Futures: the contract vehicle

A contract, not a thing

A future is an agreement: two sides commit to exchange value at a set date, at a price agreed today. Hold one and you hold exposure — your account rises and falls with the thing the contract tracks — but you own none of it. No shares arrive, no votes attach, no dividends are paid. The contract tracks indexes and goods alike: an agreement on five hundred companies is the same species as an agreement on a thousand barrels of oil. Lesson 2's trade was an exchange that settled on the spot; this is an exchange scheduled for later, priced now. For a reader with a job, the practical point comes first: this vehicle moves and settles on its own schedule, not yours — the rest of the lesson is what that schedule demands.

Settled in cash

When an index future reaches its date, nobody delivers five hundred companies to your door. Index futures settle in cash: the difference between the agreed price and the final price is paid, and the contract ends. That is what makes the vehicle clean — the exposure was financial from the first day, and it closes financially. Some commodity contracts can involve delivery of the actual good, which is exactly why almost everyone in them exits or rolls before the date — the subject of Lesson 15.

Margin is a deposit, not a price

To hold a futures contract you post margin — and the word misleads nearly everyone the first time. Margin here is not a down payment on a purchase, and it is not your maximum loss. It is a good-faith deposit: a small fraction of the contract's full value, held by the exchange as proof you can honor the agreement. That is the leverage in plain words — a small deposit steering a large exposure. The exposure is real in both directions: the same arithmetic that multiplies a gain multiplies a loss, and the loss is not stopped at the deposit.

The account settles every day

Futures do not wait for you to sell before telling the truth. Every day, the contract is marked to market: the day's gain is credited to your account, the day's loss is debited from it, in cash, that evening. A position can therefore lose money on a Tuesday without you doing anything at all — and if losses eat too far into the deposit, you must add cash or the position is closed. The vehicle demands attention on its schedule, not yours. Remember that when the capstone weighs hours.

Every contract expires

Each contract carries a month in its name, and when that month arrives, the contract ends. Holders who want to keep the exposure sell the expiring contract and buy the next one — a roll. Nothing about a future is open-ended; the position is a series of dated agreements, renewed by choice. This is the opposite pole from Lesson 13's share, which never comes due at all. Between those two poles — one vehicle with no clock, one with nothing but — sit the rest of this folder.

The market that never quite sleeps

Futures trade nearly around the clock — through the night, through overseas sessions, pausing only briefly each day. An earnings report at dawn, a headline at 3 a.m., a move in Tokyo: the futures price has already reacted before the stock market opens. That is why this desk reads them first, before anything else, every morning. They are the market's night shift, and by the opening bell they have usually written the first draft of the day. Lesson 6 explained what an index is. A futures price is not that index level itself: it is the contract's own price for the index on a future date, and it usually sits a little above or below the index level — that gap (traders call it the basis) reflects interest costs and expected dividends between now and the contract's date, and it closes to zero as settlement arrives. Picture it as the index's price arriving early, wearing a small premium or discount of its own.

Practice

Work this fictional example on paper. You are long (you bought) one E-mini S&P 500 contract (ES), multiplier $50 per index point, and you posted a hypothetical deposit of $12,000. The index falls 40 points today. (1) How much is debited from your account at tonight’s settlement? (2) How much of the deposit remains? (3) The index keeps falling tomorrow — why is your loss not capped at the $12,000 deposit?

Work it through: (1) 40 points × $50 = $2,000, debited in cash that evening — futures settle daily. (2) $12,000 − $2,000 = $10,000. (3) The deposit is a good-faith guarantee, not a price and not a maximum loss; losses are charged against the full exposure for as long as the position is open, and you must add cash or the position is closed.