What Futures Contracts Are

The short answer

A futures contract is a standardised agreement to transact at a specified price. You are not buying the asset; you are taking a position in an agreement whose value moves with the asset's price.

The standardisation is what makes the market work. Because every contract of a given type is identical, they are interchangeable, and you can close a position by taking the opposite side rather than by finding the specific person you originally traded with.

What "standardised" covers

Every contract specification defines:

• The underlying — precisely which asset or index.
• Contract size — how much underlying one contract represents. This is the field most often skipped, and getting it wrong means your position is a multiple of what you intended.
• Tick size — the minimum price increment, and what one tick is worth.
• Expiry — for dated contracts.
• Settlement — cash-settled, or physically delivered.
• Margin requirements — initial and maintenance.

Read the specification before trading a contract. Not a summary of it; the venue's own document. Specifications differ between venues for what looks like the same product.

The venue as counterparty

When you trade a future, the clearing venue interposes itself: it becomes the buyer to every seller and the seller to every buyer.

This is what makes contracts fungible and removes the need to assess the creditworthiness of whoever took the other side. It concentrates risk in the venue instead, which is managed through margin requirements, mark-to-market and a default fund.

Traditional futures markets and crypto derivatives venues both operate this way in structure, though the regulatory frameworks and protections around them differ substantially by jurisdiction and by venue. That difference is worth understanding for wherever you actually trade.

Dated contracts

A dated future has an expiry. As expiry approaches, its price converges toward spot, because at settlement the two must agree.

Practical consequence: if you want continuous exposure, you must roll — close the expiring contract and open the next one. Rolling has a cost, and if the next contract trades at a premium the roll is a recurring drag.

Perpetual contracts

Perpetuals have no expiry. Without one, the convergence mechanism is gone, so something has to replace it.

That something is funding: a periodic payment between longs and shorts, typically every eight hours. When the contract trades above spot, funding is positive and longs pay shorts — which makes being long more expensive, encourages shorts, and pushes the contract back toward spot. Below spot, it works in reverse.

So the tether is economic rather than contractual. It usually works. It can break down in extreme conditions, when the arbitrage that enforces it becomes difficult or expensive to execute.

Funding is covered in detail in funding and carrying costs.

Basis

Basis is the difference between the contract price and spot.

• Contract above spot (contango-like): often reflects crowded long positioning or a cost-of-carry.
• Contract below spot (backwardation-like): often reflects crowded shorts or acute demand for spot.

Basis is genuinely informative as a positioning signal, and it is routinely over-interpreted. A persistently high basis says leverage is concentrated on one side, which tends to make liquidation cascades in the other direction more violent. It does not say when.

Why this matters before you trade one

Two things follow directly from "a future is an agreement, not ownership":

1. You cannot hold it indefinitely for free. Dated contracts expire; perpetuals charge funding. Time is a cost in a way it is not for spot.
2. Your position can be closed by the venue. Margin, not conviction, determines how much adverse movement you can absorb. That is the subject of the next lesson.