A futures contract sounds like Wall Street math, but it's just a promise with a date stapled to it. If you've ever promised a neighbor eggs at a set price come spring, you already made one.
By the end of this one you'll know exactly what a futures contract is, what expiration means, and why most people who trade them never touch the actual thing.
The lesson
A futures contract is an agreement to buy or sell something at a set price on a set future date, and both sides are locked in. Say I promise the feed store 10 dozen eggs in June at $4 a dozen. If June eggs are selling for $5, the store got a bargain and I missed out, and if June eggs fall to $3, I'm smiling and they're grumbling, but either way the deal is the deal. The thing the promise is about, eggs here, corn or bitcoin elsewhere, is called the underlying, and the day the promise comes due is called expiration. Here's the part that surprises people: most folks trading futures today never want the eggs. They just settle the difference in cash at the end, like squaring up a bet on the egg price without a single carton changing hands.
Walk the $100
Same lesson, told by a hundred dollar bill. Tap to walk it one step at a time.
In this example, someone agrees to buy 25 dozen eggs in June at $4 a dozen, a $100 promise. If June eggs are going for $4.
40, that promise is $10 ahead, because 40 cents times 25 is $10.
If June eggs slide to $3.
60, that same promise is $10 behind.
In cash-settled futures, that $10 just moves between the two sides and nobody ever sees an egg.
At your kitchen table
Your neighbor leans on the fence in October and makes you an offer. He'll sell you 50 pounds of beef come April at $4 a pound, price locked today, $200 total. The meat counter has been all over the place lately and you both know it.
Pick your move. Then peek at the other roads if you're curious.
Shake on four dollars a pound. Come April the store is charging $4.60, so your handshake is about $30 ahead. But understand what you signed up for, if beef had dropped to $3.50 you'd still owe him $4, because the deal is the deal on both sides. That lock works in whichever direction prices go, and nobody knows which in October.
Pass and buy week to week. You stay loose and shop the sales. Some months you beat his price, some months you don't, and by summer it roughly comes out in the wash, give or take $30 across the year. What you really kept was the choice, and what you gave up was knowing your number ahead of time.
Offer to settle the difference in cash. You suggest skipping the freezer part, in April whoever's side of the price is ahead just gets paid the gap. If beef lands at $4.60, he hands you $30 and you buy your meat wherever you like. Here's the surprise, that's exactly how most futures trades end today, cash squares up and nobody ever touches a single steak or bushel.
A futures contract is just a promise with a date stapled to it, and most of the people trading them never take home the actual thing.
Quiz yourself
🐓 Got a question about this one? Ask it on the live at 7 AM or 7 PM Mountain, TikTok @247candles. Steven answers class questions by name.