Markets
SPY5,248.32+0.35%
QQQ18,432.10+0.52%
BTC98,420+1.27%
ETH3,812-1.10%
NVDA952.30+1.36%
AAPL178.42-1.19%
TSLA168.90+2.62%
EUR/USD1.0892-0.21%
GC2,342.50+0.36%
CL82.15+1.17%
SOL178.50+3.36%
DXY104.82+0.14%
SPY5,248.32+0.35%
QQQ18,432.10+0.52%
BTC98,420+1.27%
ETH3,812-1.10%
NVDA952.30+1.36%
AAPL178.42-1.19%
TSLA168.90+2.62%
EUR/USD1.0892-0.21%
GC2,342.50+0.36%
CL82.15+1.17%
SOL178.50+3.36%
DXY104.82+0.14%
TF
tf/beginners
178
tf/beginners•Posted by u/newbie_investor•

What are futures in trading? Not the philosophical concept — the actual financial instrument

I tried Googling this and got extremely confused. A futures contract is an "obligation to buy or sell an asset at a predetermined price at a specified time in the future." Okay but WHO is on the other side? WHY would someone agree to sell me oil at today's price 3 months from now? And do I actually have to take delivery of 1,000 barrels of oil?

Please explain this like I'm not a finance major because I'm not.

3 Comments

Connectez-vous pour laisser un commentaire

Sort by:
commodity_chris·edited

Great question and no you won't get 1,000 barrels of oil delivered to your apartment lol.

Here's how futures actually work:

Originally, futures were created for farmers and buyers. A wheat farmer wants to lock in $5/bushel for his harvest in September so he can plan his finances. A bread company wants to lock in $5/bushel so they can budget for flour costs. They both benefit from price certainty.

In modern markets, 97% of futures are traded by speculators who never intend to take delivery. You buy a crude oil futures contract at $75, hoping it goes to $78. You sell before expiration and pocket the difference. The oil never enters the picture.

Who's on the other side? Sometimes a hedger (an actual oil company), sometimes another speculator who thinks the price is going DOWN. The exchange matches you up anonymously.

198
algo_trader_42·edited

Fun fact: people HAVE accidentally taken delivery. In 2020 when oil went negative, some retail traders on Interactive Brokers got stuck with physical delivery obligations. IBKR ended up eating the losses. Always close your futures positions before expiration!

134
trader_mike·edited

Think of futures as a bet on the price direction with leverage. One ES contract (S&P 500 futures) costs about $13,000 in margin but controls ~$275,000 worth of the index. If the S&P goes up 1%, you make ~$2,750 on your $13,000. That's the leverage that makes futures attractive to traders — and dangerous if you're wrong.

145