What Is Futures Trading?
Futures trading involves buying or selling standardised contracts that obligate both the buyer and seller to complete a transaction at a specified future date and price. In India, stock and index futures are traded on NSE's F&O segment. A futures contract specifies the underlying asset (e.g., Nifty 50 index or Reliance Industries shares), the contract size (lot size), the expiry date, and the price agreed upon today (futures price). Futures are used for both speculation (directional bets on price) and hedging (protecting existing positions).
How Futures Contracts Work
Example: Nifty 50 futures (lot size: 25). If Nifty is trading at 22,000, one futures contract has a notional value of 25 x 22,000 = Rs 5,50,000. To buy one contract, you need to deposit margin of approximately Rs 50,000-70,000 (around 10-15% of notional value). If Nifty moves up to 22,500, your profit is 25 x 500 = Rs 12,500. If Nifty moves down to 21,500, your loss is Rs 12,500.
Key Features of Futures in India
- Expiry: Monthly (last Thursday) and weekly (Nifty and Bank Nifty have weekly expiry every Thursday).
- Settlement: All equity index futures are cash-settled; stock futures can involve physical delivery in some cases.
- Mark-to-market (MTM): Daily profit and loss is settled to your trading account; if losses reduce margin below the maintenance margin, you receive a margin call.
- Lot sizes: Standardised by NSE; Nifty 50 lot = 25, Bank Nifty lot = 15, individual stock lots vary.
Types of Futures Positions
| Position | Meaning | Profit When |
|---|---|---|
| Long (buy) futures | Agreement to buy at current futures price | Price rises above futures entry price |
| Short (sell) futures | Agreement to sell at current futures price | Price falls below futures entry price |
Futures for Hedging
Long-term investors use futures to protect their equity portfolio against short-term market declines. If you hold Rs 5 lakh worth of Nifty 50 stocks, you can sell one Nifty futures contract (approximately Rs 5.5 lakh notional) to create a near-neutral position during a market downturn. When markets fall, the profit on short futures approximately offsets portfolio losses.
Key Takeaway
Futures trading in India provides powerful leverage for speculation and effective tools for portfolio hedging. However, the daily mark-to-market settlement means losses are realised immediately, and insufficient margin can lead to forced position closure. Thorough understanding of leverage and risk management is mandatory before trading futures. Use the Lemonn app to build market understanding and track index movements before attempting futures positions.
