Module 4 Futures Trading

Chapter 2

Introducing Futures Contract

120

2.1 – Setting the context

In the previous chapter we looked at a very simple Forwards Contract example, where in two parties agreed to exchange cash for goods at some point in the future. We inspected the structure of the transaction and understood how the variation in price impacts the parties involved. Towards the end of the chapter, we had listed down 4 key risks (or issues) with respect to the forwards contracts and we concluded that, a futures contract is structured to overcome the critical risks of a forward agreement namely –

  1. Liquidity risk
  2. Default Risk
  3. Regulatory Risk
  4. Rigidity of the transitional structure

We will continue referring to the same example in this chapter as well. Hence you may want to refresh your understanding of the example quoted in the previous chapter.

From the previous chapter one thing is quite clear – If you have a view on the price of an asset, you can benefit significantly by entering into a forward agreement. All one needs to do is to find a counterparty willing to take the opposite side. Needless to say, a forward agreement is limited by the inherent risks involved, all of which is overcome by a futures agreement.

The Futures contract or Futures Agreement is an improvisation of the Forwards Agreement. The Futures Contract is designed in such a way that it retains the core transactional structure of a Forwards Market and at the same time, it eliminates the risks associated with the forwards contract. A Forward Agreement would give you a financial benefit as long as you have an accurate directional view on the price of an asset, this is what I mean when I say ‘core transactional structure’.

This may seem a bit absurd but think about it – the ‘transaction structure’ of an old generation car was just to transport you from point ‘A’ to point ‘B’. However, the new generation car comes with improvisations in terms of the safety features – air bags, seat belts, ABS, power steering etc, but it still retains the core ‘transaction structure’ i.e to help you move from point ‘A’ to point ‘B’. This is the same distinction between the forwards and the futures agreement.

M4-Ch2-title

2.2 – A sneak peek into the Futures Agreement

As we now know that the core transactional structure of the futures and forwards is the same, I guess it makes sense to look into the features that distinguishes the Futures from the forwards. We will have a quick sneak peek into these features in this chapter, but at a later stage we will dig into each and every feature in greater detail.

Recall, in the example we had quoted in the previous chapter, ABC jeweler enters into an agreement with XYZ to buy a certain quantity of gold at a certain point in the future. Now imagine this, what if ABC found it really hard to find XYZ as a counter party to the agreement? Under such circumstances though ABC has a certain view on gold and is also willing to enter into a financial agreement, they would be left helpless simply because there is no counterparty to take the opposite side of the agreement.

Now further imagine this, what if ABC instead of spending its time and effort to scout for a counterparty, simply decides to walk into a financial supermarket where there are many counterparties willing to take the opposite view. With such a financial supermarket in place, ABC has to just announce its intention and the willing counterparties would line up to take the opposing stance. What more, a true financial supermarket of this sort would not just have people with a view on gold, but instead will also have people with a view on Silver, Copper, Crude oil, and pretty much any asset class including stocks!

In fact, this is exactly how the Futures Contracts are made available. They are available and accessible to all of us and not just available to a corporate such as ABC Jewelers. The futures contracts are available to us in the financial (super) market, often called the “Exchange”. The exchange can be a stock exchange or a commodity exchange.

As we know a futures contract is structured a little differently compared to a forwards contract. This is mainly to overcome the risks involved in the forwards market. Let us look at each of these points that differentiate the futures from the forwards agreement.

Note, after reading through the following points you may still not be very clear about futures, that’s alright, just keep the following points in perspective. We will shortly consider a futures example and with that you should be clear about the way in which Futures agreement works.

Futures Contract mimics the underlying – In the example of ABC jewelers and XYZ Gold Dealers the forwards agreement was based on gold (as an asset) and its price. However, when it comes to a Futures Contract, the agreement is based on the ‘future price’ of the asset. The futures price mimics the asset, which is also called the underlying.  For example gold as an asset can have a ‘Gold Futures’ contract. Think of the underlying and its futures contract somewhat as twin siblings. Whatever the underlying asset does, the futures contract does the same. Therefore if the price of the underlying goes up, the price of the futures contract would also go up. Likewise if the price of the underlying goes down, the price of the futures contract also goes down.

Standardized Contracts – Again going back to the example of ABC jewelers and XYZ Gold Dealers the agreement was to deal with 15 kgs of gold of certain purity. If both the parties mutually agreed, the agreement could have been for 14.5Kgs or 15.25 Kgs or whatever they would think is convenient for them. However in the futures contract, the parameters are standardized. They are not negotiable.

Futures Contracts are tradable – The futures contract is easily tradable. Meaning if I get into an agreement with counterparty, unlike a forward contract, I need not honor the contract till the end (also called the expiry day). At any point in time if my view changes, I can just transfer the contract to someone else and get out of the agreement.

Futures Market is highly regulated – The Futures markets (or for that matter the entire financial derivatives market) is highly regulated by a regulatory authority. In India, the regulatory authority is “Securities and Exchange Board of India (SEBI)”. This means, there is always someone overlooking the activities in the market and making sure things run smoothly. This also means default on a futures agreement is hardly a possibility.

Futures Contracts are time bound – We will understand this point in detail a bit later but for now, do remember that all the futures contracts available to you have different time frames. In the example from previous chapter, ABC jewelers had a certain view on gold keeping 3 months in perspective. If ABC were to do a similar agreement in the futures market, contracts would be available to them in the 1 month, 2 month, and 3 month time frame. The time frame upto which the contract lasts is called ‘The expiry’ of the contract.

Cash settled – Most of the futures contracts are cash settled. This means only the cash differential is paid out. There is no worry of moving the physical asset from one place to another. More so the cash settlement is overseen by the regulatory authority ensuring total transparency in the cash settlement process.

To sum up, here is a table that quickly summarizes the difference between the “Forwards Contract” and “Futures Contract”

Forwards Contract Futures Contract
Contracts are traded over the counter (OTC) Futures Contract are traded in the exchange
Contracts can be customized Future Contracts are standardized
High counter party risk No counter party risk
Not regulated Regulated by SEBI (in India)
Contracts are not transferable Transferable hence easily tradable
Time bound to just 1 time frame Multiple time frame contracts available
Settlement is flexible (physical or cash) Cash settled

At this stage, I feel there is a need to stress upon the distinction between the spot price and the future price. The spot price is the price at which the asset trades in the ‘regular’ market, also called the ‘spot market’. For example if we are talking about gold as an underlying, then there are two prices we are referring to – gold in the regular market also called the Spot market and gold in the Futures market called the Gold Futures. The prices in the spot market and futures market move in tandem, meaning if one goes up, the other also goes up.

With these points in perspective, let us now move our attention to few other nuances of the futures contract.

2.3 – Before your first futures trade

Before we dig deeper and understand the working of a futures contract, we need to understand a few other aspects related to futures trading. Do remember at a later stage we will revisit these points and discuss them in greater detail. But for now, a good working knowledge on the following points is what is required.

Lot size – Futures is a standardized contract where everything related to the agreement is pre-determined. Lot size is one such parameter. Lot size specifies the minimum quantity that you will have to transact in a futures contract. Lot size varies from one asset to another.

Contract Value – In our example of ABC jeweler and XYZ Gold Dealers, ABC agreed to buy 15 kgs of Gold at the rate of Rs.2450/- per gram or Rs.24,50,000/- per kilogram. Since the deal was to buy 15 kgs, the whole deal was valued at Rs.24,50,000 x 15 = Rs.3.675 Crs. In this case it is said that the ‘Contract Value’ is Rs.3.675 Crs. Simply put, the contract value is the quantity times the price of the asset. We know the futures agreement has a standard pre-determined minimum quantity (lot size). Going by this, the contract value of a futures agreement can be generalized to “Lot size x Price”.

Margin – Again, referring back to the example of ABC jeweler and XYZ Gold Dealers, at the time of agreement i.e on 9th Dec 2014, both the parties would have had a gentleman’s word and nothing beyond that. Meaning both the parties would have just agreed to honor the contract on the agreement’s expiry day i.e 9th March 2015. Do notice there is no exchange of money on 9th Dec 2014.

However, in a futures agreement the moment a transaction takes place, both the parties involved will have to deposit some money. Consider this as the token advance required for entering into an agreement. The money has to be deposited with the broker. Usually, the money that needs to be deposited is calculated as a % of the contract value. This is called the ‘margin amount’. Margins play a very pivotal role in futures trading; we will understand this in greater detail at a later stage. For now, just remember that to enter into a futures agreement a margin amount is required, which is a certain percentage of the contract value.

Expiry – As we know, all futures contracts are time bound. The expiry or the expiry date of the futures contract is the date upto which the agreement is valid. Beyond the valid date, the contract ceases to exist. Also be aware that the day a contract expires, new contracts are introduced by the exchanges.

With these few points that we have discussed so far, I guess we are now equipped to understand a simple example of futures trading.


Key takeaways from this chapter

  1. The forwards and futures markets gives you a financial benefit if you have an accurate directional view on the price of an asset
  2. The Futures contract is an improvisation over the Forwards contract
  3. The Futures price generally mimics the underlying price in the spot market
  4. Unlike a forwards contract, the futures contract is tradable
  5. The futures contract is a standardized contract wherein all the variables of the agreement is predetermined
  6. Futures contracts are time bound and the contracts are available over different timeframes
  7. Most of the futures contracts are cash settled
  8. The futures market is regulated by SEBI in India
  9. Lot size is the minimum quantity specified in the futures contract
  10. Contract value = Lot size times the Futures price
  11. To enter into a futures agreement one has to deposit a margin amount, which is a certain % of the contract value.
  12. Every futures contract has an expiry date beyond which the contact would seize to exist. Upon expiry old contracts cease and new ones are created

120 comments

  1. DG0607 says:

    Pls suggest us where we can get live charts for futures like how we get for cash in google finance

  2. Surendra Nath Pal says:

    Hi,
    Can we get these modules in a paperback form???

    • Karthik Rangappa says:

      Paperback is not feasible for now, but we are exploring an ebook option.

      • SURENDRA NATH PAL says:

        Thanks !!! It would be just great if we could download it as pdf and read it on our ebook readers.
        It strains ones eyes a lot to read it over the PC.
        When can we expect it ??

        • Karthik Rangappa says:

          Thanks, thats a valuable suggestion, many have expressed the same. We will certainly work towards this.

  3. Pradyuman says:

    I havent read ahead but I felt your Chapter 2 should have covered “premium” and “discount” to spot price..

  4. nagesh says:

    Dear Zerodha,
    I appreciate your efforts clearing doubts of ZT Traders. I am Zerodha trader since from past one year, I’ve doubts regarding stock futures please clarify me the below:
    Scenario:-
    1) FUTSTK : PNB; LTP : 165; BROUGHT @ : 166; LOTS : 4;
    My simple question is,
    How much money i need to deposit for further decline in the above stock, say LTP :- 160. Please answer in layman language so i could understand it very easily..
    Thanks in advance,
    Nagesh

  5. Manish Chakraborty says:

    An excellent series of articles. Explains the nitty gritty details about Futures trading in a very clear and easy to understand manner. Very seldom any site on the web have this lucid explanation. Thanks a lot for sharing this info , many traders can hope to learn a lot about Futures from here.

  6. Subhash Goyal says:

    Thanks for such excellent efforts. Its really great learning things from here. Its very difficult to find material which explain these things this easily. Thanks a lot. You are really doing a great job.

  7. Adarsh says:

    Hi…i am beginner who was trying to learn on stock market.Videos of Mr.Manikandan on youtube lead me to zerodha and anwser for all my basic questions were here…hatsoff to Zerodha team…Thanks

  8. Kannan says:

    I am a recent addition to the Zerodha user family. I find the books (chapters ?) on trading simply brilliant in terms of the content, clarity and flow of information; congratulations to Zerodha for making available such a valuable knowledge.
    I had been trading the last couple of months in Intraday Equity and Commodities. Recently I attempted Futures in NFO. I have 2 observations:

    Y’day I bought BHEL under MIS and gave a stop loss something like 266.65 which did not get triggered even after causing me more loss when the price moved against. I was wondering why?

    Today (21/8/15) when my advisor messaged me saying that Bharti Airtel achieved a low of 392.7 or when it was messaged that BHEL went up beyond 264, the LTP in the Pi’s Admin Position had not shown the same; the same I tried to verify with NSE india site and wondered what is the time difference between NSE INDIA site’e showing (the quote is time stamped) and the same reflected in the LTP in Pi. Till the end of the day I could not see the high that BHEL went to in the LTP. On contacting Zerodha Support I was told that the high was 265 as could be seen in the snapquote. Can you help me to track the movement of the price dynamically

    Best Regards

    • Karthik Rangappa says:

      Thanks kannan for the kind words.

      SL is not guarenteed especially when there is a rapid movement in the stock. Hence it always makes sense to double check if the SL order has gone through or not.

      For query regarding Pi, I would suggest you get in touch with Srini – [email protected]

  9. manus says:

    Where can I get futures price of TATA MOTORS or say any scrip? reply on [email protected]

  10. Karthigeyan says:

    Correction required on the quoted word:
    Therefore if the price of the underlying goes up, the price of the futures contract would also go up. Likewise if the price of the underlying goes “does”, the price of the futures contract also goes down.

  11. samir porel says:

    My directional view : on zinc current price (134.60) date 16/06/2016 time 16.40
    1) zinc price would be go up + types of order have ?
    2) Zinc Price Would be go down – types of order have ?

  12. abhishek kumar sah says:

    Hi karthik,
    Is there a way to keep track of the news of a stock say about their upcoming quarter result or such related news? for example recently bank of barodra was on an uptrend till the news of its quarter earning came and on the very same say the stock fell by 8%…. is there any way to deal with such situations??

  13. abhishek says:

    can you name any book on traders psychology??

  14. Paras Lodaya says:

    Sir,What is the difference between Futures and Options ?

    • Karthik Rangappa says:

      They are two different financial instruments and their characteristics are completely different. As you may have noticed, we have exhaustive material explaining both futures and options.

  15. Ayush says:

    Does predetermined variables mean, one have to choose from various options available?

  16. Ayush says:

    What if buyer or seller will not pay the amount till expiry day?

  17. Abinash Senapati says:

    It’s not possible to take future contracts as “rms:blocked for mcx_fo goldpetal17julfut block type: all”

    • Karthik Rangappa says:

      Did you try MIS order type here? MIS in commodities works only for current month and mid month contracts. Also, for agri commodities, we do not offer MIS.

  18. Ashok says:

    Hi,
    Sometimes in Snap quote window, i see BID quantity is twice that of ASK quantity. Does that means market will be very bullish? and same for opposite. If there is a significant difference between BID and ASK quantity can i consider that during making entry and exit?

    • Karthik Rangappa says:

      Ah, if you ask me, don’t read too much into this, Ashok. Its very hard to make a sensible inference out of this data.

      • Ashok says:

        Thank you

      • Vinayak says:

        Hi,
        I have a doubt, on BIDS and OFFERS, sometimes, 2X times the OFFERS, does that mean stock price go up ? If more buyers than sellers, then price should go up right? but some times it doesn’t.
        Please clear this doubt.

        Thanks,
        Vinayak

  19. Satyam says:

    Thanks Zerodha Team for this tutorial, but if you add a video tutorial it would be great as by video tutorial investors, traders will very quickly catch the things, I have observed that many people come to market to make money without knowledge and if they lose they exit the market and never come back and also suggest other people, friends not to enter the stock market. it happens due to lack of awareness and knowledge. but one gets proper knowledge and implement it and make money they also suggest this method of investment to others. I think zerodha team should also add video tutorial and that too in many indian languages (Hindi, Tamil, Telugu, etc), this will also attract many new investor to zerodha and they will also recommend it to new people.

  20. SHANTARAM PATIL says:

    I AM JUST GOING THRU YOUR FUTURE TRADE WRITE UP AND EASY TO UNDERSTAND.

    I AM DEALING IN TRADING ONLY IN EQUITY AND NOT HAD ANY DEALING YET IN FUTURE. I WANT TO ENTER IN FUTURE TRADE. MY QUESTIONS ARE:
    1. IN FUTURE AFTER PURCHASING A PARTICULAR LOT PRICE GOES UP OR DOWN, CAN WE EXIT ANY TIME OR BOUND TO BE IN TRADE TILL ITS EXPIRY. I WANT CLEAR CUT ANSWER IN SIMPLE WAY AS I AM VERY NEW TO THE SHARE MARKET.
    2. INSTEAD IN ENTERING IN FUTURE IF I HAVE ENOUGH MONEY TO BYE 100/125 SHARES OF PARTICULAR STOCK, WHICH IS BENEFICIAL.
    3. ARE THERE ANY GOOD TRADERS TO DO BUSINESS ON BEHALF OF US .
    4. WHETHER U R CONDUSTING ANY CLASSES ON FUTURE & OPTIONS.

    • Karthik Rangappa says:

      1) Yes, you can exit anytime you wish
      2) Futures – as you will have to only pay a margin and not really the entire amount
      3) I’m not sure
      4) No, all our content is put up here, for free.

  21. Shivgouda says:

    Sir,
    Do you have advisory services on Future Stock markets, if so what are the charges. Pls advise in detail.
    Thanks and Regards.
    Shivgouda
    Mob 9071604042
    Belgaum

  22. Prashanth DN says:

    Small correction:
    ” Likewise if the price of the underlying goes does”
    should become
    ” Likewise if the price of the underlying goes down” 🙂

  23. a.k.jain says:

    I have never done future trade. I want to learn this and how to do it on terminal.
    PL.guide me.

  24. abhishek kumar sah says:

    1. On what criteria does is it decided that the particular contract will be under ban?
    If you check this link- https://zerodha.com/margin-calculator/Futures/ there are some securities under ban.

    2. I have observed that the securities under ban today may be tradable tomorrow. So my question is , i bought one contract of Rcom yesterday(as it was tradable yesterday) but today it is under ban. So what happens to my contract in this case? (If i want to sell it today will i can not as it is under ban)

    3. how do i get to know before hand if the futures contract i am going to hold will be banned in the near future so that i can avoid doing trade in that?

    • 1. All F&O contracts have an open interest limit(Maximum number of contracts that can be open at any given moment of time).
      When the number of contracts in the market cross 95% of open interest, the stock goes into ban period.
      2. You can sell your contract which you had bought before the stock entered the ban period, you are only not allowed to take a fresh position once the stock enters ban period
      3. At the end of every trading day, NSE releases Open Interest data in its Daily Reports. You can calculate the Open Interest utilized with a simple calculation of OI %= NSE OI/ MWPL

  25. abhishek kumar sah says:

    If you check this link — https://zerodha.com/margin-calculator/Futures/ , there is only one contract of ICIL(i.e. – current month’s),
    1) So does that mean that the exchange has decided to withdraw ICIL form futures trading form next month?
    2) On what basis does exchange decide to either introduce or withdraw any futures contract?

  26. Shubham Gupta says:

    Hi Karthik,
    Thanks for the module.
    You mentioned ” Futures Contract mimics the underlying “, then is the price of the futures not effected by other parameters? Please explain.

    Regards,
    Shubham

    • Karthik Rangappa says:

      No, unlike Options, the only thing that matters in Futures trading is the directional movement of the underlying.

  27. trader says:

    Hi,
    With respect to futures trading, is it appropriate to say that trading futures and trading stocks are basically the same with a few differences in futures (like open interest, expiry, higher leverage factor etc)?? as in the basic funda of making profits in plain directional bets using futures is completely same as making profits in stocks??

  28. shweta says:

    Hi..could you please tell me how to decide the entry point or when to get into the future contract and which type of indicators or charts to be used for the same and also what should be criteria for shortlisting the stocks for future contract ?

  29. RAJAN . A.T. says:

    Sirs,
    I am Rajan A.T. KITE trade no ZB2125

    After going through this chapter on ” Reintroducing Call & Put option, Kindly clear my following doubts.

    a) How is a Call option is different from a Put option for a same strike rate? for example How the ATM of today ( 16-01-2018 ) 10700 CE is different from the 10700 PE ?

    b) How ITM shift from left to right after ATM ie the light yellow back ground

    If the answer is of long stretch kindly give me a link to this answer.

    I have read this module no 5 two times . I could not get the answer for my above question.

    Please allow me to give an example of some what same to compare.

    Take chart of a Railway Time Table (RTT. in short) . This is a common chart familiar to almost maximum number of people.
    Let us compare both charts. The Railway Time Table (RTT. in short) and the Nifty Option Chain (NOC. in short)

    1 The central Strike Price column in the Nifty Option Chain (NOC) can be compared to the Train No and train name column of the Railway Time Table (RTT).

    2. The left side of the strike price column in NOC is Call option and its details . same way
    left side of RTT is UP direction of the trains and details of stations on the route and arrival & departure time of those stations.

    3 The right side of the strike price column in NOC is Put option and its details . same way right
    side of RTT is DOWN direction of the trains and details of stations on the route and arrival & departure time of those station.

    Kindly compare like this and make it very simple to understand.

    Considering the effort & time the full team of people have invested to prepare such a beautiful and versatile book, these type of comparison charts will go a long way. SORRY for taking your valuable time.

    Regards

    Rajan A. T.

    • Karthik Rangappa says:

      Sir, I really think you should read this module again with all the comments. Follow this reading by placing a small options trade. Most of the questions you’ve asked has already been answered in the chapters and comments.

      Good luck.

  30. abhishek kumar sah says:

    1) Tata steel feb fut had a lot size of 1000 yesterday. Today the lot size of the same month contract suddenly increased to 1061. why?
    2) Corporate action(tata steel) — Rights issue of 4 shares for every 25 shares held offered @ Rs 510. how to decode this?
    I understood that for every 25 share held 4 will be offered, but what about the price 510 because currently tata steel is trading at around Rs 715?
    3) In kite it is showing that tata steel share plunged by -9.13% but NSE quated it as -3.36%. Is it because in actuality tata steel fell by 3.36% and the remaining drop was due to price adjusted for 4 share for every 25 share?

    4) So how did they arrive at lot size 1061 from 1000. if you can show the calculation?

  31. ARUN says:

    Hi,
    How can i c the chart of nifty spot in marketwatch???
    I am typing nifty in space provided… its showing nifty bees and many more but not nifty spot chart. plz help.

  32. subhadeep says:

    This is the place to be for a beginner like me. Thank you for doing such a wonderful job and sharing these not-so-simple topics with so much ease and detail. thanks again!

  33. Priya says:

    Hi Karthik,

    Thanks for taking out the time to answer all the queries.
    I am totally new to trading. Bought 1 ITC share & 2 SBI shares, sold 1 SBI share for a profit of Rs.10/- last week. 🙂 I haven’t received the amount yet. But I guess this is not the relevant thread to discuss this. I will post this question in the Module 1, Chapter 10.

    Coming to Futures, I bought 1 lot of ITC APR FUT last week. Now the ITC APR FUT price has drastically gone down. I have a clutter of questions. I will try my best to keep this organised. Just to let you know, I use Kite3 to do trading.
    1. When I bought 1 lot of ITC APR FUT, the margin was nearly Rs.81000/-. In the Dashboard, my Equity ‘Available Balance’ showed a positive value. I remember the ‘Margin Used’ showed 81K. But this section now shows different values for Available Balance, Margin Used and Account Value. Now my ‘Available Balance’ is negative. Could you please enlighten me on how to understand these figures.
    2. The ITC APR FUT that I bought is displayed under ‘Positions’ tab in the Kite account. My P&L has gone to negative Rs.20000/-. It clearly means that at this point, if I sell, I will face a loss of 20K. I have two questions in my mind now –
    (a) How do I make my loss less?
    (b) If I sell today, because it shows the loss is Rs.20000/-, will the loss be deducted from the margin amount that I paid? That means 81K-20K = 61K. Will the Rs.61000/- be credited back to my ‘Funds’ today? Where should I verify the credited amount?

    Thanks in advance for taking time to answer my questions.

  34. Priya, the amount for the SBI share should have been credited on the same day to your Account. You can check this on your Contract that you would have received in your Email(Alternately, you can download it from Q-Backoffice).
    Futures are settled daily(Mark to Market), unlike Equity where you book the loss only when you close the position. So whatever losses you’ve incurred until now are already debited from the Account which has led to a negative balance. You can read Chapter 5 in this module for more on this. This will also explain all your other queries regarding the Futures position

    • Priya says:

      Thanks Faisal.
      Isn’t ITC APR FUT mostly like a share? I mean the profit/loss should only be calculated when I sell it or when the contract terminates (in this case 26 April)? Am I missing something here?

      • Although you are trading the underlying(ITC shares), Futures are a leveraged product and have a daily mark to market settlement(Daily profits is credited and losses are debited). This is what has led to the negative balance in your Account.
        All of this is explained in Chapter 5 of this module

      • Karthik Rangappa says:

        Priya, while a share can exit to perpetuity, futures contract has an expiry. As long as the futures exist and you continue to hold it, the profit or losses will be adjusted based on the closing prices, thereby netting your scores on a daily basis. The system of mark to market is in place to help manage the risk better.

        • Priya says:

          Thanks Karthik and Faisal.

          I sold my first Futures (1 lot of ITC APR FUT) for a profit of Rs.3600.
          I can’t understand the figures in the Funds section in the application.
          This is how it looks in my Funds.
          ——————————————
          Margin available 97,623
          Margin used -6,085
          Total account value 91,538
          Payin 0
          SPAN 0
          Realised profit 9,240
          ——————————————
          Could you please help me to understand the above figures. I expect the total amount (My Cost Price of 1 lot of ITC APR FUT + My Profit of Rs. 3600) will be credited by end of business today?

          Thanks very much for your time to clear my queries.

          • Check this article on the Support portal that will help you understand the Funds page better.
            The margin blocked and M2M profit is added to your trading account immediately after you close the position

  35. Vasu says:

    First – Thank You for such valuable hand holding walk thru knowledge base.

    Please help me understand this scenario – If I happen to buy a futures contract and did not square off on the expiry date, what happens next.

    WILL I BE FORCED TO BUY UNDERLYING (STOCK IN CASE OF STOCK FUTURES)

    OR

    WILL I BE PAID THE CASH DIFFERENTIAL (OR ASKED TO PAY THE DIFFERENTIAL IF IT GOES AGAINST MY POSITION)

  36. Prabir says:

    There is a spelling mistake in the below line

    Likewise if the price of the underlying goes does, the price of the futures contract also goes down.

  37. Sujith says:

    Hi,
    This may be a stupid question. But I have to ask. ‘Futures Contract mimics the underlying’. Is opposite also true. When the contracts are settled on expiry or otherwise, does it affect the spot market?

  38. Kannan P says:

    Hi Karthik, is there any education on how to keep a stop loss order in Kite? My understanding all this while seems wrong because a couple of trades failed to hit the SL. I know there is a video in the Zerodha website but that doesn’t explain enough, it only say what each option means. A live example would be helpful.

  39. PRITAM DAS says:

    If i buy the far contract of nifty. Can i sell in the current month.
    Suppose its may. I buy July contract of nifty. Can i sell the contract in this month to book profits?

    • Karthik Rangappa says:

      Yes, you can simultaneously buy and sell different month future contracts, there is no problem with this.

  40. Hari says:

    Hello Karthik,

    First of all, thanks for writing such nice articles on trading. It has been a true university for all the traders and you have an amazing way of explaining complex things in very simple manner.

    I have a question which is troubling me for the past few days. Can you please answer. I wanted to know, when a future contract is open for trading on the first day of a new expiry, who is a potential seller (first seller)? Does he have to really own the shares to sell them in future contract.

    I am getting this question because, in case of Options, we know that Option writers are the sellers but in case of futures, who are the first sellers?

    Thanks in advance…

    Hari

  41. Hari says:

    Hello Karthik,

    One more query. As per my analysis of the EoD reports on NSE, I find that there are many index future contracts that do not get squared of on expiry. My good guess is that these may be contracts held by big players. Is it true?
    If index future contracts are not squared off on expiry, what happens to such contracts?

    Can you please clear my doubt?
    Thanks in advance…

    Hari

    • Karthik Rangappa says:

      Hari, all contracts irrespective of the underlying, gets squared off on expiry day.

      • Hari says:

        Hello Karthik,

        Let me try to rephrase the question. Suppose that I own a Nifty futures contract which is highly in profit. Now, on expiry day, if I do not square it off, what are the monetary implications of it on my Zerodha account. I know the Future contract will get squared off finally but what kind of charges will be levied on me by my broker if the contract is not squared off by me?

        Thanks !!!

        Hari

  42. Sakthi Nathi Arasan says:

    Karthik, your articles are too good. Beginners can pick up the things very easily. Great work

  43. L.KAMALAKSH RAO says:

    Huge cash is required for futures trading for investment in shares for use as hedge.Will these shares get sold at expiry ,from your experience as the quantity is large.
    Will we get adequate return say,more than 9% per annum afterr paying taxes,stt,brokereage etc.i

  44. Raja C says:

    Good Training articles , Karthik.. just a note, a more complete definition would be:-
    Contract value = Lot size x Futures price x point Multiplier (based on the contract specification)

  45. Ron kalra says:

    Hi again karthik,
    If I want to hold a position for 10-15 days what is a better strategy
    1. Future contracts with heading using options. My concern in this case is that the cost will be too high and the risk to cover the cost gets higher too.
    2. Buying ( long ) calls and puts with proper risk management. In this case I’m worried about time delay and volatility. I did ask u about holding the next month contract in a separate heading.
    Can u please suggest what is a better choice and also if u can recommend some books or literature for hedging.
    Are u planning to do some topic on hedging any soon
    Many thanks
    Ron

    • Karthik Rangappa says:

      1) Yes
      2) You won’t have the decay problem if you have the next month’s contract

      You can look at buying futures if you have deeper capital. Else, an ATM option of next month should be ok, provided you are not over paying for it.

  46. Ron says:

    Hi,
    just a correction in the above post. in point 1. I meant Future contracts with Hedging ( not heading )using options.
    also, can you please guide me to some literature, books for both the strategies.
    I’m low in my confidence and not able to decide what is better for me futures or options. Any Suggestions ??

    Many thanks
    Ron

  47. Ron says:

    Thank you so much Karthik, really appreciated your quick response. You’re simple Great !!

  48. Rahil says:

    Hey,
    As you have said that the future contracts mimics it’s underlying asset.Can i assume that the vice versa isn’t possible???
    Let say for eg a stock is trading for 120 with a daily avg volume of 200k….now if a person shorts 100 million FUTURE contracts (hypothetical) of that stocks….Can i say that shorting 100 million future contracts of that stock will cause no difference to the price of that stock ?? Because as you said only future contracts mimics the stock but the vice versa is not possible

  49. Sikha Karunakara Raju says:

    Dear Sir/Madam,

    I am unable to keep bracket order in commodities i.e. Crude, Silver etc., So that I am unable to get trigger the exact price and missing targets and getting losses. Please activate the bracket order option in commodities. If it is not possible, I need to choose some other broker who is giving access to bracket order. Hope you will give access to bracket order.

    Thanks.

  50. Rahil says:

    Hey,
    what i am trying to ask is….
    Scenario 1
    let’s say a stock is trading at 120 in spot market, if someone let’s say a AMC executes a buy order 100 times the average daily volume in spot market and if there are not enough buyers to absorb the order at 120, we can expect the price to make a extreme bullish move and the price may now trade at 145 within a minute.
    Scenario 2
    let say the same order is executed but this time in Futures market and not in spot market. Will there be the same extreme bullish move in spot market ?
    because this time the AMC is not directly manipulating the spot market by placing an order in spot market…..instead they are placing an order in Futures….which directly doesn’t affect the spot market……
    Can the stock still make the same 120 to 145 move within a minute in spot market, just because an AMC has excuted a huge Future contract in Futures Market

    • Karthik Rangappa says:

      Technically possible, but this spread will not sustain through because the arbitragers would jump in to close the spread.

Post a comment