series started quoting a different contract. Back adjusted series shift the older history to remove the step, which repairs the percentage change but leaves prices that no longer match what was printed at the time.

So a day's change near a roll date should be checked against the individual contract: compare the front month's close to its own previous close. If the move is not there, the move was the roll.

Key takeaways

Frequently asked questions

Does the futures price predict what the price will be at expiry?

No. It is where two sides agree to transact today for a later date, and it carries financing and storage costs as well as opinion. In commodity markets the forward price has historically been a weak guide to the eventual spot price on the delivery date.

Do I have to take delivery of the oil if I buy a futures contract?

Only if you hold a physically settled contract into its delivery window, which almost nobody does. Others close or move the position before then, and brokers restrict accounts to closing trades near expiry.

What is the difference between a futures contract and buying a stock?

A share is an ownership stake you can hold indefinitely. A futures contract is dated, backed by a margin deposit, settled in cash daily, and it stops existing at expiry. The margin is also a different thing from stock margin: buying stock on margin means borrowing money to pay for the shares, and interest accrues on the loan, while futures margin is collateral against an obligation, with nothing borrowed and nothing bought.

Why did the futures chart show a big jump on a day with no news?

Check whether that date was a roll date. If the two delivery months trade at different levels, the unadjusted series prints the gap as a one day move.

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Source: futures exchange contract specifications and weekly Commitments of Traders reporting from the U.S. Commodity Futures Trading Commission. All figures here are hypothetical illustrations. This page is information, not investment advice. Kresmion Research.