A standardized promise

A futures contract is an agreement to buy or sell a fixed quantity of something at a price agreed today, with the exchange of money settled on a fixed future date. Almost nobody who trades futures on a screen ever takes delivery of anything. That is not because delivery is fake; it is because the contract is designed so that you can close it with an opposite trade at any time before it expires, and the vast majority of participants do exactly that.

The word that does the work in that definition is standardized. Everything about the contract except the price is fixed in advance by the exchange:

Because only the price is negotiable, every May crude oil contract is identical to every other May crude oil contract. That is what makes them tradable. If you buy one on Tuesday and sell one on Thursday, the exchange treats the two as cancelling, and you are left with the difference in price times the contract size.

Forward versus futures

A forward is a private deal between two parties: a farmer and a mill agree a price for 5,000 bushels of wheat in September. It is customized, it cannot easily be sold to someone else, and each side is exposed to the other failing to pay.

A futures contract takes that idea and fixes three problems:

1. Standard terms so the contract is interchangeable and can be traded to a stranger.
2. A central clearing house that steps between buyer and seller, so neither has to trust the other.
3. Daily settlement so gains and losses are paid every day rather than piling up until expiry.

The third point matters more to you than the first two. When you hold a futures position overnight, the exchange marks it to the settlement price and moves cash between accounts that evening. You do not owe a large sum at expiry; you have already paid or received it in daily pieces. That is why futures losses show up in your balance every single day, and why margin exists at all.

Long and short are symmetrical

In stocks, going short means borrowing shares, paying a borrow fee and dealing with availability. In futures there is nothing to borrow. Every contract is created when a buyer and a seller agree a price, so a short is simply the other half of a long. The costs, the margin and the mechanics are identical in both directions.

This is one reason index and commodity futures are the default instrument for traders who want to be short as easily as long. It is also why open interest, the number of contracts outstanding, can rise and fall: a new buyer meeting a new seller creates a contract, and a buyer closing against a seller closing destroys one.

A first piece of arithmetic

Say you buy one crude oil contract at $78.00 and sell it at $78.50. The contract is 1,000 barrels, so:

profit = (78.50 − 78.00) × 1,000 = $500

You never touched a barrel. You did not pay $78,000 for the oil. You posted a margin deposit (Module 3), the price moved 50 cents, and you collected 50 cents times 1,000. Reverse the direction and the same arithmetic produces a $500 loss.

Key idea: A futures contract is a standardized, exchange-cleared, daily-settled agreement. You trade the price difference, in units of the contract size, and you can exit at any time before expiry with an opposite trade.

The size is what surprises people. One contract is one contract; you cannot buy half a barrel of the contract or a fraction of a share of it. The exchange decided that one CL is 1,000 barrels, and that decision defines how much money moves per cent of price change. Module 2 is entirely about these numbers. For now, notice that "a 50 cent move" is meaningless until you multiply it by the contract size.

What this course assumes

This course assumes you have taken the risk management course, or at least know what 1R, fixed-fractional sizing and a daily loss limit are. Futures do not change any of that arithmetic. They change the units it is done in, the leverage sitting underneath it, and the number of ways a beginner can be surprised. Each module adds one layer: what the contract is, how the math works, what margin does, when the market is open and liquid, what can go wrong, and how to build a sensible approach including the prop firm route.

Try it: Look up the contract specifications page for one futures contract on the exchange's website (search the contract name plus "contract specs"). Write down the contract unit, the minimum price fluctuation and the listed months. You will use these three facts in every lesson that follows.

Recap

• A futures contract fixes everything except price: quantity, quality, delivery point and month.
• Standardization makes contracts interchangeable, so you can close a position with an opposite trade.
• A clearing house sits between every buyer and seller, and gains and losses are settled daily.
• Short is just the other side of long; there is nothing to borrow.
• P&L = price change × contract size; the contract size is chosen by the exchange, not by you.