⚠️ DISCLAIMER: This course is for educational purposes only and does not constitute financial advice. Trading futures involves substantial risk of loss and is not suitable for all investors. Past performance does not guarantee future results. You could lose more than your initial investment.
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Chapter 3 of 16

Reading a Futures Contract
The Car Lease Agreement

🎬 Video lesson⏱ ~35 min✅ 10-question quiz
Chapter 3 Video Lesson

Every Contract is a Detailed Agreement

🚗 The Core Analogy: The Car Lease Agreement

When you lease a car, you don't just say "I'll drive your car for a while." You sign a precise document: exactly which car (2024 Toyota Camry, VIN #XYZ), exactly how long (36 months), exactly how much ($450/month), exactly how many miles (12,000/year), and exactly what condition it must be returned in.

Every single term is specified. Nothing is vague.

A futures contract works the same way. Every detail is standardized so both parties know exactly what they're agreeing to. Let's go through each term.

Contract Specifications: The 7 Key Terms

1. Underlying Asset

What exactly is being bought or sold? "Corn" isn't specific enough — futures contracts specify the grade, quality, and type of the underlying asset. For example, CBOT Corn futures are for No. 2 Yellow Corn — a specific quality grade.

2. Contract Size

How much of the underlying asset does one contract represent? This varies by market:

  • Corn (ZC): 5,000 bushels per contract
  • Crude Oil (CL): 1,000 barrels per contract
  • Gold (GC): 100 troy ounces per contract
  • E-mini S&P 500 (ES): $50 × the S&P 500 index value
  • Micro E-mini S&P 500 (MES): $5 × the S&P 500 index value (1/10th the size of ES)
📊 Why Contract Size Matters

If gold is at $2,000/oz and one contract = 100 oz, then one gold futures contract represents $200,000 worth of gold. You don't pay $200,000 (that's where leverage comes in — Chapter 4), but that's the total value you're controlling.

3. Tick Size and Tick Value

The tick is the minimum price movement allowed. Think of it as the smallest increment on a ruler.

  • Corn: Tick = ¼ cent per bushel. With 5,000 bushels/contract, one tick = $12.50
  • Crude Oil: Tick = $0.01 per barrel. With 1,000 barrels/contract, one tick = $10.00
  • E-mini S&P 500: Tick = 0.25 index points. Tick value = $12.50
  • Gold: Tick = $0.10 per ounce. With 100 oz/contract, one tick = $10.00
💡 Analogy: The Tick as a Ruler's Smallest Marking

On a ruler, you can't measure half a millimeter — the smallest unit is 1mm. The tick is the smallest price unit in futures. If crude oil has a $0.01 tick and 1,000 barrels per contract, every penny the price moves costs or earns you $10. Move 10 cents ($10 ticks) and that's $100 per contract — in either direction.

4. Delivery Month / Expiration

Every futures contract has a specific month when it expires. Common months use letter codes:

F = January
G = February | H = March | J = April | K = May | M = June
N = July
Q = August | U = September | V = October | X = November | Z = December

So ESH25 means: E-mini S&P 500 (ES), March (H), 2025 (25). CLZ26 = Crude Oil, December 2026.

5. Last Trading Day

This is the final day you can trade the contract before it expires. This is critical — if you're still holding a physical-delivery contract at expiration, you could end up receiving (or delivering) the actual commodity.

⚠️ Don't Hold to Expiration (Usually): Most retail traders close their positions well before the last trading day. Holding a crude oil futures contract to expiration means you're obligated to take delivery of 1,000 barrels of oil. The broker will typically force-close your position before that happens, but it's a mess. Always know your contract's expiration date.

6. Settlement Method

How is the contract settled at expiration? Two options:

  • Physical Delivery: The actual commodity changes hands. Corn, crude oil, and gold contracts typically involve physical delivery.
  • Cash Settlement: No physical goods move — the profit or loss is simply credited/debited in cash. Stock index futures (S&P 500, Nasdaq) are cash-settled because you can't deliver "the stock index."

7. Trading Hours

Each contract has specified trading hours. Agricultural contracts often have limited hours (corn: 8:30 AM–1:20 PM ET), while financial futures often trade nearly 24 hours.

Rolling a Contract: What Traders Actually Do

Since futures expire, traders who want continuous exposure must "roll" from an expiring contract to the next one. For example, when the March S&P 500 futures contract approaches expiration, a trader would:

  1. Close (sell) their March contract
  2. Open (buy) the June contract

This is called a roll. Most professional traders roll their positions 1–2 weeks before expiration to avoid thin trading volume near the expiration date.

Real Contract Spec Example: E-mini S&P 500 (ES)

Symbol
ES (on CME Globex)
Contract Size
$50 × S&P 500 Index value
Tick Size
0.25 index points = $12.50 per tick
Contract Value
At S&P 5,000: $50 × 5,000 = $250,000 per contract
Expiration Months
March (H), June (M), September (U), December (Z)
Settlement
Cash settled — no physical delivery possible
Trading Hours
Sunday 6:00 PM – Friday 5:00 PM ET (with 1-hour daily break)

🎯 Chapter 3 Key Takeaways

  • Every futures contract is a standardized agreement specifying the asset, quantity, price movement rules, and expiration
  • Contract size determines how much of the underlying asset you're controlling per contract
  • The tick is the minimum price movement — tick value tells you exactly how much money moves per tick
  • Expiration months are coded with letters: H=March, M=June, U=September, Z=December
  • Physical delivery contracts require you to close before expiration; cash-settled contracts settle in cash automatically
  • Rolling means closing an expiring contract and opening the next month to maintain exposure
← Chapter 2 Chapter 4: Margin & Leverage →