In this lesson, we’ll explore the different aspects of a futures contract. We’ll discuss what the contract means for buyers and sellers. We’ll also look at how profits and losses occur. We’ll also break down the margin involved with futures trading and how to place trades. 

You will remember what a futures contract involves. It is an agreement to buy or sell an asset at a predetermined price. This occurs at a specified time in the future. These contracts are issued and regulated by futures exchanges and standardized for quality, quantity, and delivery. Contracts also have identifying details including a name, symbol, exchange, trading hours, contract size, tick size, and contract value. 

Here’s an E-mini S&P 500 futures contract as an example.

Futures symbols

We’ll start with futures names and symbols. Let’s look at an example using one of the most commonly traded futures, the E-mini S&P 500. The E-mini S&P 500 equity index futures is identified by the root symbol “ES.” The full symbol, though, also includes an identifier for the end month and year of a contract. For example, /ESZ23. Let’s break down the full symbol one piece at a time.

We’ll start with the slash. This identifier is used when trading futures on the thinkorswim^® trading platform. It signifies that the symbol being traded is a futures contract. This helps avoid confusion with certain stock symbols. For example, /CL is the symbol for crude oil futures. CL without the slash is the stock symbol for Colgate-Palmolive. With the earlier slash, you’re trading crude oil; without the leading slash, you’re trading a consumer staples company. 

The next part of the futures symbol is the root symbol. This is the product identifier. In our /ESZ23 example, the “ES” signifies the S&P 500 E-mini futures contract. The table below shows symbols of some equity indexes.

Equity indexes

The third item in the symbol is the month of end. This letter corresponds with a certain month. In our /ESZ23 example, the letter Z denotes a December expiry. The E-mini S&P 500 contract has quarterly ending, March (H), June (M), September (U), and December (Z). The contract ends on the third Friday of the end month. 

Expiration

The final item in the symbol is the year of expiry. In our /ESZ23 example, the 23 signifies 2023. The frequency of expiry varies among futures contracts. The E-mini S&P 500 futures has quarterly expiry cycles. Other futures contracts, like crude oil (/CL), have monthly end. It’s important to know when a contract expires before trading it. To see a futures contract end date on thinkorswim, go to the Trade tab, and enter its symbol.

Tick size

Next, we’ll discuss the tick size. The tick size is the smallest price increment a particular contract can fluctuate. A stock’s tick size is equal to a penny, meaning the lowest price movement is up or down one penny (+/– $0.01). 

Nonetheless, in futures, tick sizes vary. For example, the tick size for the E-mini S&P 500 is 0.25 index points. The /ES can go from 2,667.25 to 2,667.50 to 2,667.75, and so on. It only trades in quarter increments. Oil ticks in penny increments, while the E-mini Dow futures ticks in whole points. It’s important to understand tick size before trading any futures contract. 

Sample futures tick sizes

Futures multipliers

Each contract also has a standardized multiplier. The multiplier is determined by the contract size and is set by the exchange. Just like tick sizes, multipliers can vary by product. For example, the /ES has a multiplier of $50. 

The multiplier is used to calculate the financial, or notional, value of a contract. To calculate the notional value of one contract, multiply the current price by the contract multiplier. For example, if the /ES was trading at 2,250, the notional value of the contract would be $112,500. This is calculated as 2,250 x $50. Notional value can help you find out how much of your portfolio a contract offset in a hedge. We’ll discuss this more in the next lesson. 

With knowing the tick size and multiplier, we can calculate what a one point move would be. For example, because the /ES tick size is 0.25, a tick is worth $12.50 (0.25 x $50). In other words, a one point move in the /ES is equal to $50. It’s important to know the multiplier and how to calculate notional value before trading any futures contract.

There are also smaller versions of the E-mini stock index futures contracts. These are called micro futures and check in at just one-tenth the size. The CME Group created them because the classic E-minis had become too expensive for many traders. This effectively shut them out of the liquid futures market. The smaller micro contracts give traders more flexibility. They allow them to be more precise in managing their risks. Margin requirements, for example, are much smaller.

Since their launch in 2019, Micro E-minis have allowed traders to take positions on the big four U.S. indexes. These are the Dow Jones Industrial Average^®, S&P 500^®, Nasdaq-100^®, and Russell 2000^®. Traders can do this without having to commit nearly as much capital as the regular contracts. Regular E-mini S&P 500 futures contracts stand for $50 times the price of the S&P 500 index. In contrast, the Micro E-mini S&P 500 futures contract stands for $5 times the price of the S&P 500.

Micro E-mini futures allow trading with greater leverage. They allow a more efficient use of trading capital. Yet, trading leveraged products like Micro E-mini futures also creates greater risk. This includes the risk that losses can exceed the amount originally invested. Such trading is not suitable for all investors.

Trading hours

Additionally to standardizing the contracts, exchanges set the trading hours. Futures trading is available almost 23 hours per day, six days per week for most products. These hours vary from product to product, and some periods of the day are more active than others. 

Contract multipliers and trading hours are available on the Futures page on the Trade tab on schwab.com.

End and settlement

The final contract specifications we’ll discuss are end, delivery, and settlement. Futures contracts have end dates. They have a defined end date on the calendar. They will eventually cease to exist. Typically, traders close out their futures positions before the end. Some traders opt to roll their contracts to a further end date. Futures contracts are either physically settled or financially settled, also called “cash settled,” at finish. Let’s discuss each. 

Physical settlement results in two transactions. The buyer pays the notional value of the contract and receives the underlying product. Meanwhile, the seller receives the cash and delivers the underlying product. For an oil contract, this means the buyer receives and pays for 1,000 barrels of oil. The seller delivers and accepts the money for 1,000 barrels of oil.

Charles Schwab Futures and Forex LLC does not allow clients to take physical delivery of a futures contract. This is an extremely important note. Anyone trading physically settled futures must pay close attention to the First Notice Day and Last Trading Day. The First Notice Day is the first day the exchange can assign delivery to accounts that are long futures contracts. The Last Trading Day is the final day a futures contract can be traded. It is also the last day it can be closed before delivery. To prevent physical delivery, you must close your position three business days before the First Notice Date. Or close it three business days before the Last Trading Day, whichever comes first. If you’re still in a position after these dates, Charles Schwab Futures and Forex LLC will close your position. 

Financial, or cash, settlement of futures contracts impacts both the buyer and the seller. It credits or debits them at end based on the final settlement price. If a trader bought an /ES contract at 2,650, the final settlement price at the end was 2,660. The trader would gain $500. The trader benefits from a price increase. This credit would be added to their account. This occurs due to a 10 point gain multiplied by a $50 multiplier. The trader who sold the contract at 2,650 would be debited $500 at the end. Both traders would see their contracts expire at the end upon settlement. 

Charles Schwab Futures and Forex LLC doesn’t allow physically settled contracts to expire. Yet, it does allow cash-settled securities to expire. This is due to cash settlement at the end working the same way as daily settlement. In both cases, daily profits and losses are divvied out.