Futures let you participate in the price movement of an asset, such as a stock or an index, by trading a standardised contract instead of buying the asset outright. You post a margin, which is a fraction of the contract value, to open a position and gain leveraged exposure. Profits and losses are calculated on the full contract value and are settled daily through mark-to-market (MTM).

What is a Futures Contract?

A futures contract is a standardised agreement to buy or sell a specified quantity of an underlying, such as a stock, index, currency, or commodity, at a set price on a future date called the expiry. Contracts are defined by the exchange, including the lot size, tick size, and expiry cycle, and are cleared through a clearing corporation.

Key Features

• Standardised specs: The exchange defines the lot size, tick size, contract multiplier, and expiry (weekly or monthly for many indices, monthly for stocks).
• Exchange-traded and cleared: Counterparty risk is managed by margins and the clearing house.
• Obligation, not option: Both buyer and seller are obligated to settle at expiry by cash or physical delivery as per contract rules.

How Futures Trading Works

1. Choose the contract: Pick the underlying and the expiry you want: near, next, or far month, or weekly for some indices.
2. Check specs: Review the lot size, tick size, multiplier, and margin requirement.
3. Place order: Go long (buy) if you expect prices to rise, or short (sell) if you expect them to fall.
4. Margin and leverage: You post the required or posted margin. Posted margin is the cash or approved collateral that is blocked from your account to open and hold the position.
5. Daily MTM: Your P&L is settled to cash each trading day. Gains are credited to your ledger, and losses are debited.
6. Maintain margin: If losses or volatility reduce free funds, you may face a margin shortfall and need to add funds or reduce exposure.
7. Exit or hold to expiry: You can square off anytime before expiry. If you hold to expiry, settlement applies as per the contract type.

Contract Specs You Will See

• Lot size or multiplier: The fixed number of units per contract, for example, X shares per lot for stocks or an index multiplier.
• Tick size: The minimum price movement, for example, ₹0.05.
• Expiry: The last trading day, weekly or monthly, as defined.
• Price bands or limits: Exchange-defined limits that curb extreme moves.
• Contract value: Futures price × Lot size or multiplier.

Short-selling Futures

You can short a futures contract without owning the underlying. If the market falls, you can buy back lower price and profit. If it rises, losses accrue, and you must maintain margin. For stock futures, remember the physical delivery rule if you carry the position till expiry.

P&L and MTM: Two Quick Examples

Example A: Long futures

• Setup: 1 contract, lot size 100 units, futures price ₹500.
• Contract value: ₹500 × 100 = ₹50,000.
• Required or posted margin (illustrative 10 percent): ₹5,000.
• If price rises to ₹550: Contract value = ₹55,000, which is a Profit of ₹5,000.
• If price falls to ₹450: Contract value = ₹45,000, which is a Loss of ₹5,000.

Note: P&L is on the full contract value, not only on the margin you posted.

Example B: Short index futures with daily MTM

• Day 0: You sell 1 index futures at ₹20,000, multiplier 25, which gives a contract value of ₹5,00,000.
• Day 1 closed at ₹20,200: Loss equals 200 × 25, which is ₹5,000, debited as MTM.
• Day 2 closed at ₹19,800: Gain equals 400 × 25, which is ₹10,000, credited as MTM.

Net after two days equals ₹+5,000 before costs. You must keep the required or posted margin throughout.

What if…