Week 9: Futures

Futures are introduced as a contract, not a stock: an obligation to buy or sell at a set price on a set date, built on top of the margin and leverage mechanics from Week 8 — except here the leverage isn’t a choice the trader makes, it’s built into the contract by the exchange, usually far higher than a broker would ever offer against a stock. Deliberately covered before options, since a futures contract’s payoff is a straight line — the simplest possible setup for the kinked payoff options introduce next week to be compared against.

The question this week answers#

Week 8’s leverage was an account setting a trader chose. Here it’s embedded in the contract itself, and usually much higher — what is a futures contract actually obligating a trader to do, and how much closer does that embedded leverage put the account to a forced liquidation?

By the end of this lecture#

• define a futures contract as an obligation, not a choice to act
• explain how Week 8’s margin and leverage concepts apply to a futures position
• explain contract size, expiry and rollover in plain terms
• calculate the leverage multiple implied by a futures contract’s margin requirement
• explain why a futures payoff is linear

Key ideas#

A futures contract is a standardised agreement to buy or sell a set quantity of something at a set price on a set future date — unlike a stock, there’s no ownership changing hands today, only an obligation that settles later (or is closed out before then). Futures exist on far more than physical goods; this course treats them generically, as a contract shape, not a commodities course.

Futures don’t use a margin account setting the way Week 8’s stock example did — the required margin (called initial margin here) is set by the exchange as a fraction of the contract’s total value, and it’s typically a much smaller fraction than stock margin allows, which is why futures leverage is usually far higher by default. Contract size is the quantity one contract represents; expiry is the date the obligation settles; rollover is closing a contract before expiry and opening an equivalent one with a later expiry, to keep a position open without taking delivery.

A futures contract’s payoff is linear: profit or loss moves by a fixed amount for every unit the price moves, in either direction, without limit — the simplest payoff shape this course covers, and the baseline Week 10 compares an option’s payoff against.

A worked example#

A simulated futures contract represents 100 units of an underlying priced at $50, for a notional value of $5,000. The exchange requires $500 of initial margin to hold one contract.

The numbers#

Notional value and leverage multiple.

notional value = 100 × $50 = $5,000

leverage multiple = notional value ÷ margin required = 5,000 ÷ 500 = 10x

Effect of a price move. If the underlying moves $2 (a 4% move):

P/L = 100 × $2 = $200

That $200 is 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, which is the leverage multiple doing exactly what it says. A losing streak of that size, several sessions in a row, reaches the same forced-liquidation territory Week 8 covered — just faster, because the exchange set the leverage, not the trader.

What a diagram would show#

A payoff diagram: a single straight line running through the entry price on the horizontal axis, profit above and loss below, with no bend anywhere along it — deliberately the simplest payoff shape in the course, so Week 10’s kinked line stands out by contrast.

Try it yourself#

The takeaway#

A futures contract’s leverage is fixed by its margin requirement, not chosen account-by-account the way Week 8’s stock margin was — and its payoff is a straight line, moving by a constant amount per unit of price change in either direction. That fixed, usually-high leverage is exactly what makes futures a forced-liquidation risk that arrives faster than a stock margin call would, for the same size account. Week 10 keeps the obligation-versus- right distinction in view while introducing a payoff that bends.