Futures: contracts, margin and tick values
Futures are among the most popular instruments for active traders, and they are what most prop-firm evaluations use. They are also one of the easiest places for a beginner to take on more risk than they realise. This lesson explains how futures work and how to calculate what a price move is worth.
What a futures contract is
A futures contract is a standardised agreement to buy or sell a set quantity of something at a set price on a set future date. Futures trade on exchanges, such as those owned by CME Group, and the exchange defines every detail: the quantity, the minimum price change, the expiry dates and how the contract settles.
Futures were created so producers and users of commodities could lock in prices. A wheat farmer could sell wheat futures before harvest, and a baker could buy them. Today futures exist on stock indexes, interest rates, currencies, energy, metals, farm products and crypto. Many contracts, including stock index futures, are cash-settled: at expiry no goods change hands and accounts are simply credited or debited the difference. Others, such as crude oil, can be settled by physical delivery, which is one reason most speculative traders close or roll their positions before expiry.
Each contract has an expiry month. Stock index futures such as the E-mini S&P 500 expire quarterly, in March, June, September and December. Traders usually trade the nearest active month, called the front month.
Margin and leverage
When you buy a share, you pay its full price. With futures you don't. Instead you deposit margin: a good-faith deposit that covers possible losses. The exchange sets minimum margins for positions held overnight; brokers set their own requirements, which can be higher, and some allow lower margins for positions closed the same day. Margin is not a down payment: you are not borrowing the rest, and there is nothing to pay off.
At the end of each trading day the exchange marks to market: gains are added to your account and losses are taken out, in cash. If losses push your account below the maintenance margin level, your broker can demand more money or close your position.
Because the margin is small compared with the value of the contract, futures are leveraged. Suppose the S&P 500 is at 5,000. One E-mini S&P 500 contract is worth $50 for each index point, so it controls 5,000 × $50 = $250,000 worth of index exposure. That value is called the contract's notional value. A 1% move in the index, 50 points, changes the position's value by $2,500, whatever margin you put up.
Points and ticks
Every contract has a point value (what a one-point move is worth) and a tick size, the smallest price change allowed. The tick value is the money value of one tick. Here are the official CME specifications for some of the most traded contracts:
- E-mini S&P 500 (ES): $50 per index point. Tick size 0.25 point, worth $12.50.
- Micro E-mini S&P 500 (MES): $5 per index point, one tenth of ES. Tick size 0.25 point, worth $1.25.
- E-mini Nasdaq-100 (NQ): $20 per index point. Tick size 0.25 point, worth $5.00.
- Micro E-mini Nasdaq-100 (MNQ): $2 per index point. Tick size 0.25 point, worth $0.50.
- Crude oil (CL): 1,000 barrels, so $1,000 for each $1.00 move in the price per barrel. Tick size $0.01, worth $10.
- Gold (GC): 100 troy ounces, so $100 for each $1.00 move in the price per ounce. Tick size $0.10, worth $10.
To work out what a move is worth, multiply the number of points by the point value and by the number of contracts. Suppose you buy 2 MNQ contracts and the Nasdaq-100 futures price rises 40 points. The gain is 40 × $2 × 2 = $160. The same 40-point move on 2 NQ contracts would be 40 × $20 × 2 = $1,600. Same chart, ten times the money. Getting this multiplication right before entering a trade is essential.
Specifications can change, and they differ for other contracts, so always check the exchange's own contract specification page.
Trading hours
Most CME futures trade electronically nearly around the clock. Stock index futures, for example, trade from Sunday evening to Friday afternoon ET, with a short daily break in the late afternoon ET. Liquidity is usually thinnest overnight, and prices can move sharply on news when the US stock market is closed.
What prop-firm evaluations are
A proprietary trading firm (prop firm) in the retail sense offers traders the chance to trade the firm's capital, or a simulated account, under its rules, in exchange for a share of the profits. Most use an evaluation: the trader pays a fee and trades an account, often simulated, that must reach a profit target without breaking risk rules such as a maximum drawdown (the largest allowed fall from a starting or peak balance) or a daily loss limit. Traders who pass may move to a funded or simulated-funded stage with payout rules.
Rules differ widely between firms and change over time: how drawdown is measured, which contracts and sizes are allowed, minimum trading days, consistency rules and payout conditions. Evaluation fees are a source of revenue for these firms. The rules, not the headline account size, decide what a trader can actually do, so it pays to read the firm's own rulebook carefully.
PYE Markets reports confirmed rule changes at prop firms in our prop firm news, each dated and linked to the firm's own page, which stays the authority on its rules and prices. No firm pays for placement or coverage.
Key terms
- Futures contract
- A standardised exchange-traded agreement to buy or sell a set quantity at a set price on a future date.
- Margin
- A good-faith deposit held against possible losses; not a down payment.
- Notional value
- The full market value a contract controls, such as index level × point value.
- Tick
- The smallest allowed price change; tick value is its money value.
- Mark to market
- Daily settlement of gains and losses in cash.
- Evaluation
- A prop firm's paid test in which a trader must hit a target without breaking risk rules.
Next lesson: Lesson 6: Options basics
General education, not investment advice.