The mechanism
A futures contract obliges the buyer to take delivery, and the seller to make delivery, of a defined quantity at a defined date and price. The exchange defines every term except the price.
What makes it work is the clearing house. It steps between buyer and seller and becomes the counterparty to both, so neither needs to assess the other's creditworthiness. It protects itself by requiring initial margin — a deposit, typically a few per cent of contract value — and then settling gains and losses in cash every single day.
That daily mark-to-market is the part people underestimate. You do not wait until expiry to find out if you were wrong. You find out at the close, and if your margin falls below maintenance level, you post more by the next morning or the position is closed out.
Hedging, which is the point
Futures exist so that people with real exposure can transfer it. A farmer sells wheat futures and locks in a price. An airline buys fuel futures. A fund manager sells index futures to reduce equity exposure quickly without disturbing the underlying portfolio.
Speculators provide the liquidity that makes hedging possible. Both sides are necessary; neither is the villain.
The curve
Futures for different delivery months trade at different prices, and that shape carries information. Contango — later months dearer — typically reflects storage and financing costs. Backwardation — later months cheaper — usually signals immediate physical scarcity.
For anyone holding a position beyond one contract's expiry, the shape of the curve determines the cost of staying in. This is the roll yield, and over long horizons it can dominate the underlying price move entirely.
Leverage cuts both ways
Controlling £100,000 of exposure for £5,000 of margin is not free money; it is a 20:1 amplifier. A 5% adverse move eliminates the deposit. Futures losses are not limited to the margin posted — you can owe more than you put in, which is the fundamental difference between futures and buying an asset outright.
How you would actually trade it
Direct futures trading requires an account with a clearing broker, which brings suitability requirements, meaningful minimum balances and the operational duty of meeting margin calls promptly.
Most UK retail participants reach the same exposure through spread bets and CFDs, which are priced off futures but are bilateral contracts with the broker rather than cleared instruments — a different risk profile and, for spread bets, a different tax treatment.
If you do trade futures directly: know your contract's expiry, its delivery mechanism, and your broker's auto-liquidation policy before you take a position. The April 2020 negative oil episode taught several retail platforms and their clients these lessons simultaneously.
What goes wrong
- Losses can exceed your deposit. This is the defining risk and it is not theoretical.
- Margin calls arrive at the worst time, requiring cash precisely when the position has moved against you.
- Physical delivery obligations on contracts held into expiry.
- Roll costs compound quietly over long holding periods.
- Gap risk. Limit-up and limit-down moves can prevent you exiting at any price.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.