Understanding Futures Contracts: Key Details Explained
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.
In this lesson, we’ll explore the different aspects of a futures contract. We will examine what the contract means for buyers and sellers. We will learn how profits and losses occur. We’ll also break down the margin involved with futures trading and how to place trades.
A futures contract is an agreement to buy or sell an asset. The price and time are predetermined. 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, still, 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 front slash, you’re trading crude oil; without the front stroke, 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
| /VX | CBOE Volatility Index |
|---|---|
| /ES | E-mini S&P 500 |
| /NQ | E-mini Nasdaq-100 |
| /YM | E-mini Dow |
| /RTY | E-mini Russell 2000 Index |
| /VX | CBOE Volatility Index |
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 end. The E-mini S&P 500 contract has quarterly expirations, March (H), June (M), September (U), and December (Z). The contract expires on the third Friday of the end month.
Expiration
| Month | Symbol |
|---|---|
| January | F |
| February | G |
| March | H |
| April | J |
| May | K |
| June | M |
| July | N |
| August | Q |
| September | U |
| October | V |
| November | X |
| December | Z |
These symbols are used to find the expiry month of futures contracts
End months play a significant role in futures trading strategies. Here are a few key ways they impact trading:
- Volatility: As the end date approaches, futures contracts often experience increased price volatility. This happens because traders adjust their positions. Additionally, futures prices converge with the spot prices of the underlying asset.
- Liquidity: Liquidity can fluctuate as the end date nears. Some contracts see a surge in trading activity, while others experience a drop in liquidity. This can affect the ease with which traders can enter or exit positions.
- Rollover Strategies: Traders who wish to keep their market exposure beyond the end date often use rollover strategies. This involves closing the expiring contract and opening a new one with a later end date. The timing and execution of rollovers can impact trading costs and overall strategy.
- Settlement: Futures contracts can be settled either in cash or through physical delivery of the underlying asset. The type of settlement can influence trading strategies, especially for those who prefer to avoid the complexities of physical delivery.
- Arbitrage Opportunities: End months can create arbitrage opportunities as traders exploit price discrepancies between futures contracts and the underlying asset. These opportunities can be more pronounced as the due date approaches.
Understanding these factors can help traders develop more effective strategies and manage risks linked to futures trading
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 end cycles. Other futures contracts have monthly end dates, like crude oil (/CL). 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 smallest price movement is up or down one penny (+/– $0.01).
But, 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
| Product | Symbol | Size |
|---|---|---|
| Oil | /CL | $0.01 = 1 tick |
| Gold | /GC | $0.10 = 1 tick |
| E-mini Dow | /YM | 1.00 point = 1 tick |
| E-mini Nasdaq 100 | /NQ | 0.25 points = 1 tick |
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 contract’s notional value would be $112,500. This is calculated as 2,250 x $50. Notional value can help you understand the part of your portfolio a contract offset. 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 check in at just one-tenth the size. They are called micro futures. The CME Group created them. The classic E-minis had become too expensive for many traders. This development 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 how they manage 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 include 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. For example, the regular E-mini S&P 500 futures contract signifies $50 times the price of the S&P 500 index. In contrast, the Micro E-mini S&P 500 futures contract only signifies $5 times the price of the S&P 500.
Micro E-mini futures offer the ability to trade with greater leverage. They allow a more efficient use of trading capital. Nonetheless, trading leveraged products like Micro E-mini futures also creates greater risk. This includes the risk that losses can exceed the amount originally invested. It is not suitable for all investors.
| Index | Micro E-mini contract | E-mini contract size | Micro E-mini contract size |
|---|---|---|---|
| S&P 500 | S&P futures (/MES) | $50 x S&P 500 index | $5 x S&P 500 index |
| Nasdaq-100 | Nasdaq-100 futures (/MNQ) | $20 x Nasdaq-100 index | $2 x Nasdaq-100 index |
| Dow Jones | Dow futures (/MYM) | $5 x DJIA index | $0.50 x DJIA index |
| Russell 2000 | Russell 2000 futures (/M2K) | $50 x Russell 2000 index | $5 x Russell 2000 index |
Trading hours
Besides 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 date, delivery, and settlement. Because futures contracts have ending dates, they have a defined end date on the calendar. They will eventually cease to exist. Typically, traders either close out their futures positions before the end. Alternatively, they roll their futures positions to a contract with a further end date. Futures contracts are either physically settled or financially settled, also called “cash settled,” at the end. Let’s discuss each.
Physical settlement results in the buyer paying the notional value of the contract. The buyer receives the underlying product. 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 the oil 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. It’s extremely important to note this. 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 last trading day a futures contract trade or be closed before delivery. To prevent physical delivery, you must close your position three business days before the First Notice Date. If not, you must close it 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.
| Popular physically settled products | Popular financially settled products |
|---|---|
| Crude oil (/CL) | E-mini S&P 500 (/ES) |
| Gold (/GC) | E-mini Nasdaq-100 (/NQ) |
| 30-year Treasury bond (/ZB) | E-mini Dow (/YM) |
| Euro FX currency (/6E) | E-mini Russell 2000 (/RTY) |
| Natural gas (/NG) | Micro E-mini S&P 500 (/MES) |
| Corn (/ZC) |
Financial, or cash, settlement of futures contracts involves credits or debits to both the buyer and the seller. These occur at the end. These adjustments depend on the final settlement price. For example, a trader who bought an /ES contract at 2,650 would get a $500 credit. This occurs if the final settlement price was 2,660 at the end. This credit would be added to their account. This gain results from a 10 point gain multiplied by the $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. Still, it does allow cash-settled securities to expire. This is because cash settlement at the end works the same as daily settlement. Daily profits and losses are divvied out.
