Futures

Futures are standardized contracts to buy or sell an asset at a predetermined price on a specified future date. These contracts are traded on organized exchanges like the Chicago Mercantile Exchange (CME) and are standardized in terms of contract size, product quality, and delivery date.

Unlike options, futures contracts obligate the holder to either buy (long position) or sell (short position) the asset at the predetermined price on the specified date. If the holder does not wish to take delivery of the asset, they must sell the contract to another investor or someone who intends to use the asset.

Futures contracts typically cover agricultural, commercial, and mining products, but they also include stock indices like the E-mini S&P 500, E-mini Nasdaq 100, E-mini Russell 2000, E-mini DOW, as well as cryptocurrencies and other assets.

Futures let you take or shed exposure to an asset without owning it, at a fraction of the capital the underlying position would require, and electronic trading has pushed execution costs down for decades. The same efficiency that makes them useful for hedging makes them ruinous when misused — the capital required to open the position tells you nothing about the risk you have assumed.

Strategic uses of futures include:

Hedging

Futures contracts can protect against adverse price movements. For example, a wheat farmer can lock in a price for their crop by selling wheat futures, ensuring stable revenue regardless of market fluctuations. This strategy mitigates the risk of price volatility.

Speculation

Futures allow investors to profit from price movements without owning the underlying asset. For instance, if you believe oil prices will rise, you can buy oil futures. If prices increase, you can sell the futures at a profit. This approach leverages market predictions for potential gains.

Portfolio Diversification

Futures provide exposure to different asset classes. Investing in commodity futures, for example, can diversify your portfolio, reducing overall risk.

Investors can take positions in futures markets without owning the physical commodity. This is why your neighbor might invest in corn or crude oil without having a backyard full of corn stalks or barrels of oil. The liquid nature of futures markets allows producers to hedge risks and facilitates physical delivery when necessary.

Tax Considerations Every commodity, currency, interest-rate, and broad-index futures contract traded on a U.S. exchange is a § 1256 contract — single-stock and narrow-index securities futures are carved out by IRC §1256(b)(2)(A) — marked to market on the last business day of the year and taxed 60% long-term / 40% short-term regardless of holding period — a blended 26.8% federal at the top bracket. Equity options are taxed under a different regime entirely, on the holding period of the option itself, not of the underlying. Both are covered in section “Section 1256 Contracts and the 60/40 Regime” and section “Taxation of Equity Options”; the classification difference is worth roughly ten points of after-tax return on active trading, so read them before you trade, not after.

The Commodity Futures Trading Commission (CFTC) regulates these markets and the National Futures Association (NFA) is their self-regulatory body; the margin and clearing rules cited below are theirs.