The unit of trading for derivatives such as options and futures; one contract controls a fixed amount of the underlying.
Options and futures are not shares; they are agreements. One equity option contract controls 100 shares (the options-multiplier). One futures-contract controls a fixed quantity, such as 1,000 barrels of oil for cl or $50 times the index for es.
The contract size is what turns a small price move into a large dollar move. This is the source of the leverage built into derivatives.
Example: you buy one call option at a $2.00 premium. Because the contract covers 100 shares, you pay $200, and a $1 rise in the option price is worth $100.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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