Futures Trading: Contract Mechanics, Margin, and Order Handling
How a futures contract actually settles
A futures contract is a standardized, exchange-cleared agreement to buy or sell a specified quantity of a commodity or financial instrument at a future date. Candidates must be able to read a contract specification: contract unit, minimum tick and tick value, delivery months, last trading day, deliverable grade, price limits, and position limits. Positions are marked to market at the close of every session, with gains credited and losses debited daily (variation margin), so the contract is effectively re-priced at settlement each day.
Margin is a performance bond, not a down payment. Initial margin is the amount required to open a position; maintenance margin is the floor below which equity may not fall. If equity drops below maintenance, the customer must deposit enough to bring equity back up to the initial margin level, not merely back to maintenance.
Traps that appear in questions
- Stop orders are placed away from the market: buy stops above, sell stops below. Limit buys are placed below the market and limit sells above.
- Speculative position limits versus exchange accountability levels; hedge exemptions must be applied for, not assumed.
- Delivery mechanics: first notice day, delivery intent, and the difference between physically delivered and cash-settled contracts.
- Contango versus backwardation, and the cost of rolling a long position in a contango market.
Worked example
A customer is long one contract with initial margin of $6,000 and maintenance margin of $4,500. Settlement leaves equity at $4,200, below maintenance. The call is for $1,800, enough to restore equity to the $6,000 initial level.
Rule of thumb: margin call amount = initial margin minus current equity.