Futures & Basics

Learn the basics you need to know to get started trading futures.

Want to learn more about futures? Here is some introductory material to get you started:

What Are Futures?

A futures contract is the obligation to receive or deliver a commodity or financial instrument at a specific date in the future at an agreed upon price today.

These contracts have the following standard specifications:

Underlying instrument
The commodity, financial instrument, or index upon which the item is based.
Size
The amount of the underlying item covered by the contract.
Delivery or contract cycle
The specified months for which contracts can be traded.
Maturity date
The date by which a particular futures trading month ceases to exist and all obligations must be fulfilled.
Grade/quality specifications and delivery locations
A detailed description of the commodity or security and where, when, and how it can be delivered.
Settlement procedures
Rules for physical delivery of the underlying commodity, including how payments are made and received, or the specific cash series and procedures used for cash settlement of the contract.

These contracts are traded on an organized and regulated futures exchange enabling buyers and sellers to transact business. In most cases, traders fulfill the obligation of the contract by taking the offsetting position. For example, if a trader is long a futures contract, he must sell the contract prior to the expiration date to avoid taking delivery of the physical commodity.

Futures and Options Distinctions

While both futures and options are derivative products, they have their differences in terms of obligations.

Futures and options distinctions
  Options Futures
Buyer Has the right to buy or sell the underlying security Has the obligation to take delivery of the underlying commodity or financial instrument on expiration at the settlement price
Seller Has the obligation to buy or sell the underlying security Has the obligation to make delivery of the underlying commodity or financial instrument on expiration at the settlement price

Traders that hold futures position have the obligation to buy or sell the underlying commodity. In order to meet this obligation, traders need to offset the futures position.

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Futures Symbols

Both Futures and Security Futures use the same protocol for symbol identification. The first letters of the symbol are in reference to the underlying contract, such as ES represents the E-Mini S&P and GOOG for Google. For Single Stock Futures, the root is always the ticker symbol of the stock.

The root symbol is then followed by the letter of the month, and the number for the year. The two examples listed below show the symbols for the 2005 Sept S&P E-Mini contract and the 2005 December Google contract.

GOOZ07
2007 December Google
ESU07
2007 September E-Mini S&P

Futures Calendar Month Codes

  • F
    January
  • G
    February
  • H
    March
  • J
    April
  • K
    May
  • M
    June
  • N
    July
  • Q
    August
  • U
    September
  • V
    October
  • X
    November
  • Z
    December

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Value of a Futures Contract

The value of a futures contract, more commonly referred to as its notional value, is the value of the derivative’s underlying assets at the spot (cash) price. This value represents the equivalent dollar amount invested when trading a single futures contract.

In order to determine notional value, you need to know the contract specification. The specification is the amount of the underlying asset or value of index determined by the exchange. Once you have the specification, calculating the notional value of any futures contract is simple mathematics. The table below lists sample contract values of the most actively traded futures contracts.

Values of futures contracts
Contract Specs Current Quote Notional Value
E-Mini S&P $50 × S&P 1518.00 $75,900.00
S&P 500 $250 × S&P 1518.00 $379,500.00
Dow Jones $10 × DJIA 13513 $135,130.00
10–Year Note $100,000 106–205 $106,205.00
Gold 100 oz. 657.10 $65,710.00
British Pound 62,500 BP 1.9742 $123,387.50

Using the E-Mini S&P as an example, the notional value of the contract is found by multiplying the current quote of the index by $50.00:

$50.00 × 1518 = $75,900.00
(Multiplier × Current Quote of S&P 500 = Notional Value)

In the example above, the S&P 500 index has a current quote of 1518. The contract specification thus yields a notional value of $75,900.50 for one E-Mini S&P contract.

Determining the notional value of treasury futures requires an extra step. Treasuries are quoted in a percentage of the par value of the contract. The table above quotes a 10-Year Note at 106-205. The specification actually translates to 106.205 percent of par value ($100,000), or a notional value of $106,205.00.

106–205 = 106.205% = 1.06205
(Current Quote of 10–Year Note = Decimal Percentage = Equivalent Quote)
$100,000 × 1.06205 = $106,205.00
(Multiplier Equivalent Quote of 10–Year Note Notional Value)

View a detailed list of futures products and specifications.

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Futures Exchanges

Historically, futures contracts have been typically traded on an exchange where traders and brokers compete on equal footing in an auction-style, open-outcry market. Communicating by voice and hand signals, brokers and traders match orders based on the best prevailing market price. By centrally locating trading, exchanges provide an opportunity to minimize risk by allowing hedgers to protect themselves against adverse price swings and speculators to profit from such market moves.

In addition to providing a focal point for trading, futures exchanges also provide speedy clearing of trades, accurate recording of prices and trading limits to promote fair and orderly markets. Firms that are members of the exchange guarantee all the contracts traded by their customers by posting funds against outstanding positions. The exchange's function as a clearinghouse promotes overall confidence in the futures markets.

With the advent of technology, electronic trading has gained a foothold in the industry. Trading by means of electronic order matching, electronic trading offers more market transparency and faster reporting. Most US and European futures markets are fully electronic.

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More About Futures

For more information regarding futures and futures trading, please visit the following sites:

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