5.1 – How to take a futures trade
In the last chapter, we learned various concepts related to the futures market. Remember, the motivation for any trader entering into a futures agreement is to benefit financially. The trader needs to have a directional view of the underlying asset’s price. Perhaps we take up a practical example of a futures trade video to demonstrate how this is done.
In the following video, we will understand how the settlement of a futures trade is carried out.
We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- If you have a directional view on an assets price, you can financially benefit from it by entering into a futures agreement.
- To transact in a futures contract, one needs to deposit a token advance called the margin.
- When we transact in a futures contract, we digitally sign the agreement with the counterparty; this obligates us to honour the warranty.
- The futures price and the spot price of an asset are different; this is attributable to the futures pricing formula (we will discuss this topic later)
- One lot refers to the minimum number of shares that needs to be transacted.
- Once we enter into a futures agreement, there is no obligation to stick to the agreement until the contract expires.
- Every futures trade requires a margin amount; the margins are blocked when you enter a futures trade.
- We can exit the agreement anytime, which means you can leave the deal within seconds of entering the contract.
- When we square off an agreement, we essentially transfer the risk to someone else. Once we square off the futures position, margins are unblocked.
- The money you make or lose in a futures transaction is credited or debited to your trading account the same day.
- In a futures contract, the buyer’s gain is the seller’s loss and vice versa.
But Karthik I’ve read it somewhere that in “Futures” we are obliged to buy at the predetermind price. Whereas in “Options” we have this choice whether to buy or not (only loose the premium paid).
Thats the definition of forwards, the predecessor of Futures 🙂
Choosing Intraday or Overnight which is best while doing futures?
Depends on your strategy as both come with its own set of advantages and disadvantages.