Futures contract specifications: Know the delivery terms before jumping in

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Will they really drop off that commodity at your house? How much?

© Marcia Straub––Moment/Getty Images, © HUIZENG HU––Moment/Getty Images, © baona––iStock/Getty Images; Photo composite Encyclopædia Britannica, Inc.

Considering a play in the futures market? In futures contracts—as with any investment—specifics matter. In the futures market, each contract carries “specifications,” aka contract “specs,” that spell out key details like quantities and dates. Understanding futures contract specifications is critical for anyone considering a venture into futures.

Suppose you take a trip to your local supermarket to get a gallon of milk, a dozen eggs, and a six-pack of soda. Such quantities are easily understood, and everyone knows what they’re getting. That’s part of the idea behind futures contract specifications, which apply commonly accepted standards and nice, round numbers to commodity markets such as corn and crude oil as well as financial instruments such as equity indexes and interest rates.

This standardization is key to a properly functioning futures market, where contracts are “fungible,” or interchangeable, with one another. This helps make these markets accessible and useful to a wide variety of market participants: banks, farmers, oil refiners, speculators, and others. Contract specs also apply in asset classes such as options. Let’s look at some examples of futures contract specs.

For commodity futures, contract size usually refers to quantities or volumes. For example:

In financial markets such as bonds, currencies, and equities, contract sizes or units are often (but not always) based on dollar values or a dollar-based calculation. For example:

Unlike shares of stock, futures contracts have expiration dates in certain months of the year, depending on the market. Corn futures’ contract months, for example, are March, May, July, September, and December, with each contract expiring, or “going off the board,” on the business day prior to the 15th day of the contract month. (This is also known as the last trading day, sometimes referred to as “last trade” under contract specs.) In the agricultural industry, December corn and November soybeans are among the most closely followed futures contracts because both expire soon after the fall harvest in the U.S., and therefore reflect shifting market expectations about weather, crop size, and other fundamentals.

Futures based on the S&P 500 Index expire quarterly, on the 3rd Friday in March, June, September, and December.

A futures contract’s value is typically its contract size multiplied by the current price. For example, if gold futures are trading at $1,900 an ounce, one futures contract representing 100 troy ounces would be valued at $190,000 ($1,900 x 100 = $190,000). If WTI crude futures are trading at $80 a barrel, one futures contract would have a value of $80,000 ($80 x 1,000 barrels = $80,000).

A “tick” is the minimum price increment that a futures contract can fluctuate. Ticks are typically quoted in dollars and cents, and sometimes fractions of a penny. For a WTI crude futures contract, the minimum tick size is one cent per barrel, or $10. For corn futures, the minimum tick size is one-quarter cent per bushel ($12.50 per contract); E-mini S&P 500 futures have a tick size of 0.25 index points ($12.50).

Futures contracts are legally binding agreements, meaning anyone holding a futures position is obligated to “deliver” the goods if the contract is held to expiration. Futures are typically either cash settled, with the contract converting directly into cash at expiration, or physically settled, meaning contracts expire directly into the physical commodity. In theory, the buyer of one corn futures contract could hold the position until expiration and take physical delivery of the grain. In reality, most futures contracts are liquidated before expiration.

Delivery procedures vary depending on the market and are detailed in the contract specs. Many commodity futures specify a geographic location near major production regions. For example, WTI crude futures require delivery at a major oil storage and pipeline transit location in Cushing, Oklahoma. Delivery of a corn futures contract might involve the exchange of a warehouse receipt representing 5,000 bushels sitting in a warehouse in Chicago, Toledo, or another Midwestern port.

In other words, any cautionary tale you might have heard about a truckload of soybeans being dumped on your driveway because you forgot to close out a futures contract are untrue. In fact, unless you’re an authorized commercial entity, your broker will require you to liquidate all outstanding physically settled contracts well in advance of the final delivery date. If you don’t, they’ll liquidate them for you.

This is another area where futures differ from equities. Regular U.S. trading hours vary depending on the market. The trading day for grain futures is relatively short (9:30 a.m. to 2:20 p.m. ET). With most futures trading conducted electronically, many of the major futures markets, such as E-mini S&P 500 futures, trade virtually around the clock (aside from a “daily maintenance period” closing from 5–6 p.m. ET).

Although futures trading may be available in the wee hours, remember that trading is typically most active (and most liquid) when the stock, bond, and commodity “cash” or “spot” markets are open.

Futures contract specs are like the fine print on anything you might purchase or sign your name to—important details that you ignore at your own peril. As with stocks or any other asset class, it’s important to know what you might be getting into. Futures hold unique risks compared to traditional stocks and bonds, which makes a thorough understanding of contract specs crucial for any investor considering entering these markets.