A commodity futures contract is an agreement to buy or sell a fixed quantity of a commodity at a price agreed today, on a set future date. You put up only a margin — a fraction of the contract's value — and your profit or loss is settled in cash every day as the price moves.
If futures as an instrument are new to you, read what is a futures contract first; here we focus on how they play out in commodities.
A worked example: Vikram buys a gold futures contract on MCX
Suppose gold futures on MCX for delivery two months away are quoted at ₹75,000 per 10 grams, and the contract covers 100 grams. (All figures here are illustrative — actual contract sizes and prices differ, and NSE's commodity derivatives segment (NSE Commodities) publishes its own contract specifications. The mechanics below work the same way; the spec sheet belongs to the exchange.)
- Contract value: ₹75,000 × 10 units of 10g = ₹7,50,000.
- Margin: Vikram does not pay ₹7,50,000. He deposits a margin — say 6%, about ₹45,000 — and the exchange holds it as security.
Vikram now has a long position: he gains if gold rises, loses if it falls. Someone on the other side holds the matching short position.
What happens to my money each day?
Futures are settled mark to market (MTM) daily. Each evening, the exchange compares the day's closing price with your reference price and moves cash accordingly:
| Day | Futures price (per 10g) | Vikram's daily MTM on 100g |
|---|---|---|
| Bought at | ₹75,000 | — |
| Day 1 close | ₹75,400 | +₹4,000 credited |
| Day 2 close | ₹74,900 | −₹5,000 debited |
Profits are credited to his account; losses are debited from it. If losses eat into his margin, he must top it up. This daily engine is explained in what is mark to market (MTM).
What are my choices as expiry approaches?
Every futures contract dies on its expiry date. Before that, Vikram has three options:
- Square off — sell the contract he bought (or buy back one he sold), booking his net profit or loss. This is what most retail traders do, well before expiry.
- Roll over — square off the expiring contract and open the same position in the next month's contract, if he wants to stay with his view. See what is rollover in futures.
- Go to settlement — hold into expiry. Some commodity contracts settle in cash; many — including gold on MCX — are compulsory delivery contracts, where holding through the delivery period can mean actually giving or taking the physical metal, with much larger funds and formalities involved.
Retail traders should treat option 3 as something to avoid unless they genuinely intend delivery. The settlement mechanics and timelines are covered in how are commodity contracts settled.
Why do traders use futures instead of buying the commodity?
Three reasons. Leverage — a small margin controls a large position. Two-way trading — you can short sell just as easily as buy, so you can act on a falling-price view. No storage — no lockers, purity checks or warehouses. The same leverage, of course, is why losses can pile up faster than most beginners expect.
Things to keep in mind
- MTM debits are real cash leaving your account daily — keep a buffer well above the minimum margin, or a normal price wobble can force you out of a good position.
- Know your contract's expiry date and settlement type on the day you enter, not the week it expires.
- Margins can be raised by the exchange at short notice in volatile phases, and they rise as delivery approaches.
- A futures position left unattended is riskier than a share left unattended — the leverage never sleeps.
Read next
What is the difference between spot price and futures price, and what is basis? — Why the futures price sits above or below today's spot price, and what that gap tells you.