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Futures contract

A standardized, exchange-traded agreement to buy or sell a fixed quantity of something at a set price on a future date.

Futures exist for indexes (es, nq), energy (cl), metals (gc), grains, rates, and currencies. Each contract has a fixed size, a tick-value, a contract-month, and a settlement method. You post initial-margin rather than paying the full notional-value.

Futures trade nearly 24 hours a day, have no pattern-day-trader-rule, and get section-1256 tax treatment in the US. They are also highly leveraged and unforgiving of poor risk-management.

Example: one crude oil contract is 1,000 barrels. At $80 a barrel the notional is $80,000, held with roughly $6,000 of margin. A $1 move in oil is $1,000 per contract.

Related: contract, tick-value, contract-month, initial-margin, settlement

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Margin and leverageA small deposit controlling a much larger position, and the point at which losses trigger a margin call.Position you controlnotional value $100,000your margin deposit: $5,000$100,000 / $5,000 = 20:1 leverageYour deposit absorbs every dollar of loss$5,000$2,500$0Equity leftMARGIN CALLequity has fallen to $2,5000%1%2%2.5%3%4%5%How far the price moves against you
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.

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