Futures Trading

Futures Trading — Contracts, Margin & Strategy

Understand futures contracts — from traditional commodities and financial indexes to crypto perpetuals and event futures — and how to trade them.

When to Use This Skill

USE when:

• Understanding futures contract mechanics (specs, margin, settlement)
• Analyzing commodity, index, crypto, or event futures
• Evaluating margin requirements and leverage risk
• Building spread or hedging strategies
• Connecting prediction markets to traditional futures

DON'T USE when:

• Betting on sports outcomes → use /sports-betting
• Building predictive models → use /odds-modeling
• Managing betting capital → use /bankroll-management

Step 1: Futures Contract Fundamentals

What Is a Futures Contract?

A FUTURES CONTRACT is a binding agreement to buy or sell a specific
asset at a predetermined price on a specific future date.

KEY CHARACTERISTICS:
  ├── Standardized (exchange-defined size, expiry, quality)
  ├── Leveraged (control large notional value with small margin)
  ├── Zero-sum (every winner has a loser)
  ├── Mark-to-market (daily profit/loss settlement)
  └── Expiration (contracts expire — must roll or settle)

LONG POSITION:  You agree to BUY at the contract price
  → Profit if price goes UP
  → Loss if price goes DOWN

SHORT POSITION: You agree to SELL at the contract price
  → Profit if price goes DOWN
  → Loss if price goes UP

Contract Specification Template

## Contract: [Name]

| Spec | Value |
|------|-------|
| **Symbol** | [ticker] |
| **Exchange** | [CME, NYMEX, ICE, etc.] |
| **Underlying** | [what the contract represents] |
| **Contract Size** | [units per contract] |
| **Tick Size** | [minimum price movement] |
| **Tick Value** | [dollar value of one tick] |
| **Trading Hours** | [when the market is open] |
| **Expiration** | [monthly, quarterly, etc.] |
| **Settlement** | [physical delivery or cash settled] |
| **Initial Margin** | [$ required to open position] |
| **Maintenance Margin** | [$ required to maintain position] |

Major Futures Markets

Step 2: Margin & Leverage

How Margin Works

INITIAL MARGIN: Cash required to OPEN a position
MAINTENANCE MARGIN: Cash required to KEEP a position open
MARGIN CALL: When account equity drops below maintenance margin
  → Must deposit more funds or position is liquidated

EXAMPLE — E-mini S&P 500 (ES):
  Contract size: 50 × S&P 500 index
  S&P 500 at 5,200 → notional value: $260,000
  Initial margin: ~$13,200 (varies by broker/exchange)
  Leverage ratio: $260,000 / $13,200 = ~20:1

  1-point move in S&P = $50 per contract
  10-point move = $500 (3.8% of margin)
  50-point move = $2,500 (18.9% of margin)

  → A 2% market move can wipe out 40%+ of your margin
  → LEVERAGE IS THE MOST DANGEROUS FEATURE OF FUTURES

Leverage Risk Table

POSITION SIZING RULE:
  Risk per trade: 1-2% of account
  Set stop-loss BEFORE entering
  Calculate contracts: max_loss / (stop_distance × tick_value)

  Account: $50,000, Risk: 1% ($500), Stop: 10 points on ES
  Contracts = $500 / (10 × $50) = 1 contract

Step 3: Contract Types

Standard vs. Micro vs. Event

E-MINI S&P 500 (ES):
  Size: $50 × index
  Margin: ~$13,200
  Who: Professional and funded retail traders

MICRO E-MINI S&P 500 (MES):
  Size: $5 × index (1/10th of ES)
  Margin: ~$1,320
  Who: Retail traders, smaller accounts

NANO / EVENT CONTRACTS:
  Size: Fixed payout ($1 per contract on Kalshi, binary outcomes)
  Margin: Contract price (e.g., $0.65 to buy "Yes" at 65%)
  Who: Prediction market participants, retail speculators

Cash-Settled vs. Physical Delivery

CASH-SETTLED (most financial futures):
  At expiration, no asset changes hands
  The difference between contract price and settlement price is paid in cash
  Example: ES settles to the S&P 500 index value
  → No risk of accidentally receiving 1,000 barrels of oil

PHYSICAL DELIVERY (some commodity futures):
  At expiration, the actual commodity must be delivered/received
  Example: CL (crude oil) → 1,000 barrels delivered to Cushing, OK
  → Retail traders must CLOSE positions before first notice day
  → April 2020: WTI went NEGATIVE because holders couldn't take delivery

Perpetual Futures (Crypto)

CRYPTO PERPETUALS (no expiration):
  ├── No settlement date — positions can be held indefinitely
  ├── Funding rate: periodic payments between longs and shorts
  │   → If funding is positive: longs pay shorts (bullish sentiment)
  │   → If funding is negative: shorts pay longs (bearish sentiment)
  ├── Tracks spot price via funding mechanism
  ├── Leverage: Often 1x-100x+ (extremely dangerous at high leverage)
  └── 24/7 trading (no market close)

FUNDING RATE AS SIGNAL:
  High positive funding (>0.05% per 8hr):
    → Market is excessively long → contrarian short signal
  High negative funding (<-0.05% per 8hr):
    → Market is excessively short → contrarian long signal
  → Not a timing tool — but useful for gauging sentiment extremes

Step 4: Trading Strategies

Directional Trading

LONG: Buy contract expecting price to rise
SHORT: Sell contract expecting price to fall

ENTRY FRAMEWORK:
  1. Fundamental thesis (why should price move?)
  2. Technical entry (when to enter?)
  3. Position size (how much?)
  4. Stop-loss (where am I wrong?)
  5. Target (where do I take profit?)

RISK:REWARD MINIMUM: 1:2
  Risk $500 to make $1,000
  Even with 40% win rate, this is profitable:
    40 wins × $1,000 = $40,000
    60 losses × $500 = $30,000
    Net: +$10,000

Spread Trading

CALENDAR SPREAD (same product, different expirations):
  Buy December Gold / Sell February Gold
  Profit from changes in the relationship between months
  Lower margin than outright positions
  Lower risk than directional trading

INTER-COMMODITY SPREAD (related products):
  Crack spread: Buy crude oil / Sell gasoline + heating oil
  Crush spread: Buy soybeans / Sell soybean meal + soybean oil
  → Profit from refining/processing margin changes

CORRELATION TRADE:
  Long Gold / Short Silver (trading the gold-silver ratio)
  Long ES / Short NQ (trading tech vs. broad market)
  → Hedged exposure to the specific relationship

Hedging

PURPOSE: Offset existing risk exposure

EXAMPLES:
  Farmer with corn crop → SHORT corn futures (lock in sale price)
  Airline with fuel costs → LONG crude oil futures (lock in purchase price)
  Investor with stock portfolio → SHORT index futures (protect against drawdown)
  Bitcoin holder → SHORT BTC futures (hedge downside risk)

HEDGE RATIO:
  Contracts needed = (Portfolio value × Beta) / (Contract size × Index price)
  $500K portfolio, Beta 1.1, ES at 5,200:
  Contracts = ($500,000 × 1.1) / ($50 × 5,200) = 2.1 → SHORT 2 ES contracts

Step 5: Prediction Markets as Futures

Event Futures vs. Traditional Futures

SIMILARITIES:
  ├── Both are contracts on future outcomes
  ├── Both have market-determined prices
  ├── Both involve buyers and sellers
  └── Both settle at a known future date

DIFFERENCES:
  | Feature | Traditional Futures | Event Futures |
  |---------|-------------------|---------------|
  | Outcome | Continuous price | Binary (Yes/No) |
  | Settlement | Cash/physical at market price | Fixed payout ($1 for Yes) |
  | Leverage | High (margin-based) | None (pay full contract price) |
  | Underlying | Commodities, indices | Events, elections, data releases |
  | Regulation | CFTC (well-established) | CFTC (newer framework) |

KALSHI EVENT CONTRACTS:
  "Will CPI be above 3% in March?" → Yes at $0.72, No at $0.28
  If Yes: receive $1.00 (profit: $0.28)
  If No: receive $0.00 (loss: $0.72)
  → Effectively a binary option with event outcome settlement
  → See kalshi-markets skill for API/data access

Trading the Macro Connection

EVENT FUTURES ←→ TRADITIONAL FUTURES:

"Fed to cut rates in June" at $0.40 on prediction market
  → If you believe rate cuts → also consider:
    LONG ZN (Treasury notes — rates down = bonds up)
    LONG GC (Gold — lower rates = weaker USD = gold up)
    LONG ES (Stocks — lower rates = risk-on)

"Oil production cut by OPEC" at $0.55
  → If you believe production cut → also consider:
    LONG CL (Crude oil — less supply = higher price)
    SHORT XLE puts (Energy stocks benefit)

STRATEGY: Use prediction markets for signal, trade traditional futures for leverage
  → Prediction markets are often more informationally efficient on political/event risk
  → Traditional futures offer more liquidity and leverage

Step 6: Risk Controls for Futures

Mandatory Rules

1. ALWAYS use stop-losses — futures can move against you faster than you can react
2. NEVER risk more than 2% of account on a single trade
3. NEVER hold a position you can't monitor (overnight gap risk)
4. ALWAYS know the margin requirements BEFORE entering
5. ALWAYS understand the contract specs (size, tick value, settlement type)
6. NEVER add to a losing position ("averaging down" with leverage = death)
7. ALWAYS have a plan for what to do if the market halts (limit up/down)
8. ALWAYS account for rollover costs when holding positions across expirations

Max Position Limits

SUGGESTED MAXIMUMS BY ACCOUNT SIZE:

| Account | Max Notional Exposure | Max Contracts (ES) | Max % in One Trade |
|---------|----------------------|--------------------|--------------------|
| $25K    | $125K (5:1)          | 0-1                | 5% risk            |
| $50K    | $250K (5:1)          | 1-2                | 3% risk            |
| $100K   | $500K (5:1)          | 2-4                | 2% risk            |
| $250K+  | $1.25M (5:1)         | 5-10               | 1% risk            |

NOTE: These are CONSERVATIVE limits
  → Professional leverage is often 2-3:1, not 20:1
  → The leverage available to you is NOT the leverage you should use

Output

Save trading plan to artifacts/prediction-markets/futures-plan.md

Guidelines

• Leverage amplifies everything — wins, losses, emotions, and mistakes
• The margin you can use is not the margin you should use — target 3-5:1 max
• Futures are zero-sum — for every dollar you make, someone else loses one
• Understand what you're trading — contract specs, delivery, and settlement before you enter
• Event futures (Kalshi, CME) bridge prediction markets and traditional finance — use both
• Use /bankroll-management for capital preservation discipline
• Use market-mechanics-betting for position sizing with Kelly
• Use kalshi-markets or polymarket for prediction market-specific data