Futures

Week 9 · Leverage built into the contract

Course lens

How can a small retail trading account survive execution friction, drawdowns, leverage, and increasingly complex instruments?

The question this week answers

What happens when leverage is not an optional account setting, but a structural feature of the contract itself?

The point is not to find a “best” trading style or instrument. It is to understand what can make the account fail.

By the end of this lecture

  1. define a futures contract as an obligation
  2. explain contract size, expiry and rollover
  3. calculate notional exposure and implied leverage
  4. connect linear payoff and margin to small-account survival

The mechanics we need — and no more

Contract size

The quantity represented by one standardised futures contract

Expiry

The date the contract obligation settles

Rollover

Close the current contract and open a later one to keep exposure without settlement

With futures, a small margin deposit can control a much larger notional position — the account can move far more than the underlying price does

A worked example

The course uses futures as an embedded-leverage case study, not as a survey of commodities or trading strategies.

A simulated futures contract represents 100 units of an underlying priced at $50 — a notional value of $5,000. The exchange requires $500 of initial margin to hold one contract. The contract’s payoff is linear: each unit of price movement changes P/L by a fixed amount.

The numbers: leverage multiple

notional value = 100 × $50 = $5,000


leverage multiple = 5,000 ÷ 500 = 10x

The numbers: what a small move does

A 4% move in the underlying ($2)

P/L = 100 × $2 = $200

200 ÷ 500 = 40% of the margin actually put up

A 4% move in the underlying produced a 40% move relative to the trader’s own capital — the same leverage principle from Week 8, now embedded in the contract design itself.

Linear payoff, leveraged account impact

entry

Linear exposure means every $1 move changes P/L by a fixed amount. With 10x notional-to-margin leverage, a modest move in the underlying becomes a large move relative to account capital.

Try it yourself

Size the exposure

A simulated contract represents 50 units of an underlying priced at $80, requiring $400 initial margin.

Calculate the notional value, the implied leverage, and the dollar P/L from a $3 move in the underlying. Then express that P/L as a percentage of the margin posted.

The takeaway

  1. A futures contract is an obligation, not a choice.
  2. The exchange-set margin determines the leverage built into the exposure.
  3. Linear payoff makes the P/L easy to calculate — but leverage makes the account impact large.
  4. Week 10 adds nonlinear payoff and premium loss on top of the derivative framework.

Next week

Week 10 — options: bounded loss, total premium loss and nonlinear payoff.