A:

A futures contract is an agreement to buy or sell a commodity at a pre-determined price and quantity at a future date in time. While this is similar to an option, where the holder has the right to purchase the underlying security, a futures contract makes both parties to the contract obligated to deliver on the terms of the contract if it is held to settlement. If you do buy a futures contract, you are entering an agreement to purchase the underlying security and if you sell a futures contract you are entering an agreement to sell the underlying asset to another party. (To better understand this concept, read Futures Fundamentals.)

Over the life of a futures contract, the underlying security will likely move in favor of one holder over the other. So what can the holder with the profit do if they would rather exit the profitable position than hold to settlement? If a futures trader wants to close out a position all he or she needs to do is take an equivalent position that is opposite to the contract he or she already owns. So if you are long three February pork belly contracts, to close this position you would sell three February pork belly contracts.

However, usually this is not done by just selling your existing three contracts to another party, like you would a stock. The positions is usually closed out by entering into a new arrangement with another party. For example, if you purchased three contracts from party A, to close out your position you would sell three contracts to party B. Because these positions are offsetting your position in the market is neutralized and you are effectively out of the position. While this is a little more complicated than just selling the original three contracts, it is the same result.

RELATED FAQS
  1. What is the difference between forward and futures contracts?

    Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell ... Read Answer >>
  2. How do the investment risks differ between options and futures?

    Learn what differences exist between futures and options contracts and how each can be used to hedge against investment risk ... Read Answer >>
  3. How do futures contracts roll over?

    Learn about why futures contracts are often rolled over into forward month contracts prior to expiration, and understand ... Read Answer >>
  4. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between ... Read Answer >>
  5. What do the S&P, Dow and Nasdaq futures contracts represent?

    Every morning before North American stock exchanges begin trading, TV programs and websites providing financial information ... Read Answer >>
  6. What is a wild-card play?

    A wild-card play is a term related to futures contracts. A future is a financial contract obligating a buyer to purchase, ... Read Answer >>
Related Articles
  1. Investing

    What's The Difference Between Options And Futures?

    An option gives the buyer the right, but not the obligation, to buy or sell a certain asset at a set price during the life of the contract. A futures contract gives the buyer the obligation to ...
  2. Investing

    Introduction To Currency Futures

    The forex market is not the only way for investors and traders to participate in foreign exchange.
  3. Investing

    What is a Forward Contract?

    A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
  4. Managing Wealth

    How Do Futures Contracts Work?

    Futures contracts are one of the most important financial innovations in history, but they are often misunderstood. Find out this contract is used to transfer risk between different parties. ...
  5. Investing

    Investing in Crude Oil Futures: The Risks and Rewards

    Learn about the risks and rewards of trading oil futures contracts. Read about a few strategies to limit the risk in trading oil futures contracts.
  6. Investing

    How Are Futures Used To Hedge A Position?

    A futures contract is an arrangement two parties make to buy or sell an asset at a particular price and date in the future.
RELATED TERMS
  1. Cash Contract

    A financial arrangement that requires delivery of a particular ...
  2. Continuous Contract

    A reinsurance contract that does not have a fixed contract end ...
  3. Delivery Date

    1. The final date by which the underlying commodity for a futures ...
  4. Last Trading Day

    The final day that a futures contract may trade or be closed ...
  5. Contract Month

    The month in which a futures contract expires. The contract can ...
  6. Futures Contract

    A contractual agreement, generally made on the trading floor ...
Hot Definitions
  1. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  2. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  3. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  4. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  5. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  6. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
Trading Center