Futures Contract
Definition
A futures contract is a standardized agreement to buy or sell a specific asset at a predetermined price on a specified future date — widely used by day traders to access markets like the S&P 500, Nasdaq, crude oil, and gold with leverage.
Example
“He traded /ES (E-mini S&P 500 futures) in pre-market, sizing two contracts. Each tick was worth $12.50, so a 10-point move against him was a $500 loss — he sized accordingly.”
Detailed Explanation
Futures contracts let traders participate in markets that would otherwise be inaccessible or capital-intensive. The S&P 500 E-mini (/ES) lets you trade the equivalent of a large S&P 500 position for a fraction of the notional value, using margin. Futures also trade nearly 24 hours a day, five days a week, which is why traders watch /ES and /NQ overnight to gauge global sentiment before the stock market opens. The overnight futures price tells you a lot about how stocks will likely open the next morning.
Understanding futures requires learning the specific mechanics: contract size (how much notional value per contract), tick size (the minimum price increment and its dollar value), margin requirements, and expiration/rollover dates. The /ES, for example, has a $50 multiplier per point, so a 10-point move on one contract equals $500. This leverage is powerful but demands precise position sizing. Many futures traders size so small initially that a bad trade cannot do serious damage to their account — and they scale up only after proving consistent performance.
Tax treatment is a notable advantage for U.S. futures traders: futures profits are taxed under the 60/40 rule — 60% as long-term capital gains and 40% as short-term — regardless of how long you held the contract. This is significantly more favorable than stock trading, where short-term gains on trades held less than a year are taxed as ordinary income. Consult a tax professional for your specific situation, but this tax structure makes futures attractive to active traders beyond just the leverage benefits.