How to Read a Futures Contract SpecMedium

One page on an exchange's website decides how much you are exposed to, when you stop being able to change your mind, and whether a lorry arrives.

4 min read · 680 words

Why this page exists

• A future is defined entirely by a specification published by the exchange. It is short, it is free, and almost nobody reads it before trading the contract.
• Two of its fields decide how much money is at stake, and two more decide when and how the position stops being yours to manage. Neither pair is visible on a price screen.

The five fields

Contract size and tick value

• The quoted price is per unit; the contract is a multiple of units. A contract on 1,000 units at a price of 80 is 80,000 of exposure, and the margin posted against it is a fraction of that.
• Work in ticks rather than in price. If one tick is 0.01 and the contract is 1,000 units, a tick is worth 10. A move of one point is a hundred ticks and 1,000 per contract. That is the number to size a position against, and it is the arithmetic of synthetic leverage.
• Many exchanges list a full-size and a smaller version of the same contract. They track the same thing and are not interchangeable in a position.

The month, and why the curve matters

• Every future names a delivery month. A position held longer than that month has to be rolled — closed in the expiring contract and reopened in the next — and the price difference between them is paid or received each time.
• Over a year that roll can dominate the return entirely, which is why what time does to a position treats roll as a clock of its own.
• Comparing a price today with a price a year ago is meaningless unless it is the same contract month or a properly rolled series. This is the single most common error in a chart of a commodity.

Last trading day, and the tail of the contract

• The last trading day is when your ability to close ends. After it, whatever the contract says happens, happens.
• Some contracts have a first notice day before that, from which a holder can be assigned a delivery obligation. If you never intend to take delivery, that date matters more than expiry.
• Liquidity thins as expiry approaches, because most participants have already rolled. Deciding to close on the last afternoon means closing into the thinnest book of the contract's life — the mechanism behind the April 2020 oil settlement.

Cash or physical

• Cash settled — the difference is paid against a published reference price. Index futures work this way, and nothing arrives.
• Physically settled — the contract obliges delivery of the actual thing, at named locations, in named grades. This is where the specification becomes very specific: warehouse, quality, and who pays storage.
• The deliverable set is part of the price. A bond future usually allows several bonds to be delivered, and the seller chooses — so the future tracks the cheapest of them, not the one you had in mind.
• An exchange can also change the rules of a live contract in extreme conditions, including cancelling trades. The 2022 nickel episode is the case where that happened, and it is a property of the contract rather than an aberration: the rulebook says the exchange may.

The five-minute read

• Multiply price by contract size. Is that the exposure you meant?
• What is one tick worth, in money?
• Which month am I in, and when is the next roll?
• When is last trading day, and is there a notice day before it?
• Cash or physical — and if physical, could I actually take delivery?

The futures and equity future pages describe the instruments; this is the document behind them.