Investing in futures

To buy = long

To sell =  short

Unlike investing in shares where you usually buy first and sell later, futures allow you to sell first and buy back later if you desire. This enables you to take advantage of falling prices as well as rising prices. Selling a futures contract is known as being ‘short futures’. The sale of a futures contract locks the seller into an agreement to sell a commodity or security at a specified date in the future at a price agreed today or to settle the contract by paying or receiving a cash difference between the purchase price and the final settlement price.

To be long futures, means to buy a futures contract. The purchase of a futures contract locks the buyer into an agreement to purchase a commodity or security on a specified date in the future at a price agreed today or to settle the contract by paying or receiving a cash difference between the purchase price and the final settlement price.

Leverage is where only a small portion of the total value of the contract needs to be paid initially as a deposit. Leverage multiplies risk but also provides the potential for a higher return when you trade successfully. Every investor must ensure that they understand the risks involved and whether speculative trading is suitable for their financial goals. It is extremely important that your broker fully explains all the risks involved before investing. 

A number of the contracts are cash-settled when they expire. A cash-settlement contract means that the holder of the contract will receive or pay the difference between their expiry price and the official settlement price at expiry. In contrast, some contracts are deliverable which means the holder must take delivery (in the case of holding a bought contract) or deliver (in the case of holding a short contract) the actual physical commodity.

As the costs of delivery are high, speculators may wish to ensure that they exit any deliverable contracts nearing the delivery date. 

Underlying commodity: The commodity on which a futures contract is based.

Contract unit: The actual amount of a commodity designated in a given futures contract.

Contract month: The month in which delivery or cash settlement is to be made.

Minimum price movement: The smallest increment of price movement possible in trading a given futures contract.

Tick value: The value of the smallest allowable increment of price movement for a contract.

Expiry: A futures contract expires at a designated time, monthly, every 3 months in March, June, September and December or aligned to harvesting and crop seasons. 

At the end of each clearing day, ASX Clear (Futures) calculates a margin based on the movement in the value of the positions, and an initial margin to be paid by the client to the broker and lodged with ASX Clear (Futures). Among other possible components, a margin can include:

• an Initial Margin, and
• a Variation Margin, based on the difference between the entry price and the day’s settlement price.