🎯 In 30 seconds: A futures contract is an agreement to buy or sell something at a set price on a set future date. Stock index futures like the Micro E-mini S&P 500 let you gain or lose as if you held a basket worth tens of thousands of dollars, while posting only a small deposit called margin. Every day your account is credited or debited for that day's move. That is why futures can grow or drain an account much faster than shares, and why you should understand them before you touch one.
What a futures contract is
Picture a wheat farmer in spring and a bakery. The farmer worries prices will fall before harvest. The bakery worries prices will rise. They agree today that in September the farmer will deliver wheat at $6 a bushel. Both have removed a risk.
That agreement is a forward contract. A futures contract is the same idea, made standard and traded on an exchange. Every contract of a given type has the same size, the same delivery months and the same rules, so anyone can buy or sell one at any time without negotiating terms.
Key words you will see:
- Underlying: the thing the contract is based on. It can be a commodity (oil, corn, gold), an interest rate, a currency or a stock index.
- Contract month: when the contract expires. Stock index futures use a quarterly cycle: March, June, September and December.
- Long: you bought the contract. You gain if the price rises.
- Short: you sold the contract. You gain if the price falls. Going short in futures is as simple as going long. There is no borrowing of shares.
- Clearinghouse: the exchange's clearing organization stands between every buyer and seller, so you never depend on the person on the other side paying you.
Most futures traders never make or take delivery. They close the position before expiration. Stock index futures do not deliver anything anyway: they settle in cash.
The two S&P 500 contracts beginners hear about
CME Group lists futures on the S&P 500 index in more than one size. The two most common are below. Each contract is worth a fixed dollar amount, called the multiplier, for every point of the index.
| Feature | E-mini S&P 500 (ES) | Micro E-mini S&P 500 (MES) |
|---|---|---|
| Contract size | $50 x the S&P 500 index | $5 x the S&P 500 index |
| Smallest price move (tick) | 0.25 index points | 0.25 index points |
| Value of one tick | $12.50 | $1.25 |
| Value of a 1-point move | $50 | $5 |
| Contract months | March, June, September, December | March, June, September, December |
| Settlement | Cash, at expiration | Cash, at expiration |
The Micro is one tenth the size of the E-mini. Expiring contracts settle in cash on the third Friday of the contract month, based on a special calculation of the index's opening level that morning. CME Group publishes the full specifications, including trading hours, on each product's page. Check them there before you trade, since exchanges can change specifications.
CME equity index futures trade on the Globex electronic platform almost around the clock: from Sunday evening to Friday afternoon U.S. time, with a short daily break. That means prices keep moving while the stock market is closed, and your account can gain or lose overnight.
Notional value: how big your position really is
The notional value is the full dollar size of the exposure. The formula is short:
notional value = index level x multiplier
Say the S&P 500 is at 6,000. These are hypothetical round numbers to keep the arithmetic easy.
| One E-mini: 6,000 x $50 | $300,000 |
| One Micro E-mini: 6,000 x $5 | $30,000 |
One Micro contract moves like $30,000 of an S&P 500 index fund. If the index rises 1%, from 6,000 to 6,060, you gain 60 points x $5 = $300. If it falls 1%, you lose $300.
Margin in futures is a deposit, not a loan
With stocks, "margin" means borrowing from your broker. With futures it means something different. Futures margin is a performance bond: a good-faith deposit that shows you can cover daily losses. The CFTC describes futures margin as typically 2% to 10% of the contract's value.
- Initial margin: what you must have in the account to open one contract.
- Maintenance margin: the lower level your account must stay above while you hold it.
- Margin call: if your account drops below maintenance, you must deposit enough to bring it back up to the initial level, or the broker closes the position.
The exchange sets minimum margins and changes them when markets get more volatile. Brokers can and often do ask for more. Look up your broker's current figure. The numbers in the example below are made up for teaching.
Daily settlement: a worked example
Futures are marked to market every day. At the end of each session the exchange sets a settlement price, and your account is credited or debited for the change since yesterday. Gains are real cash in your account the same day. So are losses.
Hypothetical setup: you deposit $3,000 and buy one Micro E-mini at 6,000.00. Assume initial margin is $2,500 and maintenance is $2,300.
| Day | Settlement price | Change (points) | Cash change (x $5) | Account balance |
|---|---|---|---|---|
| 0 (buy) | 6,000.00 | $3,000 | ||
| 1 | 6,030.00 | +30 | +$150 | $3,150 |
| 2 | 5,940.00 | -90 | -$450 | $2,700 |
| 3 | 5,850.00 | -90 | -$450 | $2,250 |
After day 3 the balance of $2,250 is below the $2,300 maintenance level. You get a margin call for $250 to bring the account back to the $2,500 initial level. If you do not pay it, the broker can close your contract at whatever the market price is.
Leverage, in one calculation
Leverage is the ratio of the exposure you control to the money you put up.
leverage = notional value / margin posted
In the example: $30,000 / $2,500 = 12 times. A 1% move in the index is a 12% move against your margin. A move of about 8.3% would wipe out the whole $2,500.
From day 0 to day 3 the index fell from 6,000 to 5,850. That is a 2.5% drop. Someone who paid cash for $30,000 of an index fund lost 2.5%, or $750, and had $29,250 left. You also lost $750, but that was 25% of your $3,000 deposit.
The loss can also exceed your deposit. If the market gaps down hard overnight, your account can go negative, and you owe the broker the difference. With futures, you can lose more than you put in.
Futures prices are not exactly the index
The futures price is usually a little different from the index level. The gap is called the basis. It comes from the cost of carry: if you owned the stocks instead, you would tie up cash (losing interest) but collect dividends. When interest rates are above the index's dividend yield, the futures price tends to sit slightly above the index. The gap shrinks to zero as expiration approaches.
This matters when you compare a futures chart to an index chart. They will not match to the point, and that is normal.
Rollover: moving to the next contract
Because each contract expires, a trader who wants to stay in the position rolls it: sell the expiring contract and buy the next quarterly one. Most trading volume moves to the next contract in the days before expiration, so many traders roll a week or so early.
A roll is two trades, so it has two sets of commissions and possibly some slippage. The price difference between the two contracts is mostly the cost of carry, not a gain or loss in itself.
Who regulates futures
Futures are not regulated by the SEC. The Commodity Futures Trading Commission (CFTC) is the federal regulator. The National Futures Association (NFA) is the industry's self-regulatory organization, similar to FINRA for stocks.
Firms that hold customer futures money must be registered. You can look up a firm or person in NFA's free BASIC database before you send money. If a "futures" or "commodities" platform is not in BASIC, treat that as a red flag. Scams and red flags explains why.
Futures also have their own tax treatment. Regulated futures contracts are Section 1256 contracts, which are taxed under a 60/40 split between long-term and short-term rates. Taxes for traders covers the details.
Why people use futures
- Hedging. A fund manager worried about a drop can sell index futures instead of selling hundreds of stocks.
- Capital efficiency. A small deposit gives broad market exposure, which frees cash for other uses.
- Nearly 24-hour access. You can react to news when the stock market is closed.
- Speculation. Traders bet on the direction of the index, oil, gold, rates and more. This is where most beginners get hurt, because the leverage that makes futures efficient also makes them unforgiving.
Futures belong to the family of leveraged products. Leverage everywhere compares them with margin, options and leveraged ETFs.
Try it
Do this on paper, not with money. Look up today's S&P 500 level on the index dashboard.
- Work out the notional value of one Micro E-mini at that level.
- Look up your broker's initial margin for it, or use $2,500 if you do not have one. Compute the leverage.
- Find the biggest single-day percentage drop in the S&P 500 over the last year. Multiply that by your notional value. Compare the dollar loss with the margin.
- Write down how many contracts, if any, your account could hold if you risked no more than 1% of it per trade. Use Risk comes first as your guide.
- The S&P 500 is at 6,000. What is the notional value of one Micro E-mini, and what does a 1% move mean in dollars? Answer: $30,000 (6,000 x $5). A 1% move (60 points) is $300.
- You post $2,500 of margin for one Micro E-mini worth $30,000. What is your leverage, and what index move wipes out the margin? Answer: 12 times ($30,000 / $2,500). A move of about 8.3% would wipe out the $2,500.
- Your maintenance margin is $2,300 and initial margin is $2,500. After a bad day your account is at $2,250. What happens? Answer: You get a margin call for $250 to bring the account back to the $2,500 initial level. If you do not pay, the broker can close the contract at the market price.
- Who regulates futures in the US, and where can you check a firm before sending money? Answer: The CFTC is the federal regulator and the NFA is the self-regulatory organization. Check the firm in NFA’s free BASIC database.