Glossary · Funds and derivatives
Futures
A futures contract is a promise, traded on an exchange, to buy or sell a set amount of something on a set future date at a price agreed today.
Also called: futures contract, futures market, oil futures, index futures
Cushing, Oklahoma, November 3, 2026: the price oil futures settle against.
April 20, 2020, as the futures contract for May delivery was about to expire.
In plain words
In spring, a wheat farmer and a bakery shake hands: in September the farmer will deliver 5,000 bushels and the bakery will pay $6 a bushel, whatever the price is by then. The farmer is safe from a price fall, the bakery from a rise. Standardize that deal (always the same amount, quality, place and dates), trade it on an exchange, and you have futures.
The buyer of a futures contract is “long”: they gain if the price rises. The seller is “short”: they gain if it falls. Futures exist for oil, gas, gold, copper, wheat, coffee, currencies, interest rates, bitcoin and stock indexes such as the S&P 500.
You do not pay the full price up front. You put down a deposit called margin, often 5–15% of the contract’s value, and every day the exchange moves money between buyers and sellers as the price changes. That makes futures heavily leveraged.
Example
One oil contract, day by day
You buy one oil futures contract: 1,000 barrels at $80, worth $80,000. You put up $8,000 of margin; the exchange requires at least $6,000 to stay in (the maintenance margin).
- Day 1: oil closes at $82. You gain $2 × 1,000 = $2,000; your account shows $10,000.
- Day 2: oil closes at $79. You lose $3,000; the account shows $7,000.
- Day 3: oil closes at $77. Another $2,000 lost: $5,000 is below the $6,000 minimum, so you get a margin call and must add $3,000 to get back to $8,000, or close the position.
- Oil fell less than 4% from where you bought, but you have lost $3,000, more than a third of your first deposit.
Daily settlement means losses must be paid as they happen, not at the end.
One level deeper
Most futures are closed before they expire: the buyer sells an identical contract and pockets the difference. Stock index futures are settled in cash. Some, like the main US oil contract (1,000 barrels delivered at Cushing, Oklahoma), end in real delivery, and that can matter a lot.
In April 2020, with the world in lockdown, oil tanks at Cushing were filling up. Holders of the contract for May delivery had nowhere to put the oil and paid others to take it off their hands. The spot price closed at −$36.98 a barrel on April 20, 2020. The next trading day it was back at $8.91.
A clearing house stands between every buyer and seller and collects margin from both, so that a trader who goes bust cannot leave the other side unpaid. The price of a future is usually close to the spot price plus the cost of storing and financing the goods until delivery; when it is above or below, the market is in contango or backwardation.
The day oil cost less than nothing
The WTI oil price day by day around the 2020 lockdowns. On April 20, 2020 it closed at −$36.98: sellers paid buyers to take oil they could not store. It was the only close below zero since the data begin in 1986.
The numbers behind the chart
| Date | WTI crude oil, $ per barrel |
|---|---|
| October 1, 2019 | $53.6 |
| December 31, 2019 | $61.14 |
| December 31, 2020 | $48.35 |
| March 31, 2021 | $59.19 |
Why it matters
Futures let producers and users of goods lock in prices, which makes farming, mining, airlines and manufacturing more predictable.
Many prices you hear on the news, from oil to gold to wheat, are really futures prices, set by trading on exchanges in Chicago, New York and London.
Their built-in leverage means traders can win or lose many times their deposit in days.
A common mistake
Myth: If you buy oil futures, a tanker of oil turns up at your door.
In fact: Almost all traders close their contracts before expiry, and delivery, when it happens, is at a storage hub, not at home. But someone holding an oil contract at expiry must take the oil there, as April 2020 showed.
Questions people ask
What is the difference between futures and options?
A futures contract obliges both sides to trade at the agreed price. An option gives the buyer the right, but not the obligation, to buy or sell; the buyer pays a premium for that choice.
How can oil prices go negative?
Oil futures end in physical delivery. In April 2020 storage at the delivery point was nearly full, so traders who held contracts at expiry and had nowhere to put the oil paid others to take it.
Why do people trade futures?
Hedgers use them to lock in prices they will pay or receive; speculators to bet on price moves with little money down. Investors also use stock index futures to adjust their exposure quickly and cheaply.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- Crude oil price: West Texas Intermediate (WTI), Cushing, Oklahoma, daily: U.S. Energy Information Administration, Spot Prices, series DCOILWTICO; retrieved from FRED, Federal Reserve Bank of St. Louis.
- The chart is the spot price, which tracks the nearest futures contract. On April 20, 2020 the futures contract for May delivery settled a little lower than the spot close, at −$37.63.
- This page explains a term. It is not investment advice.