Module 4: Futures trading

A futures contract is an agreement to buy or sell an asset at a set price on a later date. In India, stock and index futures trade on NSE and BSE, and they settle in cash. This module explains how they work and why leverage cuts both ways.

01Forwards and futures

A forward is a private agreement between two parties. A futures contract standardises it: fixed lot sizes, fixed expiry dates and an exchange in the middle that guarantees both sides.

02Lot size and contract value

Futures trade in lots set by the exchange. The contract value is the price times the lot size, and it is usually far larger than the money needed to open the position.

03Margin and leverage

You deposit a margin, a fraction of the contract value. Because profit and loss are on the full value, a small move in price is a large move against the margin. Leverage magnifies losses exactly as much as gains.

04Mark-to-market

Every day the exchange settles the change in value: profit is added to your account and loss is taken from it. If losses eat into the margin, you are asked to add money.

05Expiry and rollover

Each contract expires on a set day. A trader who wants to keep the position closes the expiring contract and opens the next one, which is called rolling over.

06Open interest

Open interest counts contracts that are still open. Read with price, it shows whether new positions are being built or old ones closed.

07Shorting with futures

Selling a futures contract lets a trader profit from a fall without owning the asset. The risk on a short is open-ended if price keeps rising.

08Hedging

An investor holding shares can sell futures to protect against a fall for a while. The hedge reduces loss and also gives up gain while it is on.

09Spot, futures and the basis

The futures price usually sits above the spot price, reflecting the cost of carrying the position to expiry. The gap, called the basis, narrows to zero at expiry.

10Where this leads

On A1Stock, futures open interest and the futures order book sit beside the index chart, and paper trading lets you practise with real prices before using margin.