Understanding Futures Contracts
What are Futures?
A futures contract is an agreement to buy or sell a specific asset at a predetermined price on a specific future date. These contracts are standardized and traded on exchanges. Originally designed for farmers and businesses to hedge against price changes, futures are now widely used by speculators and investors.
Types of Futures Contracts
Commodity Futures
- Agricultural: Corn, wheat, soybeans, coffee
- Energy: Crude oil, natural gas, gasoline
- Metals: Gold, silver, copper, platinum
- Livestock: Cattle, hogs
- Softs: Cotton, sugar, cocoa
Financial Futures
- Stock Index Futures: S&P 500, NASDAQ
- Currency Futures: Euro, Yen, British Pound
- Interest Rate Futures: Treasury bonds, Eurodollars
- Cryptocurrency Futures: Bitcoin, Ethereum
Futures Market Basics
Contract Specifications
- Contract Size: Standardized amount
- Delivery Month: When contract expires
- Tick Size: Minimum price movement
- Price Limits: Daily trading ranges
- Position Limits: Maximum positions allowed
Market Participants
- Hedgers: Businesses managing risk
- Speculators: Profit from price changes
- Market Makers: Provide liquidity
- Clearing Houses: Guarantee trades
- Brokers: Execute trades
How Futures Trading Works
Key Concepts
- Margin: Initial and maintenance requirements
- Leverage: Control large positions with less capital
- Mark-to-Market: Daily profit/loss settlement
- Contango: Future price higher than spot
- Backwardation: Future price lower than spot
Trading Mechanics
- Standardized contract terms
- Exchange-traded
- Centrally cleared
- Daily settlement
- Physical or cash settlement
Trading Strategies
Basic Strategies
- Long Position: Profit from price increase
- Short Position: Profit from price decrease
- Spread Trading: Multiple contract positions
- Rolling Contracts: Maintaining exposure
- Hedging: Risk management
Advanced Strategies
- Calendar Spreads: Different delivery months
- Inter-commodity Spreads: Different commodities
- Crack Spreads: Energy product relationships
- Basis Trading: Futures vs. cash market
- Options on Futures: Additional flexibility
Risk Management
Key Risks
- Market Risk: Price movements
- Leverage Risk: Amplified losses
- Margin Risk: Meeting calls
- Liquidity Risk: Trading volume
- Delivery Risk: Physical settlement
Risk Control Measures
- Position sizing
- Stop-loss orders
- Diversification
- Hedging strategies
- Regular monitoring
Understanding Market Analysis
Technical Analysis
- Price charts
- Trading volume
- Open interest
- Technical indicators
- Chart patterns
Fundamental Analysis
- Supply and demand
- Weather impacts
- Economic data
- Inventory reports
- Global events
Getting Started in Futures
Prerequisites
Knowledge Requirements
- Market mechanics
- Risk management
- Technical analysis
- Fundamental analysis
Account Setup
- Futures broker selection
- Account funding
- Platform familiarity
- Trading permissions
Steps to Begin
- Study futures basics
- Practice on simulator
- Start with mini contracts
- Focus on one market
- Keep detailed records
Important Considerations
Trading Requirements
- Minimum account size
- Margin requirements
- Commission costs
- Platform fees
- Data subscriptions
Best Practices
- Start small
- Use proper position sizing
- Maintain adequate margin
- Monitor positions regularly
- Have exit strategy
Market Hours and Trading
Major Exchanges
- CME Group: Largest futures exchange
- ICE: Energy and softs
- CBOE: Index futures
- Regional Exchanges: Specialized products
Trading Sessions
- Different products have different hours
- Electronic trading availability
- Holiday schedules
- Settlement times
- Delivery periods
Detailed Trading Hours
CME Globex (Electronic Trading)
- Sunday Open: 5:00 PM Central Time (CT)
- Monday to Friday: 5:00 PM to 4:00 PM CT (next day)
- Daily Break: 4:00 PM to 5:00 PM CT
Pit Trading (Limited Contracts)
- Typically 8:30 AM to 1:15 PM CT
- Mainly for agricultural commodities
ICE (Intercontinental Exchange)
Energy Contracts
- Sunday to Friday: 6:00 PM to 5:00 PM ET (next day)
- Daily 1-hour break from 5:00 PM to 6:00 PM ET
Soft Commodities
- Trading hours vary
- Typically 3:00 AM to 2:00 PM ET
CBOE (Chicago Board Options Exchange)
- Regular Trading Hours: 9:30 AM to 4:00 PM ET
- Extended Hours for Index Options: 8:30 AM to 4:15 PM ET
Additional Resources
- CME Group Education
- Futures Industry Association
- Commodity Futures Trading Commission
- Exchange websites
- Broker educational materials
Glossary of Terms
- Basis: Difference between cash and futures price
- Delivery: Physical settlement of contract
- Open Interest: Outstanding contracts
- Rolling: Moving positions forward
- Settlement: Daily marking to market