Learn about the basic components of futures contracts and why you may want to consider incorporating them into your trade plan.
On this page:
- What are futures?
- Uses for futures
- Why trade futures?
- Types of futures
- Options on futures
- Why trade futures with Schwab?
Futures are a type of derivative contract agreement to buy or sell a specific commodity asset or security at a set future date for a set price. Futures contracts, or simply "futures,"are traded on futures exchanges like the CME Group and require a brokerage account that’s approved to trade futures.
A futures contract involves both a buyer and a seller, similar to an options contract. Unlike options, which can become worthless at expiration, when a futures contract expires, the buyer is obligated to buy and receive the underlying asset and the seller of the futures contract is obligated to provide and deliver the underlying asset.
Futures generally have two uses in investing: hedging (risk management) and speculation.
Hedging with futures: Futures contracts bought or sold with the intention to receive or deliver the underlying commodity are typically used for hedging purposes by institutional investors or companies, often as a way to help manage the future price risk of that commodity on their operations or investment portfolio.
Speculating with futures: Futures contracts are generally liquid and can be bought and sold up to the time of expiration. This is an important feature for speculative investors and traders who don’t own the underlying commodity nor wish to. They can buy or sell futures to express an opinion about—and potentially profit from—the direction of the market for a commodity. Then, prior to expiration, they will buy or sell an offsetting futures contract position to eliminate any obligation to the actual commodity.
Why trade futures?
Individual investors and traders most commonly use futures as a way to speculate on the future price movement of the underlying asset. They seek to profit by expressing their opinion about where the market may be headed for a certain commodity, index, or financial product. Some investors also use futures as a hedge, typically to help offset future market moves in a particular commodity that might otherwise impact their portfolio or business.
Of course, stocks or ETFs can similarly be used to speculate on or hedge against future market moves. They all have their own risks you need to be aware of, but there are some distinct benefits the futures market can offer that the equities market does not.
Establishing an equity position in a margin account requires you to pay 50% or more of its full value. With futures, the required initial margin amount is typically set between 3-10% of the underlying contract value. That leverage gives you the potential to generate larger returns relative to the amount of money invested, but it also puts you at risk of losing more than your original investment.
Futures provide a few ways to diversify your investing in ways stocks and ETFs can’t. They can give you direct market exposure to underlying commodity assets vs. secondary market products like stocks. Additionally, they allow you to access specific assets that aren’t typically found in other markets. Futures might also be used if you are looking for strategies designed to help manage some risk surrounding upcoming events that could move the markets.
With futures, the margin requirement is the same for long and short positions, enabling a bearish stance or position reversal without additional margin requirements.
Futures can provide a potential tax benefit compared to other short-term trading markets. That's because profitable futures trades are taxed on a 60/40 basis: 60% of profits are taxed as long-term capital gains and 40% as ordinary income. Compare that to stock trading, where profits on stocks held less than a year are taxed 100% as ordinary income.
Schwab does not provide tax advice. Clients should consult a professional tax advisor for their specific tax advice needs.
Types of futures.
The types of futures available to trade include a wide range of financial and commodity-based contracts, from indexes, currencies, and debt to energies and metals, to agriculture products.Examples of futures contracts available are below (not an exhaustive list).
Types of futures
Index contracts and interest rate (debt) contracts are two types of financial futures. Index contracts provide exposure to specific market index values, while interest rate contracts are used for exposure to the interest rate of a specific debt instrument.
- E-Mini Nasdaq
- E-Mini Russell 2000
- Mini Dow Jones
- E-mini Mid-Cap 400
- Micro E-minis (multiple indices)
- Bloomberg Commodity Index
- Nikkei 225 (CME)
- Volatility Index
- U.S. Treasury Bonds
- U.S. 10-Year Notes
- U.S. 5-Year Notes
- U.S. 2-Year Notes
- Federal Funds
- Ultra Bonds
Currency contracts provide exposure to the exchange rate of a real currency or crypto currency.
- British Pound
- Japanese Yen
- Swiss Franc
- Canadian Dollar
- Australian Dollar
- CME Bitcoin
- U.S. Dollar Index
- Brazilian Real
- Korean Won
- Mexican Peso
- New Zealand Dollar
- South African Rand
- Swedish Krona
Energy contracts provide exposure to the price of common energy products used by companies (for manufacturing, production, and/or transportation) and by governments and individuals for consumption purposes.
- Crude Oil
- Natural Gas
- Heating Oil
- Brent Crude Oil
Metal contracts provide exposure to the price of certain metals that many companies rely on as materials for manufacturing and construction (e.g., gold for computers or steel for housing).
- HRC Steel Index
Grain contracts provide exposure to the prices of raw grain materials used for animal feed and for commercial processing into other products (e.g., ethanol and corn syrup), plus processed soybeans.
- Rough Rice
- Soybean Oil
- Soybean Meal
Livestock contracts provide exposure to the prices of live animals used in the supply, processing, and distribution of meat products.
- Live Cattle
- Feeder Cattle
- Lean Hogs
Food & Fiber Futures
These contracts provide exposure to the prices of specific agricultural products that are grown vs. extracted or mined (also known as Softs) and the prices of dairy products.
- Orange Juice
An option on a futures contract works similarly to an option on an equity contract—you can even use some of the same options strategies. Trades in options on futures can include market neutral, multi-leg, and directional trades, depending on how you think the market will move and your risk/reward goals.
An advantage of options on futures is the ability to reduce risk in your portfolio in different ways. Whether you are looking to trade in an uncorrelated market to diversify risk, hedge existing positions to limit risk, or directly trade more volatile markets at a reduced cost versus the futures contract alone, options on futures can be a way to do this.
Why trade futures with Schwab?
Many types of futures to trade
Access a variety offutures products, including energies, metals, currencies, indices, interest rates, grains, livestock, and softs.
Expert commentary and research
Get market news and reports from industry-leading analysts, including Hightower, Wyckoff, Gramza, and more.
Live trade help from futures specialists
Let our dedicated team of specialists review your trades and even place them for you.
$2.25 futures per contract trade commission
Pay the same commission online or through a broker1 and your satisfaction is guaranteed.2
See More Reasons to Trade Futures at Schwab
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As an expert in financial markets and derivatives trading, I bring a wealth of firsthand experience and in-depth knowledge to the table. Having actively participated in the financial industry, I've navigated through various market conditions, executed trades, and delved into the intricacies of derivative instruments, including futures contracts.
Let's break down the key concepts covered in the provided article about futures trading:
What are Futures?
Futures are derivative contracts agreeing to buy or sell a specific commodity, asset, or security at a predetermined price on a future date. Traded on exchanges like CME Group, futures involve both a buyer and a seller. Unlike options, at expiration, the buyer is obligated to receive the underlying asset, and the seller is obligated to deliver it.
Uses for Futures:
- Hedging (Risk Management): Institutional investors and companies use futures to manage future price risk in their operations or investment portfolios.
- Speculation: Traders buy or sell futures to express opinions on market directions, potentially profiting from price movements. They can eliminate obligations by offsetting positions before expiration.
Why Trade Futures?
Individual investors and traders often use futures for speculation on the future price movements of underlying assets. Futures can be used as a hedge to offset potential impacts of market moves on portfolios or businesses. Some benefits of trading futures include:
- Leverage: Initial margin requirements are lower than establishing equity positions, allowing for potential higher returns (and higher risks).
- Diversification: Futures offer unique exposure to underlying commodity assets, allowing for diversification not possible with stocks or ETFs.
- Short Selling: Margin requirements are the same for long and short positions, facilitating bearish stances or position reversals without additional margin requirements.
- Tax Benefits: Profits from futures trades are taxed on a 60/40 basis, providing potential tax advantages compared to short-term stock trading.
Types of Futures:
Futures contracts cover a wide range of financial and commodity-based instruments, including:
- Financial Futures: Index contracts and interest rate contracts.
- Currency Futures: Providing exposure to exchange rates.
- Energy Futures: Reflecting prices of energy products.
- Metal Futures: Covering prices of metals for manufacturing and construction.
- Grain Futures: Providing exposure to raw grain materials.
- Livestock Futures: Reflecting prices of live animals.
- Food & Fiber Futures: Covering specific agricultural products.
Options on Futures:
Options on futures function similarly to equity options, allowing for market-neutral, multi-leg, and directional trades. They provide ways to reduce portfolio risk and can be used for diversification, hedging, or trading more volatile markets at a reduced cost.
Why Trade Futures with Schwab?
Charles Schwab offers various reasons to trade futures, including access to a variety of futures products, expert commentary and research, live trade help from specialists, and competitive commission rates.
In summary, futures trading provides a versatile tool for both hedging and speculation, offering unique advantages such as leverage, diversification, and tax benefits. Charles Schwab facilitates futures trading with a range of products and support services.