A futures contract is one of the oldest instruments in trading, and one of the most misunderstood. Retail traders often lump it in with CFDs or options because all three offer leveraged exposure without owning the underlying asset. But a futures contract is structurally different from both, and that difference shows up the moment you hold one past its expiry date. If you have read about trading commodities or index futures on this site and wondered what "rolling a contract" or "contango" actually means, this is the explainer that fills in the gap.
What a Futures Contract Actually Is
A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an asset at a specific price on a specific future date. "Standardized" is the key word. Unlike a CFD, which is a bilateral bet between you and your broker with no fixed expiry, every futures contract on a given exchange has identical terms: the same contract size, the same tick increments, the same expiry calendar. That standardization is what lets contracts trade on a central exchange with a clearinghouse guaranteeing every trade, rather than relying on your broker's balance sheet.
The obligation is the other defining feature. A futures contract is a commitment, not a choice. If you are long one contract at expiry and you have not closed or rolled the position, you are obligated to take delivery (or settle in cash, depending on the contract). Compare that to an option, where the buyer holds the right, not the obligation, to buy or sell. That asymmetry is why options buyers pay a premium and futures traders do not — futures have no upfront premium, only margin, but both sides carry equal obligation.
Futures vs Options vs CFDs
| Feature | Futures | Options | CFDs |
|---|---|---|---|
| Obligation | Binding for both sides | Buyer has a right, not an obligation | Binding for both sides |
| Expiry | Fixed date, standardized | Fixed date, standardized | No expiry (rolling daily) |
| Traded on | Regulated exchange | Regulated exchange | Broker (OTC) |
| Upfront cost | Margin only | Premium (buyer) | Margin only |
| Settlement | Physical or cash | Physical or cash (if exercised) | Cash difference only |
Contract Specs: Tick Size, Tick Value, and the Multiplier
Every futures contract has three numbers that determine how much money moves when the price moves: the tick size (the smallest price increment the contract can move), the tick value (the dollar amount that one tick is worth), and the multiplier (the dollar value per full point of price movement). These aren't arbitrary — they're set by the exchange and they never change for a given contract.
Take the CME's E-mini S&P 500 (ES) contract, the same instrument covered in our piece on trading stock indices via futures. It has a multiplier of $50 per index point and a tick size of 0.25 points, making each tick worth $12.50. If you buy one ES contract when the index is at 5,000.00, your notional exposure is 5,000 x $50 = $250,000 — controlled with a fraction of that in margin. If the index rises 25 points to 5,025.00, that's a gain of 25 x $50 = $1,250, or equivalently 100 ticks x $12.50 = $1,250. If it falls 20 points instead, you're down $1,000. The math is symmetrical and immediate — there's no premium decay to account for, just points times multiplier.
The numbers below are illustrative and rounded for clarity. Real specs are set by the exchange (CME Group publishes them for all its products), and margin requirements shift with volatility, so always confirm current figures with your broker before sizing a position.
Illustrative Contract Specs by Product
| Contract | Multiplier | Tick Size | Tick Value | Illustrative Notional |
|---|---|---|---|---|
| E-mini S&P 500 (ES) | $50/point | 0.25 pts | $12.50 | $250,000 |
| Crude Oil (CL) | $1,000/barrel | $0.01 | $10.00 | $70,000 |
| Gold (GC) | $100/oz | $0.10 | $10.00 | $240,000 |
| Corn (ZC) | $50/cent | 1/4 cent | $12.50 | $22,500 |
Expiry, Delivery, and Why Almost No Retail Trader Takes a Barrel of Oil Home
Every futures contract expires. Financial futures like stock index and interest rate contracts typically follow a quarterly cycle (March, June, September, December), while many commodity futures expire monthly. As a contract approaches its First Notice Day or Last Trading Day, exchanges start tightening the screws — some brokers raise margin requirements or force position closures days ahead of expiry specifically to keep retail accounts away from delivery.
Delivery only matters if you hold a physically-settled contract into expiry. Index futures like the ES and financial futures are cash-settled: at expiry, the difference between your entry price and the final settlement price is credited or debited to your account, and that's it, no product changes hands. Commodity futures — crude oil, corn, gold, natural gas — are more often physically settled, meaning the long holder is contractually obligated to accept delivery of 1,000 barrels of oil or 5,000 bushels of corn if the position is still open when the contract expires. This is exactly why the guide to trading commodities stresses using futures for speculation rather than accumulation: retail brokers do not want you taking delivery, and most will auto-liquidate physically-settled positions before First Notice Day regardless of what you intended.
- Cash-settled, low delivery risk: stock index futures (ES, NQ, YM) and most interest rate futures.
- Physically settled, high delivery risk if held to expiry: crude oil (CL), corn (ZC), and most other agricultural and energy contracts.
- Physically settled but rarely delivered in practice: gold (GC) and other metals, where most retail volume closes out well before First Notice Day.
Rollover Mechanics: Contango, Backwardation, and the Cost of Staying in the Trade
If you want to keep exposure to an asset past a contract's expiry without taking delivery, you roll: you close the expiring contract and simultaneously open a new position in the next active month. This happens constantly in futures markets — it's why open interest shifts visibly from the front month to the next month in the weeks before expiry.
The cost or benefit of rolling depends on the shape of the futures curve. In contango, longer-dated contracts trade above the front month (common in oil and many commodities, reflecting storage and financing costs). A long position rolling forward in contango sells the cheaper front month and buys the more expensive next month, absorbing a cost. In backwardation, the curve is inverted — longer-dated contracts trade below the front month — so rolling a long position actually generates a small credit. This is the same dynamic that erodes returns in futures-based commodity ETFs discussed in our commodities guide; the ETF's fund manager is doing this exact roll on your behalf, and contango quietly eats into performance over time.
Roll Impact on a Long Position (Illustrative)
| Curve Shape | Front Month Price | Next Month Price | Impact on Roll |
|---|---|---|---|
| Contango | $70.00 | $70.80 | Costs $0.80/barrel |
| Backwardation | $70.00 | $69.20 | Credits $0.80/barrel |
Margin: Initial, Maintenance, and Margin Calls
Futures margin is not a down payment on the asset — it's a performance bond that shows you can cover potential losses. Initial margin is what you need to open the position. Maintenance margin is the lower threshold your account equity cannot fall below while the position is open; if it does, you get a margin call requiring you to deposit funds or the position gets liquidated. This works the same way conceptually as it does in forex and CFD margin trading, but futures margin is set by the exchange's clearinghouse rather than negotiated broker-to-broker, and it can change overnight if volatility spikes.
Because margin is a small fraction of notional value, futures carry substantial embedded leverage before you even touch a leverage setting. The chart below shows initial margin as a percentage of contract notional for the four products in the specs table — the lower the percentage, the more leverage is baked into the contract by default.
Illustrative Initial Margin as % of Notional Value
A margin percentage of 5% means roughly 20x leverage before you've made any trading decision at all. That's higher than most regulated forex and CFD accounts allow retail clients by default, which is one reason futures losses can escalate fast relative to the capital posted.
Risk Considerations
- Embedded leverage. Margin requirements of 4-8% of notional mean small price moves produce outsized account swings in both directions.
- Overnight and weekend gap risk. Futures markets can gap on news between sessions, and stop-loss orders do not guarantee a fill at your stop price during a gap.
- Expiry and delivery risk. Holding a physically-settled contract too close to expiry can force an unwanted delivery obligation or an emergency broker-initiated close.
- Rollover cost. Persistent contango erodes long-term long positions and futures-tracking ETFs alike, even when the underlying spot price is flat.
- Margin calls compound quickly. Because maintenance margin sits close to initial margin, a single volatile session can trigger a call with little warning.
Key Takeaways
A futures contract is a standardized, exchange-cleared obligation to buy or sell at a set price on a set date — not a right like an option, and not an open-ended bet like a CFD. The tick size, tick value, and multiplier determine your dollar exposure per point of movement, and margin (not the notional value) is what your account actually needs to hold the position. Most retail traders never intend to take delivery: they close or roll positions before expiry, and the cost of that rolling depends entirely on whether the futures curve is in contango or backwardation.
Futures give you exchange-guaranteed, highly leveraged exposure to almost any asset class — but that leverage and the fixed expiry date are structural features you have to actively manage, not details you can ignore until expiry week arrives.
Disclaimer: This content is for educational purposes only and does not constitute financial advice. Trading involves substantial risk of loss. Past performance does not guarantee future results.
