Options Trading Fundamentals

How to Trade Futures

Q: What happens if I do not close before expiration?

It depends on the settlement type. In cash-settled contracts — indices — the position settles automatically at the final price and there is no problem beyond the result. In physically delivered contracts — crude, grains, livestock — most retail brokers close positions before first notice day, often charging high fees to do so. The responsibility to manage it in time is yours, not the broker’s.

Q: Do futures have better tax treatment?

In the United States, Section 1256 contracts — which include most futures — are marked to market at year end and taxed on a 60% long-term, 40% short-term split, regardless of holding period. For short-term trading that is usually more favourable than ordinary treatment. In other jurisdictions the regime differs and it is worth verifying with a local adviser before counting on that advantage.

ES: Cómo Operar Futuros PT: Como Operar Futuros

The practical mechanics: which contract to choose, how margin works, when you have to roll, and the specific errors that empty futures accounts.

Before the First Order: Understand the Contract

Every futures contract has a specification sheet that must be read in full before trading it, and four items are indispensable. The multiplier, which converts points into money: 50 in the E-mini S&P, 5 in the micro, 1,000 barrels in crude, 100 ounces in gold. The tick value, the minimum increment translated into dollars. The hours, which in the main contracts run almost continuously from Sunday to Friday. And the settlement method: physical delivery or cash settlement. With those four items you can calculate the notional, size the position, and know whether there is any risk of ending up in a delivery process.

How Margin Works

Futures are not bought: they are opened by posting initial margin, which is not a payment but collateral that remains yours. There is also a lower maintenance margin, the minimum that must stay in the account; if the balance falls below it, a margin call requires immediate top-up or the position is liquidated. The key particularity is daily mark-to-market: at each session close, the day’s result is credited or debited in cash to your account. An unrealised loss in futures is not unrealised: it has already left. Many brokers also offer reduced intraday margins, and that convenience is precisely what most tempts traders into excessive size.

Choosing Contract and Expiration

Two decisions. The first is size: micro contracts carry a tenth of the notional of the standard ones and allow precise sizing in modest accounts; starting with them is the sensible route regardless of available capital. The second is the month: liquidity concentrates overwhelmingly in the front contract, normally the nearest expiration, and distant months can have unacceptable spreads. It is also worth knowing each product’s expiration cycle — quarterly in indices, monthly in energy — and the roll calendar, because trading the wrong contract means trading a market with no counterparty.

Rolling: The Cost You Must Anticipate

Futures expire, so maintaining exposure requires rolling: closing the contract about to expire and opening the next. The cost of that operation depends on the shape of the curve. In contango — the distant expiration more expensive — rolling a long position costs money on every rotation, and that accumulated negative roll yield can be substantial in commodities. In backwardation the opposite happens and rolling longs adds return. It is best to roll a few days before expiration, when liquidity has already shifted to the next contract but the current one still trades normally; many platforms offer calendar spread orders that execute both legs at once with less slippage.

The Errors That Empty Accounts

Four, and they are always the same. Sizing by margin: the fact that four contracts fit does not mean four is reasonable; the calculation must start from the notional. Ignoring gap risk: even though the market trades almost continuously, there are pauses and there are violent moves in low-liquidity hours where a stop can fill far from the level set. Trading illiquid contracts: distant months or secondary products where getting in is easy and getting out is not. And forgetting the expiration: letting a position run in a physically delivered contract to first notice day can generate high fees or real complications, and the responsibility to close or roll in time always rests with the trader.

Frequently Asked Questions

How much capital do I need to start?

With micro contracts, a few thousand dollars allows trading at reasonable size. But the figure that matters is not the margin, it is the notional: a micro E-mini S&P controls around $25,000 of exposure, so a 4% adverse move is $1,000. Apply the usual rule of risking 1% to 3% per trade against that figure and you get the minimum capital your plan needs.

What happens if I do not close before expiration?

It depends on the settlement type. In cash-settled contracts — indices — the position settles automatically at the final price and there is no problem beyond the result. In physically delivered contracts — crude, grains, livestock — most retail brokers close positions before first notice day, often charging high fees to do so. The responsibility to manage it in time is yours, not the broker’s.

When should I roll my position?

A few days before expiration, when volume has already shifted to the next contract but the current one still trades normally. Rolling too early means paying wider spreads in the new contract; too late means finding no liquidity in the expiring one. Using a calendar spread order executes both legs simultaneously and reduces slippage compared with two separate orders.

Do futures have better tax treatment?

In the United States, Section 1256 contracts — which include most futures — are marked to market at year end and taxed on a 60% long-term, 40% short-term split, regardless of holding period. For short-term trading that is usually more favourable than ordinary treatment. In other jurisdictions the regime differs and it is worth verifying with a local adviser before counting on that advantage.

Can I trade futures in a retirement account?

Some brokers allow it with significant restrictions: they typically require higher margins, do not permit positions that could generate negative balances, and limit the strategies available. In addition, the Section 1256 tax advantage loses relevance in a tax-deferred account, since there is no annual taxable event. It is worth checking the broker’s specific terms before assuming the trading will be equivalent.