Futures basics

What a futures contract is

A futures contract is an agreement to buy or sell something, such as an index or a share, at a price fixed today, for settlement on a set future date called expiry. In India, futures on indices and on a list of selected shares trade on NSE and BSE.

The buyer of a future gains if the price rises and loses if it falls; the seller gains if the price falls and loses if it rises. Gains and losses can be large compared with the money put up.

Lot size

Futures trade in fixed lots. One lot of an index future covers a set number of units of that index. Lot sizes are set by the exchange and revised from time to time, so we don’t list them here: the lots page shows the current figures.

Since SEBI’s changes to index derivatives in November 2024, contracts are sized so that one lot represents a larger amount of money than before.

Margin

To hold a futures position, a trader deposits margin with the broker instead of paying the full contract value. The exchange sets the minimum margin, made up mainly of an initial (SPAN) margin and an exposure margin. Because the margin is only a fraction of the contract value, a small price move changes the result by a large share of the money put up. This is called leverage.

Mark-to-market

Every trading day, each open futures position is valued at that day’s settlement price. The day’s gain is added to the account and the day’s loss is taken from it. This is mark-to-market (MTM). If losses take the account below the required margin, the broker asks for more money; if it is not paid, the position can be closed.

Expiry

Every futures contract has an expiry day. Equity futures in India are settled in cash at expiry for indices; for stock futures, positions open at expiry are physically settled, which means actual delivery of shares. Most traders close or roll over positions before expiry. Expiry days are set by the exchange and can move for holidays.

Basis and open interest

The futures price is usually a little different from the spot price of the index or share. The difference is called the basis. It mainly reflects the cost of holding the position until expiry, and it shrinks towards zero as expiry approaches.

Open interest (OI) is the number of contracts that are open at the end of a day, neither closed nor expired. A rise in OI means new positions were opened; a fall means positions were closed. OI by itself does not say which side will gain.

The risk

SEBI’s study of individual traders in equity futures and options for FY2022 to FY2024 found that about 9 in 10 made a net loss. Losses in futures are not limited to the margin put up.