A futures contract is an agreement between a buyer and seller to trade a specified amount of a commodity at a predetermined price for delivery at a future date.  The amount of the quantity to be traded is defined by the contract size.  This varies between each commodity futures market and their contracts.  The CBOT wheat contract is for 5,000 bushels, while the COMEX gold contract is for 100 troy ounces.  Many contracts offer smaller versions or mini contracts.  The COMEX mini gold contract is only for 50 troy ounces.  It’s all a matter of what commodity futures market and exchange you use, but varying sized contracts offer the trader versatility.

Rarely does the full monetary value of the contract trade hands in the initial trade – but it can happen.  For example, if gold is trading at $900/oz, the buyer and seller don’t exchange $90,000 if they trade a gold futures contract.  The traders use leverage by only putting up a portion of the contract’s value in the actual trade.  The capital required to trade a futures contract is called the margin.  For the COMEX gold contract, the initial non- member outright speculative margin is $5,399 per contract.  Leverage can be a trader’s best friend or worst enemy.  Because of its nature, trading on margin can result in losing more money than your initial investment.  If your broker senses that you are in danger of going negative on your investments, you might get a margin call.  In this situation, you would be required to either liquidate some of your positions to raise capital, or add additional funds to your account with more capital immediately.  As a trader of a commodity futures market, it’s important to avoid margin calls at all costs.

Another aspect of a futures market that can be confusing is the delivery months.  All contracts are traded under a specified delivery month.  For crude oil futures, all months are deliverable.  For corn futures, you can only trade March, May, July, Sept., and Dec. Each month has a one letter code that defines it.  The month codes are as follows:

Having an understanding of the basics of a commodity futures markets is a good way to get your trading career started.  Make sure you know the margins and tradable months of the market you’re trading.  There are lots of places trade mistakes trading futures can and will happen.  Errors can and will happen relating to contract specifications. Knowledge can be beneficial and errors can usually be avoided when careful.

Trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.