2.1 – Setting the context
In the previous chapter, we looked at a straightforward Forwards Contract example, where 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) concerning the forward’s contracts, and we concluded that a futures contract is structured to overcome the critical risks of a forward agreement, namely –
- Liquidity risk
- Default Risk
- Regulatory Risk
- The 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 view 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 so that it retains the core transactional structure of a Forwards Market. At the same time, it eliminates the risks associated with the forward’s contract. A Forward Agreement would give you a financial benefit as long as you have an accurate directional view of an asset’s price; 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 to transport you from point ‘A’ to point ‘B’. However, the new generation car comes with improvisations in terms of the safety features – airbags, seat belts, ABS, power steering etc… However, 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.
2.2 – A sneak peek into the Futures Agreement
As we now know, the core transactional structure of the futures and forwards is the same, and I guess it makes sense to look into the features that distinguish the Futures from the forwards. We will have a quick sneak peek into these features in this chapter, but we will dig into each feature in greater detail at a later stage.
Recall, in the example we had quoted in the previous chapter, ABC jeweller agrees 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 counterparty 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 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, decides to walk into a financial supermarket where many counterparties are willing to take the opposite view. With such a financial supermarket in place, ABC has to 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 forward’s agreement.
Note that you may still not be very clear about futures; that’s alright; keep the following points in perspective. We will shortly consider a futures example, and with that, you should be clear about how Futures agreement works.
Futures Contract mimics the underlying – In the example of ABC jewellers 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 asset’s future price. The futures price mimics the asset, which is also called the underlying. For example, gold as an asset can have a ‘Gold Futures’ contract. Please 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 futures contract’s price would also go up. Likewise, if the price of the underlying goes down, the futures contract’s price also goes down.
Standardized Contracts – Again, going back to the example of ABC jewellers 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. If I get into an agreement with a counterparty, unlike a forward contract, I need not honour the contract until the end (also called the expiry day). At any point in time, if my view changes, I can transfer the contract to someone else and get out of the agreement.
Futures Market is highly regulated – A regulatory authority highly regulates the Futures markets (or, for that matter, the entire financial derivatives market). 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, remember that all the futures contracts available to you have different time frames. In the example from the previous chapter, ABC jewellers 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 months, 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. 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 counterparty risk | No counterparty 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 |
| The settlement is flexible (physical or cash) | Cash settled |
At this stage, I feel there is a need to stress the distinction between the spot price and the futures 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 called the Spot market and gold in the Futures market, called the Gold Futures. The spot market prices and futures market prices move in tandem, meaning if one goes up, the other also goes up.
With these perspective points, let us now focus our attention on a few other futures contract nuances.
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 of futures trading. Do remember at a later stage, we will revisit these points and discuss them in greater detail. But for now, good working knowledge on the following points is what is required.
Lot size – Future is a standardized contract where everything related to the agreement is pre-determined. The 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 jeweller 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 of the price of the asset. We know the futures agreement has a standard pre-determined minimum quantity (lot size). The contract value of a futures agreement can be generalized to “Lot size x Price”.
Margin – Again, referring back to the example of ABC jeweller and XYZ Gold Dealers at the time of the 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 honour 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 occurs, both the parties involved will have to deposit some money. Consider this as the token advance required for agreeing. 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 pivotal role in futures trading; we will understand this in greater detail later. For now, 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, the exchanges introduce new contracts.
With these few points that we have discussed so far, I guess we can now understand a simple example of futures trading.
Key takeaways from this chapter
- The forwards and futures markets give you a financial benefit if you have an accurate directional view of an asset’s price.
- The Futures contract is an improvisation over the Forwards contract.
- The Futures price generally mimics the underlying price in the spot market.
- Unlike a forwards contract, the futures contract is tradable.
- The futures contract is a standardized contract wherein all the variables of the agreement is predetermined.
- Futures contracts are time-bound, and the contracts are available over different timeframes.
- Most of the futures contracts are cash-settled
- SEBI in India regulates the futures market.
- The lot size is the minimum quantity specified in the futures contract.
- Contract value = Lot size times the Futures price.
- To enter into a futures agreement, one has to deposit a margin amount, a certain % of the contract value.
- Every futures contract has an expiry date beyond which the contract would seize to exist. Upon expiry, old contracts cease and new ones are created.
Pls suggest us where we can get live charts for futures like how we get for cash in google finance
Have you seen our new trading software called Pi zerodha.com/pi ? You can get live FNO quotes here.
Is it free of cost zerodha pi tell me
Yes, it is.
Hi,
Can we get these modules in a paperback form???
Paperback is not feasible for now, but we are exploring an ebook option.
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 ??
Thanks, thats a valuable suggestion, many have expressed the same. We will certainly work towards this.
I havent read ahead but I felt your Chapter 2 should have covered “premium” and “discount” to spot price..
Thanks, but I thought taking about ‘Premium’ and ‘Discount’ while discussing the Futures pricing would make more sense. Hence I have done the same here – http://zerodha.com/varsity/chapter/futures-pricing/
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
Since you are anticipating a drop of 6 Rupees, its better to have enough buffer money in your account to the extent of the loss you are anticipating. Since each lot is 1250, you have 4 of these…so thats 5000 shares….so 5000*6 = 30K is how much you need to have as buffer. Also have you read this chapter on Margins – http://zerodha.com/varsity/chapter/margin-calculator-part-1/
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.
Thanks for the encouragement. Means a lot to us at Zerodha 🙂
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.
Subhash, thanks for the encouragement, means a lot to all of us at Zerodha 🙂
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
Thanks Adarsh!
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
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]
Where can I get futures price of TATA MOTORS or say any scrip? reply on [email protected]
Sorry, cant send out individual emails. You could use this link – http://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuoteFO.jsp?underlying=NIFTY&instrument=FUTIDX&type=-&strike=-&expiry=29OCT2015
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.
Noted 🙂
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 ?
Sorry, dint get your question.
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??
and then the price recovered back in the next few trading sessions..
These are just over reactions to a regular corporate event, mainly driven by trader’s emotions. You need to be reading a bit on Trader’s phycology for this.
can you please name any book related to traders Phycology?
I usually do this by entering the stock name in my Google Alerts. Quite effective, you should give it a try.
can you name any book on traders psychology??
I guess there is a book called ‘The Trading Plan’, which is quite good.
Sir,What is the difference between Futures and Options ?
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.
Does predetermined variables mean, one have to choose from various options available?
Yes, the variables of a future contract is predetermined by the exchanges.
What if buyer or seller will not pay the amount till expiry day?
They have to, you cannot choose not to pay.
It’s not possible to take future contracts as “rms:blocked for mcx_fo goldpetal17julfut block type: all”
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.
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?
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.
Thank you
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
Na, this is a dynamic variable, keeps changing, so can’t really take a call based on this.
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.
Thanks for the inputs, Satyam. It is on the list of things for me to do.
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.
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.
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
No, we do not advise our clients on what to buy or sell. We do not give out any tips over SMS/email/Whatsapp. Do this this – https://tradingqna.com/t/i-am-getting-a-lot-of-unsolicited-stocks-tips-sms-messages-ever-since-i-opened-a-trading-account-how-do-i-stop-these/15177
Small correction:
” Likewise if the price of the underlying goes does”
should become
” Likewise if the price of the underlying goes down” 🙂
Hey, thanks Prashanth, will fix this 🙂
I have never done future trade. I want to learn this and how to do it on terminal.
PL.guide me.
I’d suggest you attend a demo, conducted online, twice a day — at 2:30 PM and again at 6:30PM. – https://www.youtube.com/user/zerodhaonline .
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
Hi faisal,
so we are req to calculate manually or does zerodha provide date on daily basis?
“”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””
so where can i get this OI% AT EOD??
Here you go – https://www.nseindia.com/products/content/derivatives/equities/homepage_fo.htm all info along with OI can be downloaded from here. Good luck.
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?
1. NSE has decided to stop F&O trading for ICIL after the expiry of the January 2018 contract. You can check this circular for the same.
2. You can read NSE’s criteria of selection of stocks for F&O trading here
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
No, unlike Options, the only thing that matters in Futures trading is the directional movement of the underlying.
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??
In a sense yes, as long as your directional view is correct, you make profits.
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 ?
I’d suggest you go through the module on Technical Analysis for this – https://zerodha.com/varsity/module/technical-analysis/
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.
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.
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?
1) Check this – https://www.nseindia.com/content/circulars/FAOP36862.pdf
2) Quite straightforward for every 25 shares, you are entitled to buy 4 more shares at 510. 510 is likely a discount price to the prevailing market price. Right issue is always at discount to market.
3) Not sure, need to check this
4) The link to the circular may have some cues for this calculation.
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.
Type ‘Nifty Index’, in the market watch search box. In fact, you can search for any index by this format.
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!
Happy learning!
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.
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
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
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.
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
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)
Vasu, the settlement is in cash, no physical settlement yet in India.
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.
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?
Usually it does not, but for a brief period during the trading session, it may.
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.
Kannan, you can use something like volatility based SLs or Average True Range (ATR) for placing SLs. Check this chapter on ATR – https://zerodha.com/varsity/chapter/supplementary-notes-1/
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?
Yes, you can simultaneously buy and sell different month future contracts, there is no problem with this.
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
Thanks for the kind words, Hari 🙂
Not really, the seller can be anyone who expects the prices to go down.
thank you so much for your reply 🙂
Good luck, Hari!
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
Hari, all contracts irrespective of the underlying, gets squared off on expiry day.
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
No charges as such, Hari. Your position will be squared off and P&L will be settled.
ok, thanks so much Karthik for clearing my doubt…
Happy Trading 😛
Hari
Good luck, Hari!
Karthik, your articles are too good. Beginners can pick up the things very easily. Great work
Thanks for the kind words, Sakthi. Good luck with the all the learning 🙂
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
Guess, my previous answer covers these points.
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)
Contract value is the worth of the entire contract, so it is just, Contract value = Lot size x Futures price 🙂
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
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.
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
Yup, I figured as much. Unfortunately, I’m not too sure about any online literature on this, Ron.
Thank you so much Karthik, really appreciated your quick response. You’re simple Great !!
lol 🙂
Happy reading, Ron!
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
On shorter timeframes, the other way round influence may be possible, Rahil.
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.
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
Technically possible, but this spread will not sustain through because the arbitragers would jump in to close the spread.
Hi,
If we buy futures today, how to retain it for 4 to 5 days. What option I need to select for this. When I buy the futures, it will get closed in a day.
You will have to buy it under NRML product type and have enough funds (margin) to maintain the position. You can check this link to see the applicable NRML margins -https://zerodha.com/margin-calculator/SPAN/
Let’s say there’s company XYZ whose share prce is Rs 1/- and has 1000 stocks in the market
1. As I understand the contract is between two parties, here how does a party create a contract? Is it when he takes a short position contract get’s created?
2. Can anyone create a contract?
3. In this scenario, as the contracts are not deliverable, does the number of shares in the overall contract (all contracts) match with the volumes present in the market minus deliverables held?
4. As I understand we are not entitled to dividends or bonuses during the timeframe contract held? The reason is if the total volume matches then how does the company determine which is contact and which is not. I am sure NSE and broker knows about is that the way they find out.
5. Is there a limit on the number of contracts that can be created?
6. Let’s take Person A has a sell and Person B takes a long, they both virtually hold a contract. Now Person B decides to book profit, he does a short to zero the holding. In this scenario does it become that now Person B has done a short, he will hold a new contract with Person C who bought this
1) As and when a trade is matched at a certain price (both buy and sell), a contract gets traded, any by virtue of it created
2) Only exchange can
3) No, this is a separate segment, not related to deliverable qty
4) Yes, F&O traders are not eligible for corporate action. Reason being there are no shares in the DEMAT, its just a contract based on the underlying that gets traded
5) Yes, there are exchange limits
6) No, in this case Person B is out of the market completely. Its between A and C now.
Thanks Karthik for the reply. Had some more queries:
1. When I click on the market depth in futures, we see the number of lots available. So these are the contracts which exchange has created right?
2. When I take a long position and it matches someone who takes short on it and as long position holder, I choose to close the contract the moment I feel if my loss are more. Similarly, on the other side when I am taking profit, can the seller close his contract with me coz he is incurring more losses. As I understand he can close his short position by taking a long, then what would happen to the contract I held with him?
1) Yes, available for you to trade
2) Yes, he can square off his position anytime he wants.
Thanks again for the reply. Just last question: In the above context when the shot holder sells his position, my contract would be with a new person who took it right. Would there any such case wherein there is no takers for the contract and I am stuck in my long position?
For every open position, there is a counterparty 🙂
Hi sr
Sr I have gone through NSE website, there I have found that many stock futures contracts have less price as compare to their underlying asset for current month as expiry and many has more …but as you have told that futures contract price will always more than spot price …what’s the reason behind this…TIA
This can happen due to demand-supply situation, Amandeep. Quite common.
Hello,
I noticed the F/O contracts can be physically settled now in India. So this need correction.
Yeah, but indices are still cash-settled. Will update the module anyway.
Hello, I have a doubt in Futures Contract.
I PARTY (A) made a buy futures say 100 contracts and my contract becomes final when i get match order from the other party (B) say sell 100 contracts.
after 2 days, i changed my decision to buy 50 contract instead 100. so i will give sell 50 contract and if my order match with other party say party C who needs to buy 50 contract (like how i changed my mind likewise party C also changed).
so My contract and Party C contract diluted leads to decrease in Open Interest.
Now my doubt is What happens to Party B.
does his contract be reduced? or it will be same. and how?
Kindly clarify my doubts.
Thanks in Advance!
It will be the same until B decides to act.
1. Can we purchase futures contact as CNC and sell it on MIS on the same day?
2. Future contacts can be shorted in CNC ?
1) You can convert the position to MIS. Do check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/how-to-convert-mis-to-cnc-nrml-and-vice-versa
2) Yes, you can.
I have one question sir how margin money calculate . Lets example i have buy 10 share @ 100 rs each. so my total price is 1000 rs. Now if the share price go down 5 so how much margin money i have deposit on next day.Please reply on simple language so that i can understand easily sir. Thanks for the help and its really nice article its help me lot.
Sandeep, its much easier if you can look up on the margin calculator here – https://zerodha.com/margin-calculator/SPAN/, you will get the exact values.
Also sir please advise why people trade in future rather than equity. I mean to say what is the difference between equity and future. What is the advantage to trade in future.Thanks for reply in advance.
Futures offers additional leverage, meaning you can transact for a much higher value compared to the cash available with you at hand.
Its superb information you have portrayed in very simple and layman language with a concrete examples. I appreciate your hard work and zeal to prepare this articles. I just loved it to read. Just one feedback if you can publish thin in a paper book/ pdf. Thanks.
Thanks Sachin. I’m glad you liked the work 🙂 We already have the PDFs, you download the same on the module page.
I am a student and wanted to use Zerodha Kite Api to develop a alogrithm but the thing is I have to pay Rs 2000 ,is there any trial version or free version available for students
Nope, there is no trial version.
can you please explain contract value in detail I am getting confused whether it is calculated on future price or CMP .
Contract value = Lot size * Futures price.
Thank you so much for your kind response sir. actually I have completed basics of stocks and technical analysis from courses of varsity still I feel like I am not good enough do a trade with the use of technical analysis what should I do next to improve my knowledge on technical analysis. TIA
This is good enough to start, Santhosh. You need to apply these things in real markets and start taking trades. If not at least start with paper trading.
Dear sir,
as we consider SPOT PRICE moves( mimic ) the Future Price, than what is the relevance to see the volume of Future Chart. is the volume in Future chart also affects SPOT price. Please explain on it sir.
Regards.
The volume on Futures tells you the qty in which the futures has traded, however, the spot gives you the same info for the spot. I’d personally look at spot volume to arrive at my trading decisions. This makes more sense considering the fact that the spot is the one which influences the futures.
I doubt whether we can find such a literature on Futures any where. So simply worded, easily understandable, superbly covering iimportant points of practical value, beautiful language so that it is clear for even a layman, with good examples, extra care and pain excercised so that it reaches the traders to make them at home while trading. Simply superb
Thanks for the kind words, Srinivasan! Happy reading 🙂
Question 1: The price of a future depends on an underlying asset. So there is no connection of the future price with demand and supply, right?
Question 2: You mentioned that most of the future contracts are cash settled. So is there a way where we can get the delivery or cash settlement is the only option?
Question 3: You mentioned that the Contract Price is equal to “Lot Size multiplied by Price”. Which price is this, current market price of stock or the price at which the future agreement has been made?
Question 4: Whatever concepts you mentioned that we will study later in detail are all covered within this module?
1) Yes, depends on the underlying and also on the market’s demand and supply situation
2) That is outdated, please see the last chapter. Contracts are physically settled
3) Yes, the current market price
4) Yes
3) Current market price of future or stock?
Hi
Can i buy any futures between 3:30pm to 3:40pm? Or it wil be closed at 3:30pm only?
No, you cant transact after the market closes.
Sir, how to study Economic Survey , published by ministry of finance., every year. What points to be studied.
That is an elaborate task, please look for the blueprint, which will contain its summary.
Lets say IOC futures contract(lot size – 6500) is trading at Rs 100 and my entry price was Rs95. So my profit is 5*6500 = Rs 32000 A dividend of Rs7.5(more than 5%) per share is announced. and so next day due to adjustment the price if going to from from Rs 100 to Rs 92.5.
Can you please explain how it will Impact the P&L. Because unlike shares holder a futures holder does not get that dividend amount.
Dear karthik,
I don’t know how to say this. You are just amazing. Your way of writing is superb and very engaging. You make every concept crystel clear and easily understandable. Thank you very much.
Thanks for the kind words, Bhaskar. Hope you enjoy reading VArsity 🙂
When a person sells the contract, it gets transferred to someone else. This continues till the expiry. Who sells the contract for the first time? Are those contracts actually the shorts created by certain individuals? Because I cannot buy unless there is someone to sell. Who are the sellers for the first time?
No, these contracts are made available and you can choose to either be a seller or buyer.
Wonderful explanation even understandable by kids
Thanks, and happy reading!
Sir, thank you for this module.
My query is as follows:
Sir, on expiry date both SPOT PRICE AND FUTURE PRICE is same.
but toady i.e. 25.02.2021 (Thursday) – FEBRUARY MONTH EXPIRY I CHECKED NSE website. I checked SPOT and FUTURE Price of NIFTY and ACC.
Following are the CLOSING PRICES ON THE 25.02.2021 – EXPIRY
NIFTY (SPOT PRICE) – 15,097.35
NIFTY (FUTURE PRICE) -15,099.30
—————————————–
ACC (SPOT PRICE) – 1,808.70
ACC (FUTURE PRICE) – 1,813.70
WHY THERE IS A DIFFERENCE BETWEEN SPOT AND FUTURE PRICES ON THE DATE OF EXPIRY . BOTH THE PRICES MUST BE SAME?
KINDLY EXPLAIN. PLEASE
These are the last traded prices, you need to look at the settlement price, they will be the same.
Sir where to find settlement price on nse website. Which SECTION. Pls.
Do check the Bhav copy, you can Google for the link. Thanks.
Nicly explained👍
Happy learning, Anand.
Is future cash settled or physically settled now ?
Physically for stock, cash-settled for index.
Thanks for great learning from Varsity and feeling gratitude for the team who have prepared such a lucid manner. Thanks a lot again.
Thanks for letting us know, Ambrish. Happy learning 🙂
It would be helpful for us if this chapter would contain videos attached for examples.
Noted, Haresh.
Hi Karthik,
I learnt a lot after going through your Basics, Technicals, Fundamentals modules, before that I was totally a newbie, but now I got a better understanding. I was wondering if I could get in-person training from you in this life. Because Mentor only finds our mistakes and convert them to expertise.
I’m glad you liked it, Haresh. Unfortunately, that won’t be possible. Everything that I know is already in Varsity 🙂
What will happen once the old contract expires, is the transaction finished between ABC and XYZ in Futures? Do each party get their money and do they exit from the market?
Yes, based on the physical delivery obligation the contract is settled between the two parties.
In the last sentence of this section, “…contract would seize to exist.”
Please replace “seize” with “cease”.
Rest of the content is going great! Thanks for the effort!
Thanks, Vasu. Making a note of this.
Ummm… I didn’t quite get it … As abovementioned about future contracts … Then what’s the difference between having a point of view when we go to buy a stock expecting it to rise further … Or going for a futures contract …
When you buy stock, you need to have full cash, to the extent of how much you want to buy. In future, you only pay a part of the money to take a position in a large contract. I’ve explained more about this in the leverage chapter.
Futures make forward trading easy and foolproof
People roaming pole to pillar to learn trading and they dont know how beautifully Zerodha providing this to them. Really this is the first site to visit for my theoretical doubts. And on top of that active response from support team…great site. Kudos to
@TeamZerodha
Thanks for the kind words, Navneet. I hope you find the content useful 🙂
hey,
First of all, thanks for making it easily understandable for us beginners.
My question :
Is there any way we can paper trade this? I would like to practice this before jumping in and making mistakes.
Instead of paper trading, I’d suggest you trade USD INR, works just like Nifty but costs a lot less, and the risk is also lot lesser.
Umm sir what’s the difference between the contracts that expire on the last Thursday of every month and the continuous contracts (e.g. banknifty1! And banknifty2!)
Continous contracts are for charting purposes where you stitch together monthly charts to make the futures stock look continuous.
So we can actually trade only on the contracts that do expire..? While for charting we can go for the continuous contracts right ?
Yeah, you can do that.
Can we have a trading terminal wherin we can practice buying and selling futures without actually investing money.I mean a simulator kind of platform.
Thats not possible, but an even better way to do this by actually placing a trade on a low value contract like USD INR. Gives you a real sense of trading while the risk of losing money is low.
I really appreciate the efforts you guys made to create this super easy to understand course..
I love the content..
Thanks you guys ..😍😍
Happy learning, Shivu!
Hello sir,
It is nice to know that your organization is offering learning about financial skills, the question is will you be providing certificate based on the learning?
We have quiz-based certification in the mobile app, Rakshitha. You can download the same and give it a shot.
I have read all the modules and i am continuously learning /investing / trading can i get a chance to work with u sir . Anything sir
Vivek, right now we dont have any positions open. Please do keep an eye on Zerodha’s career page.
First of all thank u sir for the reply
But sir the career page will require certain qualifications paperwork they cant judge me by my knowledge or experice there
Sir if u will be willing to test me i will be thankful to
You and i will gain some more experience and knowledge anytime u can tell i dont want anything in exchange sir thank u
Vivek, the tests if at all, will be on real-world knowledge. So don’t worry about that.
Future , very well explained for even a novice to understand. Thanks for the effort.
Happy learning!
Great job guys!!!
These series are far better than those NISM pdfs. Keep adding new things. God Bless!!
Happy learning, Dipanjan!
Hi Karthik,
With all due respect, a couple of errata in the article which could be fixed in a future edit:
1. “The Futures contract or Futures Agreement is an improvisation of the Forwards Agreement.”
– I believe you mean to say, “The Futures contract or Futures Agreement is an improvement over the Forwards Agreement.” Improvisation means to come up with something on the spot, as in ad-libbing or extempore.
2. “This means there is always someone overlooking the activities in the market and making sure things run smoothly.”
– Overlooking should be replaced with “looking over”, as the former means “to fail to notice”.
I hope this is helpful. Apologies if these have already been mentioned in a past comment.
Hey Shyam, thanks so much for letting me know. I’m taking up the task of cleaning up the content from Mid Oct. Will fix these soon 🙂
That’s great to hear!
I must give you and your team Kudos for how clearly the articles here explain essential finance concepts. As a final year engineering student inclined toward finance, Varsity has been my Gita for the past 3 years.
I would love to help with the clean-up effort of the articles if your team needs a hand; please let me know if so!
Cheers 🙂
Thanks, Shyam. Will certainly reach out 🙂
It has been explained in an easy to understand style.Thanks.
Happy learning!
Yesterday I bought RELIANCE FEB 2100 PE NFO with 250 quantity with an average price of 2. But today I wanted to sell that 50 quantity. But I am not able to do so because its required a margin of Rs 72195. and i bought that 250 quaintity of Rs 500 margin. so why they are asking for Rs 72195 to sell that 250 quantities. please explain me what is the problem, and why they are asking that huge amounts… please explain me because I dont have that much money.
You cant sell 50 out of the 250. YOu will have to transact in the lot size of 250.
These chapters are too serialized and are not self-contained. Especially where one chapter quotes examples that are mentioned in an entirely different chapter, so it can be confusing to follow a lesson as it is confusing to keep track of what the current chapter is referencing.
Thats because these are all interconnected chapters, just like reading a book. Reading chapters in isolation will not give you the complete context.
What a wonderful guy, explains so well that even a novice like me is able to understand.
Happy learning 🙂
1.What is the meaning of ‘futures contracts are cash-settled’?
2.What happens to the trade/postion we have taken, if we have not exited from the trade on expiry. Is there any penalty/risk involved?
1) It means that upon expiry of the contract, whatever is the difference amount, that will be settled to you in cash.
2) Upon expiry, all positions will cease to exisit and therefore deemed settled.
I’d suggest you read further ahead in this module to understand these concepts better.
Hi, really enjoying these lessons that you’ve put up.
I believe the change to settlement mechanism in recent times has not been updated here…
Thanks Lavish. We have, please do check the last chapter.
can you please share any video around the futures topic anything that helps understand crypto futures ?
Ah, we have nothing specific to crypto 🙂