# How Futures Contracts Work

> A futures contract is a standardised agreement to buy or sell an asset at a set price on a future date. Learn how futures trade, margin, daily settlement and expiry.

Source: https://learn.tradelabsai.com/futures/how-futures-contracts-work/  
Track: Futures · Level: Intermediate · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "How Futures Contracts Work", https://learn.tradelabsai.com/futures/how-futures-contracts-work/

A futures contract is a standardised, exchange traded agreement to buy or sell a set quantity of an asset at a price agreed today, for delivery or cash settlement on a specific future date. Futures exist on commodities such as crude oil, corn and gold, on financial assets such as stock indices, bonds and currencies, and on crypto. They let producers and consumers hedge prices and let traders take leveraged positions on almost any major market. The short introduction is in [What Is a Future?](https://learn.tradelabsai.com/markets/what-is-a-future/); this lesson explains the mechanics in detail.

## The key features

| Feature | Description | Lesson |
|---|---|---|
| Standardised | Exchange sets size, quality, delivery months and rules | [Contract Specifications](https://learn.tradelabsai.com/futures/contract-specifications/) |
| Exchange traded | Bought and sold on venues such as CME, ICE and Eurex | [Exchanges](https://learn.tradelabsai.com/market-structure/exchanges/) |
| Centrally cleared | A clearing house guarantees both sides | [Clearing Houses and Central Counterparties](https://learn.tradelabsai.com/market-structure/clearing-houses/) |
| Margined | Traders post a deposit, not the full value | [Futures Margin: Initial and Maintenance](https://learn.tradelabsai.com/futures/futures-margin/) |
| Marked to market daily | Gains and losses are settled every day | [Mark-to-Market](https://learn.tradelabsai.com/markets/mark-to-market/) |
| Expires | Each contract has a last trading day | [Contract Months and Expiration](https://learn.tradelabsai.com/futures/contract-months-and-expiration/) |

## Long and short

- **Long (buyer):** agrees to buy at the futures price. Profits if the price rises.
- **Short (seller):** agrees to sell at the futures price. Profits if the price falls.

Going short is as easy as going long; there is no borrowing of the asset as with short selling stocks. See [Short Selling](https://learn.tradelabsai.com/markets/short-selling/).

## A worked example

**Example: Trading E-mini S&P 500 futures**
The E-mini S&P 500 futures contract (ES) is worth $50 times the index. With the futures at 5,000, one contract controls $250,000 of exposure. Initial margin might be around $12,000 to $15,000, set by CME and the broker.

You buy one contract at 5,000. The next day the futures settle at 5,040: your account is credited 40 × $50 = $2,000. The day after, they settle at 4,990: you are debited 50 × $50 = $2,500. You close at 4,990, a net loss of $500 (10 points × $50). On a $15,000 margin deposit, a 1% move in the index (50 points) is a $2,500 gain or loss, about 17% of margin. See [Leverage](https://learn.tradelabsai.com/markets/leverage/).

## Daily settlement

Every trading day, the exchange sets a settlement price. Each account's open positions are revalued, and gains and losses move in cash between accounts through the clearing house. If your account falls below the maintenance margin, you receive a margin call and must add funds or reduce positions. This daily settlement is what makes futures safer for counterparties than private forward contracts. See [Forwards vs Futures](https://learn.tradelabsai.com/futures/forwards-vs-futures/).

## How futures prices relate to spot

Futures prices are linked to the spot price by the cost of carry: financing, storage and any income from holding the asset.

```
futures price ≈ spot price × (1 + financing cost + storage cost - income) over the period
```

When futures trade above spot, the market is in contango; below spot, backwardation. At expiry, the futures price converges to the spot price. See [Spot vs Futures](https://learn.tradelabsai.com/futures/spot-vs-futures/), [Contango](https://learn.tradelabsai.com/futures/contango/) and [Backwardation](https://learn.tradelabsai.com/futures/backwardation/).

## How futures end

- **Offset:** most traders close positions before expiry by taking the opposite trade.
- **Roll:** move the position to a later contract month. See [Rolling Futures Contracts](https://learn.tradelabsai.com/futures/rolling-futures-contracts/).
- **Cash settlement:** for index and some other contracts, the final gain or loss is paid in cash.
- **Physical delivery:** for many commodity and bond contracts, the actual asset changes hands. See [Physical Delivery vs Cash Settlement](https://learn.tradelabsai.com/futures/physical-delivery/).

## Who uses futures

| User | Purpose | Example |
|---|---|---|
| Producers | Lock in selling prices | A farmer sells corn futures before harvest |
| Consumers | Lock in buying prices | An airline buys jet fuel or crude futures |
| Investors | Hedge portfolios | A fund sells index futures before a risky event |
| Speculators | Profit from price moves | A trader buys gold futures on an inflation view |
| Arbitrageurs | Exploit price gaps | Cash and carry trades. See [Cash-and-Carry Arbitrage](https://learn.tradelabsai.com/futures/cash-and-carry-arbitrage/) |

## Why traders like futures

- **Leverage and capital efficiency.**
- **Deep liquidity** in major contracts, with tight spreads.
- **Nearly 24 hour trading** for many contracts.
- **Easy shorting.**
- **Tax treatment** in some countries; for example, US regulated futures are generally taxed under Section 1256 rules. Check local rules. See [Trading Taxes and Capital Gains](https://learn.tradelabsai.com/industry/trading-taxes-and-capital-gains/).

## The risks

- **Leverage cuts both ways:** small price moves create large gains or losses relative to margin.
- **Losses can exceed the deposit.**
- **Margin calls** can force selling at bad times.
- **Gaps** around news and weekends.
- **Delivery risk** if a physically settled contract is held too long.

## Frequently asked questions

### How do futures contracts work?

They are standardised agreements to buy or sell an asset at a set price on a future date, traded on exchanges with margin and daily settlement of gains and losses.

### Can you lose more than you invest in futures?

Yes. Because futures are leveraged, losses can exceed the margin deposited, and you are responsible for the shortfall.

### Do I have to take delivery of a futures contract?

Not if you close or roll the position before the delivery period. Many contracts are also cash settled.

Next, learn to read a contract's details in [Contract Specifications](https://learn.tradelabsai.com/futures/contract-specifications/).

## Sources

- CFTC, [Basics of futures trading](https://www.cftc.gov/LearnandProtect)
- CME Group, [Education](https://www.cmegroup.com/education.html)

## Continue learning

- Next lesson: [Contract Specifications](https://learn.tradelabsai.com/futures/contract-specifications/)
- Related: [What Is a Future?](https://learn.tradelabsai.com/markets/what-is-a-future/): A futures contract is an agreement to buy or sell something at a set price on a future date. Learn how futures work, margin, leverage, settlement and who uses them.
- Related: [Contract Specifications](https://learn.tradelabsai.com/futures/contract-specifications/): Contract specifications define a futures contract's size, tick, months, hours and settlement. Learn every field, with examples for E-mini S&P, crude oil and gold.
- Related: [Futures Margin: Initial and Maintenance](https://learn.tradelabsai.com/futures/futures-margin/): Futures margin is a performance bond, not a loan. Learn initial and maintenance margin, day trading margin, margin calls, SPAN and how to avoid forced liquidation.
- Related: [Tick Size and Tick Value](https://learn.tradelabsai.com/futures/tick-size-and-tick-value/): Tick size is a future's smallest price move; tick value is what it is worth per contract. Learn to calculate P&L, risk per trade and position size from ticks.
- Related: [Rolling Futures Contracts](https://learn.tradelabsai.com/futures/rolling-futures-contracts/): Rolling moves a futures position from an expiring contract to a later one. Learn when to roll, how to use calendar spreads, roll costs and common roll schedules.
- Related: [Futures Trading](https://learn.tradelabsai.com/markets/futures-trading/): How futures trading works day to day: choosing contracts, margin, tick values, trading hours, rolling, costs and risk, with a worked Micro E-mini trade.