Informational Text – What Is Futures Trading?

Futures trading involves buying or selling contracts that obligate a trader to purchase or deliver an asset at a set price on a specific future date. Instead of trading the physical asset directly, traders work with standardized contracts on organized exchanges.

Futures contracts cover a wide range of markets: commodities like crude oil, gold, and wheat; indexes like the S&P 500; currencies like the euro or Japanese yen; and even interest rates. Each futures contract has a defined contract size (how much of the asset it represents) and a tick value (how much each minimum price movement is worth in dollars).

Futures markets are known for leverage. With a relatively small amount of money called margin, a trader can control a much larger position. This leverage can greatly increase potential gains—but it can also turn small price moves into large losses if risk is not controlled.

Unlike regular stock trading hours, many futures markets are open nearly 24 hours a day. That means global news—such as economic reports, wars, storms, or political decisions—can move prices at almost any time. Traders must watch their positions closely and understand how quickly things can change.

Scenario Example – Crude Oil Futures Trade

A trader believes crude oil prices will rise over the next month. Instead of buying shares of an oil company, the trader buys a crude oil futures contract.

One standard crude oil futures contract controls 1,000 barrels of oil. If oil is trading at $80 per barrel, the contract represents $80,000 worth of oil. The trader does not need $80,000 in cash. Instead, they post a much smaller margin—for example, $6,000—to open the position.

Every small move in the crude oil price now has a big impact. If oil rises by $1 per barrel, the contract gains $1,000 in value (1,000 barrels × $1). If oil rises by $2, the trader’s position is up $2,000. Because the trader only posted $6,000 in margin, a $2 move represents a very large percentage gain.

But the same leverage works in reverse. If oil drops by $2 instead, the trader could lose $2,000 very quickly. If the account value falls too much, the broker may issue a margin call, forcing the trader to deposit more money or close the position. This is why futures traders must always respect leverage and plan for both outcomes—profit and loss.

Process Summary – How Futures Traders Think

• Select a futures contract – Choose the market (commodities, currencies, indexes, or interest rates) that matches your idea.
• Study contract details – Understand the contract size, tick value, and expiration date.
• Deposit margin – Put up the required margin to open the position, knowing that it represents only a fraction of the full contract value.
• Monitor leveraged movement carefully – Track how each tick affects your profit or loss and stay aware of news that could cause sudden moves.
• Close or roll the contract – Before expiration, either close the trade or roll it over into a later month if you want to extend the idea.

Key Vocabulary

• Margin – Money required to open or maintain a futures position. It is not a down payment; it is a good-faith deposit that can go up or down with market moves.
• Leverage – The ability to control a large asset with a smaller amount of capital. In futures, leverage comes from using margin.
• Tick Value – The smallest possible price change in a futures contract and how much that move is worth in dollars.
• Settlement Price – The official daily closing price used by the exchange for marking accounts and calculating gains and losses.
• Rollover – Closing a near-expiring contract and opening a new one with a later expiration to keep the trade going.

Cross-Strategy Vocabulary Use:

• Leverage → Forex, Options
• Tick Value → Scalping
• Margin → Options (margin accounts), Forex

Lesson Flow – How the Session Unfolds

Learning Target: I can explain how futures contracts work and evaluate how leverage affects gains and losses.

Essential Question: How does leverage create both opportunity and risk in futures trading?

Bell Ringer: Students estimate how much money is gained or lost when a sample futures contract moves by one tick, then share how quickly multiple ticks can add up.

Mini-Lesson: The instructor explains contract specifications, leverage, and margin calls, showing how small moves can become large dollar changes.

Modeling: The crude oil example is walked through using real contract values. Students see how a $1 or $2 move translates into profit or loss when one contract controls 1,000 barrels.

Guided Practice: Students use sample contracts to calculate gains and losses for different price moves. They practice converting tick changes into dollar amounts.

Independent Practice: Students analyze a written scenario and decide whether placing a futures trade is appropriate based on the trader’s risk tolerance and the leverage involved.

Closure: Students respond to: “Why must futures traders monitor positions constantly when markets are open almost 24 hours a day?”

Exit Ticket: Define leverage in your own words and give one reason it can be dangerous.