Futures Contracts
A standardised agreement to transact at a set price on a future date. Unlike an option, both parties are obliged, and the exposure is the full contract value.
MadStockAlerts Research · Updated August 29, 2026
What to take away
- Both sides are obliged; a future is not an option to do anything.
- Contract terms are standardised by the exchange, with only the price negotiated.
- The notional exposure is far larger than the margin posted.
- Positions are marked to market daily, with cash moving each day.
- Contracts expire, so maintaining exposure requires rolling.
MAD Academy Training Video · 0:45
An Agreement, Not a Purchase
A futures contract commits both sides to a transaction on a future date, which is why the margin is a performance bond rather than a down payment.
This lesson is part of a Stock Alerts + Tools plan.
How a future differs from an option
| Option | Future | |
|---|---|---|
| Buyer's position | A right, not an obligation | An obligation |
| Maximum loss for the buyer | The premium | Substantial, and not capped by the position's cost |
| Cost at entry | The premium | No premium; margin is posted as collateral |
| Daily cash flows | None until closed | Marked to market daily |
| Exposure | Delta-adjusted | The full contract notional |
The second row is the distinction that matters most for risk. A long option cannot lose more than was paid; a long futures position can lose far more than the margin posted, and the obligation is symmetric.
The notional exposure
A futures contract represents a defined quantity of the underlying, and the position's exposure is that quantity multiplied by the price. The margin posted is a performance bond rather than a purchase price, and it is a small fraction of the exposure.
notional value = contract multiplier x index or price level
- an equity index future with a $50 multiplier at 5,000 has a notional of $250,000
- the margin required might be a low tens of thousands, which is where the leverage comes from
This is the single most common source of unintended risk in futures. Sizing a position by the margin required rather than by the notional exposure produces a position many times larger than intended, and the arithmetic is unforgiving.
- Initial marginA performance bond, frequently a low single-digit percentage
- The contract multiplierFixed by the exchange
- x the index or price levelWhich is where the exposure actually comes from
- = the notional exposureThe number a position should be sized against
Expiry and rolling
Every contract has a delivery month, and maintaining exposure beyond it requires closing the expiring contract and opening the next one. That transaction is the roll.
- The roll is executed at whatever spread exists between the two contracts, which is a cost or a benefit.
- Some contracts settle physically, which is a genuine obligation to deliver or receive.
- Most financial futures settle in cash against a reference value.
- Continuous price series used for charting are constructed by splicing contracts, and the splicing method changes the history.
The last point matters for anyone analysing futures charts. A continuous series is a construction, and back-adjusted and unadjusted versions of the same series produce different levels and different indicator values.
What they are used for
| Use | Character |
|---|---|
| Hedging a commercial exposure | The original purpose. A producer or consumer fixing a price |
| Hedging a portfolio | An index future offsets equity exposure without selling holdings |
| Expressing a directional view | Efficient, and with leverage that requires careful sizing |
| Accessing markets around the clock | Many contracts trade nearly continuously |
The first row is why these markets exist, and the terms of every contract reflect it: delivery points, grades and quantities are specified because someone at the end of the chain may actually deliver.
The contract families
Futures exist on a wide range of underlyings, and the families differ in what drives them and in who the natural participants are.
| Family | Examples | Natural hedgers |
|---|---|---|
| Equity index | Broad index contracts | Portfolio managers adjusting exposure |
| Interest rate | Government bond and short-rate contracts | Banks and bond portfolios |
| Energy | Crude, natural gas, refined products | Producers, refiners and large consumers |
| Agricultural | Grains, softs, livestock | Farmers and processors |
| Metals | Precious and industrial | Miners and manufacturers |
| Currency | Major pairs | Companies with cross-border revenue |
The third column is the reason these markets exist and it is also why the contracts have the specifications they do. Delivery points, grades and quantities were set for the people in that column rather than for a speculator.
Micro and mini contracts on many of these were introduced specifically to make smaller position sizes possible. They are the same exposure at a smaller multiplier.