13.1 Futures

Futures open the derivatives half of Section Nine: Comparative Market Analysis in the 2026 CMT Program Guide. Cash equities, indexes, and bonds were the prior chapter. This unit asks what a futures contract is economically, which terms define the listed instrument, what open interest measures, how the market is classified, and why a technician cannot treat a single listed month as a 20-year equity tape. The unit sits in Cross-asset Analysis under Advanced Techniques (26% of CMT Level I—the 132-question, 2-hour sitting, 120 scored plus 12 unscored pilots). Independent OpenExamPrep teaching for these CMT Level I futures topics is not a CMT Association publication and does not claim partnership with the Association. Independent CMT Level I practice by OpenExamPrep is at /practice/cmt.

A futures contract is a standardized, exchange-listed agreement to buy or sell a specified underlying at a future expiry, on terms the exchange publishes. Two counterparties take opposite sides: one is long (agrees to buy, or is exposed as if owning), one is short (agrees to sell). A clearinghouse stands between them after matching, so the technician's credit concern is the clearing system and the margin process, not the name of the other customer. Most participants offset before delivery: they enter the opposite trade and go flat. Delivery still matters. It is the economic backstop that keeps the futures price tied to the cash market, plus cost of carry.

Do not import exchange-traded product or spot foreign-exchange definitions here. Those are the next two sections. Currency futures belong in this unit as financial futures; the spot dealer market is 13.3.

Economic purpose: hedging and price discovery

Futures exist for two jobs Level I names first. Speculation is real and supplies the other side of many hedges, but it is not the economic purpose the unit asks you to recite.

Hedging and risk transfer

A hedge uses the futures market to transfer price risk from a party who does not want it to a party who will take it. The hedge does not make the commercial operation riskless. It substitutes basis risk—the imperfect match between the cash position and the futures contract—for the raw price risk of inventory, a harvest, a fuel bill, or a portfolio.

Producer or inventory hedge (short). A farmer who will harvest corn, a miner with unsold metal, or a portfolio manager who must stay invested in stocks but wants less equity beta can sell futures. If the cash price falls, the short futures position gains and offsets inventory or portfolio loss. If the cash price rises, the futures loss offsets inventory gain. The hedger accepted a more stable result and gave away the windfall.

Consumer or anticipatory hedge (long). An airline that will need jet fuel, a baker who will buy wheat, or a pension that will receive cash next quarter and wants equity exposure now can buy futures. The long lock-in is against a rising cash market.

Risk transfer. The other side may be another hedger (a miller buying against the farmer's short) or a speculator who has no commercial inventory and wants the price bet. Speculators provide liquidity and absorb residual risk. Without an other side, the hedge does not print.

Worked overlay. A fund holds about $10 million of S&P 500 names and wants a temporary overlay rather than a taxable stock sale. The CME E-mini S&P 500 (ES) multiplier is $50 times the index (a published contract size, not a CMT Association figure). At an index of 5,000, one contract's notional is $50 × 5,000 = $250,000. Selling 40 contracts shorts about $10 million of index notional. Residual basis remains if the portfolio is not the S&P 500.

Exam trap: calling a futures purchase a prepaid acquisition of the commodity. You post margin, not the full notional. You do not own the warehouse until, and unless, you stand for delivery.

Price discovery

Price discovery is the process by which a centralized, rules-based market produces a public price that summarizes supply, demand, and expectations. A listed future has a visible bid and ask, a last sale, a daily settlement the clearinghouse uses, and a curve of expiries. That curve is information: it is not a promise of the future spot price, but it is a tradable consensus about the futures price for each delivery.

Cash markets can be private, stale, or regional. Grain elevators, OTC forwards, and dealer inventories do not always print a single tape. The listed future is often the venue commercials and funds look at first. A technician reading crude, copper, or the S&P 500 future is often reading the discovery venue that cash participants themselves use.

The basis (commonly cash minus futures, with sign conventions that vendors flip—know which one your stem uses) keeps the two markets honest. As expiry approaches, a deliverable contract is forced toward cash by arbitrage, subject to delivery grade, location, and timing options. A cash-settled financial future is forced toward its published settlement index instead of a warehouse.

Price discovery distorts when the contract is illiquid, when deliverable supply is squeezed, or when the pane you plot is a spliced series that no one could have traded as a single instrument. Those last points return under data challenges.

Major contract terms

Before you draw a trendline on a future, read the contract specifications. Two tickers in the same commodity can differ in size, tick, and settlement. A stem that gives a quote without size is asking you to know that points are not dollars until you apply the multiplier.

Underlying. Equity-index futures reference an index (S&P 500, Nasdaq-100). Interest-rate futures reference a Treasury note, a SOFR rate, or a similar published instrument. Commodity futures reference a grade and location (a stated crude stream at a stated point, or gold of a stated fineness). FX futures reference a currency pair and a notional amount of the base currency. If you cannot name the underlying, you cannot interpret a breakout.

Size. Industry examples from published CME Group and COMEX specs: E-mini S&P 500 (ES) is $50 × the index; Micro E-mini (MES) is $5 × the index; COMEX gold (GC) is 100 troy ounces; WTI crude (CL) is 1,000 barrels; corn (ZC) is 5,000 bushels; Euro FX (6E) is 125,000 euros. A 10-handle move in ES is 10 × $50 = $500 per contract, not $10.

Tick. ES trades in 0.25 index points; 0.25 × $50 = $12.50 per tick. WTI's $0.01 per barrel on 1,000 barrels is $10 per tick. Gold's $0.10 per ounce on 100 ounces is $10 per tick. Stops and targets in "points" are meaningless until converted.

Expiry. Each contract has a delivery month (standard codes: F January, G February, H March, J April, K May, M June, N July, Q August, U September, V October, X November, Z December). Financial indexes often list a quarterly cycle (H, M, U, Z). Energy and many agricultural contracts list more months. Last trading day and, for physical contracts, first notice day are not the same date. After first notice, longs may be assigned for delivery. Speculators who do not want a tanker or a warehouse receipt roll or offset before that window.

Delivery versus cash settlement. Physical delivery means the short can be called to deliver the specified grade at the specified location, and the long can be called to take it. That threat is what pins the future to cash. Cash settlement pays the difference versus a published reference (for many equity-index contracts, a special quotation on the underlying index). There is no warehouse. You still have an expiry and a last bar. You do not have grain in a silo.

Margin. Futures margin is a performance bond, not a down payment that buys the underlying and not the equity-style Regulation T margin of a stock account (the numbers and rules differ). Initial margin is what you post to open. Maintenance margin is the floor; if equity in the account falls below it after the daily mark-to-market, you get a variation (margin) call. Gains and losses are realized in cash daily through the clearinghouse. That daily settlement is why a persistent trend transfers cash from the losing side to the winning side every session, and why a technician reading a long trend is also reading a long sequence of variation payments.

Hypothetical leverage arithmetic (live SPAN bonds change; do not memorize a clearinghouse number as a CMT fact). ES notional $250,000. If initial margin were $15,000, the bond is 6% of notional. A 2% index decline is $5,000 per contract—one-third of that hypothetical bond—not a 2% cash-equity drawdown on $250,000 of stock paid in full. Leverage magnifies both the chart's swings in account space and the chance of a forced exit that the price chart alone does not show.

Open interest in futures

Open interest (OI) is the number of outstanding futures contracts that have not been closed out or delivered. One long and one short make one contract of open interest, not two. Cash common stocks do not have futures-style open interest; shares outstanding are a corporate statistic. The volume chapter already used OI as sponsorship. This unit needs the market-structure definition: OI is the stock of live contracts in a listed month.

Volume is a flow: how many contracts traded during the bar. Open interest is a stock: how many remain open after the bar. A print can raise OI (both sides opening), lower OI (both sides closing), or leave OI unchanged (one side opening while the other closes).

Front-month OI usually dwarfs back months until the roll. As expiry nears, OI in the expiring month migrates to the next month: shorts and longs close the near contract and reopen in the deferred. That migration is why a continuous chart must switch months, and why a plunge in near-month OI into expiry is often a roll, not a sudden loss of interest in the commodity.

Exam trap: treating a high-OI back month as the contract everyone is trading. Liquidity lives where volume and OI are. Chart the liquid month unless the stem gives you a specific deferred contract.

Classifying futures markets: industrial, agricultural, financial

Level I classifies listed futures into three economic groups. The grouping is about what is being priced, not about which software folder holds the symbol.

Industrial. Technicians group energy and metals because they are non-agricultural physicals tied to industrial demand, the dollar, and (for bullion) monetary hedges. A copper breakout is a different story from a corn breakout even if both are "commodities." WTI and Brent can diverge on location and grade; gold can trend with real rates while crude trends with growth. Do not mash them into one "stuff" chart without saying which industrial you mean.

Agricultural. Crop years, freeze dates, and herd cycles create seasonality that equity indexes do not share. Listed months follow the harvest and feeding calendar. Storage and full carry matter for the curve. A gap in July wheat into a new-crop month can be a calendar event, not a classical breakaway gap in a single going-concern equity.

Financial. Index futures are how many funds hedge or gain beta without touching 500 cash names. Treasury futures price duration. Currency futures sit next to the dealer spot market you will chart in 13.3, but they are still listed contracts with size, ticks, expiry, OI, and exchange volume. When a stem says "financial futures," do not answer with soybeans.

A single exchange lists all three classes. Classification is economic, not "which matching engine prints the trade."

Data challenges: rolls, switching, expiration gaps, short listed lives

Equity technicians inherit a corporate-action-adjusted tape that can run for decades on one ticker. Futures technicians inherit a stack of expiring contracts. Building a usable history is a data problem. Level I wants you to name the problems, not to code a vendor's roll engine.

Limited history on a single listed month. March 2027 crude is a real contract, but it has been listed only since the exchange listed that month. It does not have a 20-year private history of "March 2027." You cannot compute a 200-week moving average on one delivery month that has traded for eight months. Long studies require a continuous series stitched from many months.

Contract switching. The front month (usually the nearest liquid delivery) changes several times a year. Software that always plots "the front" is switching the ticker underneath the same pane. Indicators, trendlines, and volume histograms then mix different contracts unless the vendor adjusts the splice.

Rolls. A roll is the market event of moving a position from the expiring month to a later month (sell the near, buy the deferred if you were long). Liquidity and OI move with the roll. Vendors build continuous charts by rolling on a calendar date, on a volume or OI crossover, or on a proprietary rule. Those dates do not always match the day a given fund rolled. Your backtest's roll is an assumption.

Gaps at expiration (and at the splice). The expiring contract and the next contract are not the same price. The difference is the calendar spread (contango if the deferred is richer, backwardation if the deferred is cheaper, with sign conventions you must read from the stem). If a vendor unadjusted-splices the last price of the old front to the new front, the chart gaps by that spread. The gap is not a classical equity gap: nobody panicked in the cash commodity by exactly the spread. Back-adjusted (additive / Panama) series shift historical prices by the roll difference so the chart does not gap, but then old price levels are not the prices that actually traded. Ratio-adjusted series preserve percent moves better and still rewrite history. Unadjusted series keep real traded prices and accept gaps.

Exam habits. When a stem shows a futures "crash" on one day and the date is a roll or last-trading window, ask whether you are looking at a splice. When a stem asks for economic purpose, say hedging / risk transfer and price discovery. When it asks for terms, list underlying, size, tick, expiry, settlement type, margin. When it asks what open interest is, say the stock of outstanding contracts, not volume. When it asks why a 15-year commodity study is hard, say rolls, switching, expiration gaps, and the short life of one listed month.

Key Takeaways

• Futures transfer price risk (hedging) and discover prices on a listed, cleared contract
• Read underlying, size, tick, expiry, delivery vs cash settlement, and margin before trusting the pane
• Open interest is outstanding contracts not closed or delivered; volume is the day's flow
• Classify as industrial (energy/metals), agricultural, or financial
• Long histories require rolls and switches; naive splices gap and distort