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).
Kindly explain.
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.
Got to learn something new in the simplest manner. thank you very much.
Glad you mentioned that, happy learning Divya.
I have purchased futures 10qty @13 total 130 now market going down 9 rupee, loss 40 rupees, this loss amount also required to maintain in balance in my wallet/demat account, if not maintaining these loss what will impact to my purchased qty(not expiry)?
This is the market to market process, Shaik. Your margins will take care of this.
Sir I have a doubt that when we pay margin in futures trading, for example if I pay Rs 1,00,000 margin then will the profit and loss be plus or minus from that or will it be plus or minus from the balance of my trading account.
The margins are supposed to take care of the M2M. But sometime the margin requirements suddenly increase and therefore the need for having some balance in your trading account.
In the eg. on 4 day the closing price that you decided is to set on 1st day or whenever we feel to? or can we set our closing price at anytime during the day?
Soumya, not sure if I understand your query fully. Can you please elaborate? Thanks.
Dear Karthik Sir,
I entered into a future trade type NRML by shorting a stock this morning. And unfortunately soon after I started to incur losses on it. Could I exit the trade right away as NRML Futures transaction? Also would it be considered an intraday MIS transaction requiring me to file ITR 3 later?
Many thanks in advance!
Yes, you can exit it the same time. No need to hold it.
Your way of explanation is amazing, Karthik. Thanks for the insightful content.
Thanks so much, glad you liked the content. Happy learning 🙂
I was searching this content from last month and finally got there, you teach Futures in a simplest manner, thanks a lot
Happy learning, Haider!
Hello, I have purchased futures of BPCL at 368.35 and after that it goes to 339 n yesterday it bounced back from 340 to 372 . I think I have purchased it 2 weeks earlier. According to your calculation the reference price would be the last day’s closing price but what in my case as it went down to 339 from 369 and on my selling day it opened at 340 and went to 372. How should I calculate my p&l ? Kindly explain.
YOu only need to check the closing price for the day and for your M2M calculation. Other prices does not matter.