Derivatives: Futures Explained

Derivatives are financial contracts whose value derives from an underlying asset — a stock, index, or commodity. Futures and Options are the two main types traded in India. This chapter focuses on Futures.

A Futures contract is an agreement to buy or sell an asset at a predetermined price on a future date. Both buyer and seller are obligated to honor the contract. In India, stock and index futures expire on the last Thursday of every month.

Lot Size determines the minimum quantity per contract. For Nifty futures, the lot size is 75 units. If Nifty is at 22,000, one lot = 75 x 22,000 = Rs 16,50,000 in exposure. You do not need this full amount — you pay margin.

Margin is the upfront deposit required to take a futures position. SEBI mandates initial margin (typically 10-15% of contract value) and maintenance margin. If your position moves against you and margin falls below the maintenance level, you receive a margin call — deposit more money or your position is squared off.

Mark-to-Market (MTM) means your profit or loss is calculated and settled daily. If Nifty moves 100 points against your 1-lot position, you lose Rs 7,500 that day (75 x 100). This is debited from your account immediately.

Rollover happens when traders carry forward positions to the next month's contract before expiry. The cost of rollover (difference between current and next month contract price) depends on interest rates and dividends.

SEBI data consistently shows that over 90% of individual F&O traders lose money. The leverage that makes futures attractive is the same force that amplifies losses. Only trade futures if you fully understand margin, MTM, and have a strict stop-loss discipline.

Key risks: Unlimited loss potential (unlike options), daily MTM settlement depleting your capital, high emotional stress from leveraged positions, and transaction costs eating into thin margins.