Commodity Futures 101: Learn How to Trade Commodity Futures

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Where Will I Put All Those Pork Bellies?

Of course, few commodity traders want a truckload of soybeans or pork bellies dumped on their front lawn, nor do they plan to dump them on someone else's lawn. What usually happens is that most futures positions are closed out before the deliver date.

Because they seldom make or take delivery, commodity futures traders are only required to deposit a portion of the contract's value. This is called the "initial margin," and it's the equivalent of that good faith deposit mentioned earlier.

The minimum initial margin for each futures contract is set by the commodity exchanges, but brokerage firms usually require traders to deposit more than just the minimum required by the exchange. Typically, margin is between 2% and 10% of the contract value. Volatile futures contracts require larger deposits than less-volatile ones, and either the exchange or your broker can change the margin requirements at any time.

Next: Futures and Margin