Futures Trading

What are Futures Contracts?

Futures are standardized contracts to buy or sell an asset at a predetermined price on a specific future date. They are used for hedging risk or speculation.

Key Characteristics

Types of Futures

• Commodity Futures: Agricultural products, metals, energy
• Financial Futures: Stock indices, currencies, interest rates
• Stock Index Futures: Based on stock market indices like S&P 500

How Futures Trading Works

1. Long Position: Agree to buy the asset at the contract price
2. Short Position: Agree to sell the asset at the contract price
3. Margin: Deposit required to open a position
4. Settlement: Contracts settled on expiration date

Risk Management

Futures trading involves significant risk due to leverage. Key concepts:

• Initial Margin: Deposit to open position
• Maintenance Margin: Minimum balance to keep position open
• Margin Call: When account falls below maintenance margin
• Stop Loss Orders: Automatically close position at specified price

Example Trade

Suppose you buy 1 contract of Gold futures at $1,800 per ounce:

• Contract size: 100 ounces
• Total value: $180,000
• If gold rises to $1,820: Profit = $2,000 (minus fees)
• If gold falls to $1,780: Loss = $2,000 (minus fees)