Module 3: Types of Futures Contracts

Objective: Explore the variety of futures contracts, understand their specifications, and identify which markets suit your trading goals.

Welcome to Module 3! Now that you understand what futures contracts are and how their markets operate, it’s time to dive into the types of futures contracts you can trade. From grains to gold to stock indices, futures cover a wide range of assets. In this module, we’ll break down the major categories, explain contract specifications, and introduce smaller contracts for retail traders. Let’s explore the exciting world of futures markets!

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Major Categories of Futures Contracts

Futures contracts are based on a variety of underlying assets, grouped into several key categories. Each category serves different industries and traders, offering unique opportunities for hedging and speculation.

1. Agricultural Futures

- What They Are: Contracts based on farm products like grains, livestock, and soft commodities.

- Examples:

- Corn: Traded on the CME, used by farmers and food processors.

- Wheat: Key for bakers and exporters.

- Soybeans: Linked to animal feed and biofuels.

- Coffee and Sugar: Traded on ICE, vital for food and beverage companies.

- Why Trade Them?: Agricultural futures are sensitive to weather, supply chains, and global demand, creating opportunities for speculators.

- Example: A farmer sells corn futures at $6 per bushel to lock in prices before harvest, hedging against a potential price drop.

2. Energy Futures

- What They Are: Contracts tied to energy products like oil and natural gas.

- Examples:

- Crude Oil (WTI): Traded on CME, a benchmark for global oil prices.

- Natural Gas: Used by utilities and manufacturers.

- Gasoline and Heating Oil: Linked to consumer and industrial demand.

- Why Trade Them?: Energy markets are volatile due to geopolitics, production changes, and seasonal demand, attracting speculators.

- Example: An airline buys crude oil futures at $75 per barrel to hedge fuel costs for next year.

3. Metals Futures

- What They Are: Contracts based on precious and industrial metals.

- Examples:

- Gold: A safe-haven asset traded on COMEX (part of CME).

- Silver: Used in jewelry and electronics.

- Copper: A barometer for economic growth, used in construction.

- Why Trade Them?: Metals are influenced by inflation, industrial demand, and currency fluctuations, appealing to both hedgers and speculators.

- Example: A jewelry company buys gold futures at $1,900 per ounce to secure inventory costs.

4. Financial Futures

- What They Are: Contracts tied to financial instruments like stock indices, interest rates, and currencies.

- Examples:

- E-mini S&P 500: Tracks the U.S. stock market (CME).

- Treasury Bond Futures: Linked to U.S. government debt.

- Euro FX Futures: Based on the euro vs. U.S. dollar exchange rate.

- Why Trade Them?: Financial futures are highly liquid, ideal for portfolio hedging or betting on economic trends.

- Example: A hedge fund shorts S&P 500 futures to protect against a market downturn.

5. Other Futures

- What They Are: Emerging or niche contracts for specialized markets.

- Examples:

- Bitcoin Futures: Traded on CME, tied to cryptocurrency prices.

- Weather Futures: Based on temperature or rainfall, used by insurers.

- Real Estate Futures: Linked to housing indices.

- Why Trade Them?: These markets offer unique opportunities but may have lower liquidity.

- MikoFutures Note: Niche contracts are best for experienced traders due to complexity.

Real-World Insight: In 2025, energy and metals futures are particularly active due to global economic shifts and geopolitical tensions. Check MikoFutures.com’s blog for market updates!

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Contract Specifications

Every futures contract has specifications that define its terms. Understanding these is crucial for trading effectively. Here’s what to look for:

1. Contract Size

- The quantity of the underlying asset per contract.

- Examples:

- Corn: 5,000 bushels per contract.

- Crude Oil: 1,000 barrels.

- Gold: 100 troy ounces.

- E-mini S&P 500: $50 x index value (e.g., at 500 points, worth $25,000).

- Why It Matters: Contract size determines your exposure and margin requirements.

2. Tick Size

- The minimum price movement of a contract, which affects profits/losses.

- Examples:

- Crude Oil: $0.01 per barrel = $10 per contract (1,000 barrels x $0.01).

- E-mini S&P 500: 0.25 points = $12.50 per contract ($50 x 0.25).

- Why It Matters: Smaller tick sizes allow precise trading but can add up quickly.

3. Expiration

- The date when the contract settles, typically monthly or quarterly.

- Example: A December 2025 corn futures contract expires mid-December, requiring the trader to close or roll over the position.

- MikoFutures Tip: Most speculators exit before expiration to avoid delivery (covered in Module 7).

4. Margin Requirements

- The deposit needed to trade, set by the exchange and broker.

- Example: One crude oil contract might require $5,000 initial margin, even though the contract’s value is $75,000 (at $75/barrel).

- Why It Matters: Margin enables leverage but increases risk.

Example in Action: Let’s say you trade one E-mini S&P 500 futures contract:

- Contract Size: $50 x index (at 500 points = $25,000).

- Tick Size: 0.25 points = $12.50.

- Margin: ~$6,000 initial margin.

- Scenario: The index rises 10 points (40 ticks). Your profit is 40 x $12.50 = $500, a strong return on your $6,000 margin.

MikoFutures Warning: Large contract sizes and leverage can lead to significant losses. Always use risk management (Module 6).

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Micro Futures: A Game-Changer for Retail Traders

Standard futures contracts can be intimidating due to their size and capital requirements. Enter micro futures, smaller versions designed for retail traders.

What Are Micro Futures?

- Scaled-down contracts with lower margin and smaller notional values.

- Examples:

- Micro E-mini S&P 500: 1/10th the size of the E-mini, worth $5 x index (e.g., $2,500 at 500 points).

- Micro Crude Oil: 100 barrels vs. 1,000 for standard contracts.

- Micro Gold: 10 ounces vs. 100 for standard gold futures.

- Margin: Often $500-$1,000 per contract, vs. $5,000-$10,000 for standard contracts.

Benefits of Micro Futures

- Lower Capital Requirements: Accessible for traders with smaller accounts.

- Easier Risk Management: Smaller positions reduce exposure.

- Practice Ground: Ideal for learning without massive risk.

- Example: A 10-point move in the Micro E-mini S&P 500 earns $50 (vs. $500 for the E-mini), making it less stressful for beginners.

Who Uses Them?

- Retail traders, new investors, and those testing strategies.

- MikoFutures Tip: Start with micro futures in a demo account to build confidence (Module 4).

Real-World Scenario: A trader with a $2,000 account buys one Micro E-mini S&P 500 contract (margin: ~$600). The index rises 20 points, earning $100 (20 x $5). The same move in a standard E-mini would require $6,000 margin and yield $1,000, showing micro futures’ accessibility.

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Quiz: Test Your Knowledge

1. Which category includes contracts for corn and coffee?

a) Financial futures

b) Agricultural futures

c) Energy futures

Answer: b

2. What does “tick size” refer to in a futures contract?

a) The contract’s expiration date

b) The minimum price movement

c) The margin requirement

Answer: b

3. Which type of futures contract is tied to crude oil and natural gas?

a) Metal futures

b) Energy futures

c) Currency futures

Answer: b

4. What is the primary purpose of a stop-loss order in futures trading?

a) To lock in profits

b) To limit potential losses

c) To increase leverage

Answer: b

5. Which futures category includes contracts for gold and silver?

a) Precious metal futures

b) Agricultural futures

c) Equity index futures

Answer: a

6. What does the term “contract month” indicate in futures trading?

a) The month the contract was purchased

b) The month the contract expires

c) The month trading volume is highest

Answer: b

7. Which of the following is an example of a financial futures contract?

a) Wheat futures

b) S&P 500 index futures

c) Crude oil futures

Answer: b

8. What is the significance of “tick value” in futures trading?

a) The total value of the contract

b) The monetary value of one tick movement

c) The initial margin requirement

Answer: b

9. Which factor most directly influences agricultural futures prices?

a) Interest rates

b) Weather conditions

c) Currency exchange rates

Answer: b

10. What is a key characteristic of currency futures contracts?

a) They are settled only in cash

b) They involve the exchange of one currency for another at a future date

c) They are tied to commodity prices

Answer: b

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Exercise: Apply What You’ve Learned

Task: Compare the contract specifications of the Micro E-mini S&P 500 and the standard E-mini S&P 500 futures. Use CME Group’s website (cmegroup.com) to find details like contract size, tick size, and margin. Write a brief summary (3-4 sentences).

Example: The Micro E-mini S&P 500 has a contract size of $5 x index (e.g., $25,000 at 5,000 points), a tick size of 0.25 points ($1.25), and requires ~$600 margin. The standard E-mini S&P 500 is 10x larger at $50 x index ($250,000), with the same tick size but a $12.50 value and ~$6,000 margin. Micro futures are ideal for smaller accounts due to lower costs and risk.

Submit: Share your summary in the MikoFutures Discord community or email support@mikofutures.com for feedback!

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Key Takeaways

- Futures contracts span agricultural, energy, metals, financial, and other categories, each with unique drivers.

- Contract specifications (size, tick size, expiration, margin) define how a contract trades and its risk/reward profile.

- Micro futures offer smaller, more accessible contracts for retail traders, reducing barriers to entry.

- Understanding contract types and specs helps you choose markets that align with your goals and capital.

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What’s Next?

In Module 4: Trading Futures: Getting Started, we’ll guide you through choosing a broker, opening a trading account, and placing your first trade. Get ready to take your first steps in the futures market!

Ready to Continue? Jump to Module 4 or join our community for exclusive tips and Q&A sessions.

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