A deal for the future
Lesson 1 of 16 in the course “Futures from Zero”. Free, with animations and a quiz.
Meet Nika
Nika is 22, a freelance designer who saves a bit from every gig. Her feed keeps showing “+500% overnight on futures” screenshots, and under them stories of people who lost their whole deposit in an hour. Nika wants to get what this beast is before putting money in. We go through the course with her: simply, step by step, with no promises of easy money.
It all started with bread
Picture a farmer and a baker. The farmer fears wheat will get cheaper by autumn, the baker fears it will get pricier. In spring they agree: in autumn the farmer sells a tonne at $200, whatever the market price is. Both sleep well. That deal is a futures contract. The first organised exchange for such deals appeared in Japan in 1730: at the Dojima exchange in Osaka people traded rice that hadn’t been harvested yet.
Futures in plain words
Futures are a deal to buy or sell something later at a price agreed now. They trade on an exchange, so the terms are the same for everyone: how much of the thing is in one contract, when it settles, the price step. The contract price follows the price of the thing. And here’s the key: almost no trader waits for a sack of wheat. They buy and sell the contracts themselves and win or lose on the price difference.
When oil cost less than zero
Why keep the settlement date in mind? On 20 April 2020, at the height of lockdowns, the May WTI oil futures settled at −$37.63 a barrel. Storage was full, and anyone holding the contract to the end had to pay extra just so someone would take the oil. Those who didn’t close in time lost more than they put in. Takeaway: a regular futures contract has an expiry, and you need to know it in advance.
What’s next
Five levels, from easy to hard. First we cover what futures, long and short are. Then margin, leverage and liquidation: this is where most money is lost. Next come orders, stops and costs. Then risk and psychology. At the end you choose what suits you: crypto futures or gold, oil and currencies at a broker, and open a practice terminal. There you can trade with fake money as much as you like.
Check yourself
- What is a futures contract?
Correct answer: A deal to buy or sell later at a price agreed now. Futures lock in the price of a deal that happens later. On its own it guarantees nothing: the price of the thing can go anywhere. - Why did the farmer and the baker make a deal in spring?
Correct answer: So they don’t have to fear the price moving against them in autumn. It’s insurance against price swings, called hedging. That’s how futures started: first for protection, only later for speculation. - What does the −$37.63 oil story teach?
Correct answer: A regular futures contract expires, so know the date and close early. The futures price went below zero because contract holders had to take the oil and had nowhere to store it. The settlement date is no small detail.