Futures Contract
A standardized agreement to buy or sell a specific quantity of an underlying asset at a predetermined price on a specified future date — the foundational instrument of futures markets.
What is Futures Contract?
A futures contract is a standardized legal agreement between two parties to buy or sell a specific quantity of an underlying asset at a predetermined price on a specified future date. “Standardized” is the key word — every ES contract is identical to every other ES contract: same notional size, same tick increment, same expiration date for a given month, same delivery mechanics.
Standardization makes futures liquid and tradeable. Two parties don’t need to negotiate terms; they just transact at the current market price. The exchange (CME, CBOT, NYMEX, COMEX) sets all the contract specifications and provides the clearing infrastructure that guarantees both sides will fulfill their obligation.
For prop firm traders, futures contracts are the work product. The vast majority of prop firm trading is intraday futures speculation on equity index contracts (ES, NQ, MES, MNQ), energy (CL, MCL), and metals (GC, MGC). Traders open and close positions within the session, never holding to expiration or taking physical delivery — they’re capturing price movement, not actually buying barrels of oil or ounces of gold.
How Futures Contract works
What’s defined in a futures contract:
- Underlying asset: S&P 500 index (for ES), barrels of WTI crude oil (for CL), etc.
- Contract size: ES = $50/index point × current S&P value (~$240,000 notional). CL = 1,000 barrels of crude oil.
- Tick size: Smallest legal price increment (ES: 0.25 points; CL: $0.01)
- Tick value: Dollar value per tick (ES: $12.50; CL: $10)
- Expiration: Specific date the contract terminates (ES Mar = third Friday in March)
- Delivery mechanism: Physical delivery (CL) or cash settlement (ES — no actual S&P stocks change hands)
- Trading hours: CME equity index futures trade nearly 24/5; commodities have varying hours
Lifecycle of a futures contract:
- Open interest creation: Two parties enter offsetting positions (one long, one short)
- Active trading: Position can be closed any time by entering opposite trade
- Front month vs. back month: Most volume is in nearest expiration (“front month”)
- Rollover: Before expiration, traders close current month and open next month positions
- Expiration: Remaining open positions either physically deliver or cash-settle
Leverage mechanics: A trader doesn’t need the full notional value to trade. They post margin (~5-15% of notional). For ES at $240K notional, day-trade margin might be ~$500-$1,500. This 100-500x leverage is what makes futures attractive to prop firm traders — small capital can control large positions.
Long vs. short: A futures trader can profit equally from rising prices (long) or falling prices (short) — no borrowing required. Selling futures short is structurally identical to buying long, just with inverted P&L.
Worked example
ES futures contract example:
- Trader buys 1 ES Mar contract at 4500.00 (“long ES at 4500”)
- Notional value: 4500 × $50 = $225,000
- Margin posted (Apex day-trade margin): ~$500
- Leverage: 450x
- ES rises to 4505. Trader closes the position.
- P&L: 5 points × $50/point = +$250
- Return on margin: $250 / $500 = 50% in minutes
Same trade with leverage tradeoffs:
- If ES had fallen to 4495 instead: -$250 = -50% on margin
- If ES had fallen to 4490: -$500 = -100% on margin (account wiped if no other capital)
- This is why prop firm drawdowns matter — the leverage cuts both ways
Cash-settled vs. physically delivered:
- ES (cash-settled): At expiration, position settles based on the index value × multiplier. No actual stocks change hands.
- CL (physically delivered): At expiration, long contracts are obligated to take delivery of 1,000 barrels of crude oil. Day traders never hold to expiration to avoid this — they close before First Notice Day.
Futures Contract vs related concepts
Side-by-side comparison of Futures Contract against the most commonly confused alternatives.
| Concept | Definition | Category |
|---|---|---|
| Futures Contract this term | A standardized agreement to buy or sell a specific quantity of an underlying asset at a predetermined price on a specified future date — the foundational instrument of futures markets. | Futures Mechanics |
| Tick Size | The smallest price movement allowed on a futures contract — a fixed increment defined by the exchange that determines how prices step up and down. | Futures Mechanics |
| Tick Value | The dollar value per minimum price movement on a futures contract — multiplying tick value by ticks moved gives your dollar P&L change per contract. | Futures Mechanics |
| Margin | The capital deposit required to open and hold a futures position — set by the exchange (initial margin) and broker (day-trade margin), typically 5-15% of contract notional value. | Futures Mechanics |
| Point Value | The dollar value of a one-point price movement on a futures contract — equal to the contract multiplier; a key input to position sizing math. | Futures Mechanics |
| Mini Futures | Mid-sized futures contracts (typically 10x the size of micro futures, 1/5th to 1/10th the size of pit-traded contracts) — the most-traded futures contracts on US exchanges. | Futures Mechanics |
| Micro Futures | Smaller-sized versions of major futures contracts (typically 1/10th the size of mini futures), designed for retail and prop firm traders to manage risk with less capital. | Futures Mechanics |
Why traders fail Futures Contract
Confusing futures with forex. Forex trades currency pairs without expirations or exchange-standardized contracts. Futures have defined contract sizes, ticks, and expirations. Different markets, different mechanics.
Holding crude oil futures into delivery period. CL physically delivers. The infamous 2020 negative oil price event happened because traders couldn’t close positions before delivery and had to PAY to store the crude. Day traders should always close before First Notice Day (typically the 25th of the prior month for CL).
Not understanding cash settlement. ES, NQ, RTY all cash-settle. There’s no “buying actual stocks” risk. Holding to expiration just produces a P&L based on the closing index value vs. your entry.
Over-leveraging based on margin. The fact that a $500 margin lets you control $225K notional doesn’t mean you should. Risk per trade should be 1-2% of total trading capital, not maxing out leverage.
Frequently asked questions about Futures Contract
What are futures contracts?
Standardized legal agreements to buy or sell an underlying asset (commodity, index, currency) at a predetermined price on a specified future date. Listed on exchanges (CME, CBOT, NYMEX) with identical specifications across all contracts of the same type. Used for hedging and speculation.
How do I buy a futures contract?
Through a broker that offers futures trading — for prop firm traders, the broker connection is set up by the firm using platforms like Rithmic, Tradovate, or NinjaTrader. You don't buy contracts in dollar amounts; you trade in contract units (1 ES, 5 MNQ, etc.). The exchange matches your buy order with another trader's sell order.
What's the difference between futures and stocks?
Futures have expiration dates; stocks don't. Futures use exchange-standardized contracts; stocks have specific share counts. Futures use significant leverage (100-500x typical); stocks have far less. Futures can be sold short without borrowing; stocks require locating shares to short. Different mechanics for different purposes.
Are all futures cash-settled?
No. Equity index futures (ES, NQ, RTY, YM) cash-settle — no actual stocks change hands at expiration. Commodity futures (CL, GC, NG, ZC) physically deliver — at expiration, contracts must produce or take physical delivery of the underlying. Day traders close commodity positions before delivery period to avoid this.
How much capital do I need to trade futures?
Day-trade margin (capital required to hold an intraday position) is typically $500-$1,500 per ES contract, $300-$800 per NQ, $100-$300 per micro. Overnight margin is much higher (5-15% of notional). Prop firm accounts skip these capital requirements — the firm provides the capital and the trader pays evaluation/activation fees instead.