Module 4 Futures Trading

Chapter 4

Leverage & Payoff


4.1 – A quick recap

With the help of the Tata Consultancy Services (TCS) example in the previous chapter we got a working knowledge on how Futures trading works. The futures trade example required us to go long on TCS futures as the expectation was that the TCS stock price would increase in due course. Further we decided to square off the contract the very next day for a profit. However, if you recall, right at the beginning of the example we posed a very important question, let me rephrase and repost the same for your ready reference.

A rational to go long on TCS was built – the thought was that TCS stock price had over reacted to the management’s statement. I expected the stock price to increase in due course of time. A directional view was established and hence a futures trade was initiated. Now, the question was – anyway the expectation is that the stock price will go higher, why should one bother about buying futures and why not the stock in spot market?

In fact buying futures requires one to enter a digital agreement with the counterparty. Besides, a futures agreement is time bound, meaning the directional view has to pan out within the specified time period. If it does not pan out within the specified time (as in the expiry) then one has to suffer a loss. Contrast this (futures buying) with just buying stock and letting it reside in your DEMAT account. There is no obligation of an agreement or the pressure of time. So why does one really need futures? What makes it so attractive? Why not just buy the stock and stay oblivious to the stock price and the time?

The answers to all these questions lie in the ‘financial leverage’ which is inherent in financial derivatives, including futures. Leverage as they say is a true financial innovation, if used in the right context and spirit leverage can create wealth. Without much ado, let us explore this angle of futures trading.

4.2 – Leverage in perspective

Leverage is something we use at some point or the other in our lives. It is just that we don’t think about it in the way it is supposed to be thought about. We miss seeing through the numbers and therefore never really appreciate the essence of leverage.

Here is a classic example of leverage – many of you may relate to this one.

A friend of mine is a real estate trader, he likes to buy apartments, sites, and buildings holds them for a while and then sells them for a profit at a later stage. He believes this is better than trading in equities, I beg to differ – I could go on and on debating this, but maybe some other time.

Anyway, here is a summary of a recent real estate transaction he carried out. In November 2013, Prestige Builders (popular builders in Bangalore) identified a piece of land in South Bangalore and announced a new project – A luxurious apartment complex with state of the art amenities. My friend jumped in and booked a 2 bedroom, hall, and kitchen apartment, expected to come up on the 9th floor for a sum of Rs.10,000,000/-. The project is expected to be completed by mid 2018. Since the apartment was just notified and no work had started, the potential buyers were only required to pay 10% of the actual buy value. This is pretty much the norm when it comes to buying brand new apartments. The remaining 90% was scheduled to be paid as the construction progressed.

So back in Nov 2013, for an initial cash outlay of Rs.10,00,000/- (10% of 10,000,000/-) my friend was entitled to buy a property worth Rs.10,000,000/-. In fact the property was so hot; all the 120 apartments were sold out like hot cakes just within 2 months of Prestige Builder announcing the brand new project.

Fast forward to Dec 2014, my friend had a potential buyer for his apartment. Being a real estate trader, my friend jumped into the opportunity. A quick survey revealed that the property value in the area had appreciated by at least 25% (well, that’s how crazy real estate is in Bangalore). So my friend’s 9th floor apartment was now valued at Rs.12,500,000/-. My friend and the potential buyer struck a deal and settled on the sale at Rs.12,500,000/-.

Here is a table summarizing the transaction –

Particulars Details
Initial Value of Apartment Rs. 10,000,000/-
Date of Purchase November 2013
Initial Cash outlay @ 10% of apartment value Rs.10,00,000/-
Balance Payment to Builder Rs.90,00,000/-
Appreciation in apartment value 25%
Value of the apartment in Dec 2014 Rs.12,500,000/-
New buyer agrees to pay the balance payment Rs.90,00,000/- to the builder
My friend gets paid 12,500,000 – 9000000 = Rs.35,00,000/-
My friend’s profit on the transaction Rs.35,00,000/- minus Rs.10,00,000/- = Rs.25,00,000/-
Return on investment 25,00,000 / 10,00,000 = 250%

Clearly, few things stand out in this transaction.

  1. My friend was able to participate in a large transaction by paying only 10% of the transaction value
  2. To enter into the transaction, my friend had to pay 10% of the actual value (call it the contract value)
  3. The initial value he pays (10 lakhs) can be considered as a token advance or in terms of ‘Futures Agreement’ it would be the initial margin deposit
  4. A small change in the asset value impacts the return massively
  5. This is quite obvious – a 25% increase in asset value resulted in a 250% return on investment
  6. A transaction of this type is called a “Leveraged Transaction

Do make sure you understand this example thoroughly because this is very similar to a futures trade, as all futures transactions are leveraged. Do keep this example in perspective as we will now move back to the TCS trade.


4.3 – The Leverage

While we looked at the overall structure of the futures trade in the previous chapter, let us now re-work on the TCS example with some specific details. The trade details are as follows, for the sake of simplicity we will assume the opportunity to buy TCS occurs on 15th of Dec at Rs.2362/- per share. Further we will assume the opportunity to square off this position occurs on 23rd Dec 2014 at Rs.2519/-. Also, we will assume there is no difference between the spot and future price.

Particulars Details
Underlying TCS Limited
Directional View Bullish
Action Buy
Capital available for the trade Rs.100,000/-
Trade Type Short term
Remarks The expectation is that the stock price will increase over the next few days
Buy Date 15th Dec 2014
Approximate buy Price Rs.2362/- per share
Sell Date 23rd Dec 2014
Approximate Sell Price Rs.2519/- per share

So with a bullish view on TCS stock price and Rs.100,000/ in hand we have to decide between the two options at our disposal – Option 1 – Buy TCS stock in the spot market or Option 2 – Buy TCS futures from the Derivatives market. Let us evaluate each option to understand the respective dynamics.

Option 1 – Buy TCS Stock in spot market

Buying TCS in spot market requires us to check for the price at which the stock is trading, calculate the number of stocks we can afford to buy (with the capital at our disposal). After buying the stock in the spot market we have to wait for at least two working days (T+2) for the stock to get credited to our DEMAT account. Once the stocks resides in the DEMAT account we just have to wait for the right opportunity to sell the stocks.

Few salient features of buying the stock in the spot market (delivery based buying) –

  1. Once we buy the stock (for delivery to DEMAT) we have to wait for at least 2 working days before we can decide to sell it. This means even if the very next day if a good opportunity to sell comes up, we cannot really sell the stock
  2. We can buy the stock to the extent of the capital at our disposal. Meaning if our disposable cash is Rs.100,000/- we can only buy to the extent of Rs.100,000/- not beyond this
  3. There is no pressure of time – as long as one has the time and patience one can wait for really long time before deciding to sell

Specifically with Rs.100,000/- at our disposal, on 15th Dec 2014 we can buy –

= 100,000 / 2362


Now, on 23rd Dec 2014, when TCS is trading at Rs.2519/- we can square off the position for a profit –

= 42 * 2519

= Rs.105,798/-

So Rs.100,000/- invested in TCS on 14th Dec 2014 has now turned into Rs.105,798/- on 23rd Dec 2014, generating Rs.5,798/- in profits. Interesting, let us check the return generated by this trade –

= [5798/100,000] * 100

= 5.79 %

A 5.79% return over 9 days is quite impressive. In fact a 9 day return of 5.79% when annualized yields about 235%. This is phenomenal!

But how does this contrast with option 2?

Option 2 – Buy TCS Stock in the futures market

Recall in futures market variables are pre determined. For instance the minimum number of shares (lot size) that needs to be bought in TCS is 125 or in multiples of 125. The lot size multiplied by the futures price gives us the ‘contract value’. We know the futures price is Rs.2362/- per share, hence the contract value is –

= 125 * 2362

= Rs.295,250/-

Now, does that mean to participate in the futures market I need Rs.295,250/- in total cash? Not really, Rs.295,250/- is the contract value, however to participate in the futures market one just needs to deposit a margin amount which is a certain % of the contract value. In case of TCS futures, we need about 14% margin. At 14% margin, (14% of Rs.295,250/-)  Rs.41,335/- is all we need to enter into a futures agreement. At this stage, you may get the following questions in your mind –

  1. What about the balance money? i.e Rs.253,915/- ( Rs.295,250/ minus Rs.41,335/-)
    • Well, that money is never really paid out
  2. What do I mean by ‘never really paid out’?
    • We will understand this in greater clarity when we take up the chapter on “Settlement – mark 2 markets”
  3. Is 14% fixed for all stocks?
    • No, it varies from stock to stock

So, keeping these few points in perspective let us explore the futures trade further. The cash available in hand is Rs.100,000/-. However the cash requirement in terms of margin amount is just Rs. Rs.41,335/-.

This means instead of 1 lot, maybe we can buy 2 lots of TCS futures. With 2 lots of TCS futures the number of shares would be 250 (125 * 2) – at the cost of Rs.82,670/- as margin requirement. After committing Rs.82,670/- as margin amount for 2 lots, we would still be left with Rs.17,330/- in cash. But we cannot really do anything with this money hence it is best left untouched.

Now here is how the TCS futures equation stacks up –

Lot Size – 125

No of lots – 2

Futures Buy price – Rs. 2362/-

Futures Contract Value at the time of buying = Lot size *number of lots* Futures Buy Price

= 125 * 2 * Rs. 2362/-

= Rs. 590,500/-

Margin Amount – Rs.82,670/-

Futures Sell price = Rs.2519/-

Futures Contract Value at the time of selling = 125 * 2 * 2519

= Rs.629,750/-

This translates to a profit of Rs. 39,250/- !

Can you see the difference? A move from 2361 to 2519 generated a profit of Rs.5,798/- in spot market, but the same move generated a profit of Rs. 39,250/- . Let us see how juicy this looks in terms of % return.

Remember our investment for the Futures trade is Rs.82,670/-, hence the return has to be calculated keeping this as the base –

[39,250 / 82,670]*100

Well, this translates to a whopping 47% over 9 days! Contrast that with 5.79% in the spot market. For sake of annualizing, this translates to an annual return of 1925 % …and with this; hopefully I should have convinced you why short term traders prefer transactions in Futures market as opposed to spot market transactions.

Futures offer something more than a plain vanilla spot market transaction. Thanks the existence of ‘Margins’ you require a much lesser amount to enter into a relatively large transaction. If you’re directional view is right, your profits can be really large.

By virtue of margins, we can take positions much bigger than the capital available; this is called “Leverage”. Leverage is a double edged sword. If used in the right spirit and knowledge, leverage can create wealth, if not it can destroy wealth.

Before we proceed further, let us just summarize the contrast between the spot and futures market in the following table –

Particular Spot Market Futures Markets
Capital Available Rs.100,000/- Rs.100,000/-
Buy Date 15th Dec 2014 15th Dec 2014
Buy Price Rs.2362 per share Rs.2362 per share
Qty 100,000 / 2362 = 42 shares Depends on Lot size
Lot Size Not Applicable 125
Margin Not Applicable 14%
Contract value per lot Not Applicable 125 * 2362 = 295,250/-
Margin Deposit per lot Not Applicable 14% * 295,250 = 41,335/-
How many lots can be bought Not Applicable 100,000/41,335= 2.4 or 2 Lots
Margin Deposit Not Applicable 41,335 * 2 = 82,670/-
No of shares bought 42 (as calculated above) 125 * 2 = 250
Buy Value (Contract Value) 42 * 2362 = 100,000/- 2 * 125 * 2362 = 590,500/-
Sell Date 23rd Dec 2014 23rd Dec 2014
No of days trade was live 9 days 9 days
Sell Price Rs.2519/- per share Rs.2519/- per share
Sell Value 42 * 2519 = 105,798 250 * 2519 = 629,750/-
Profit earned 105798 – 100000 = Rs.5798/- 629750 – 590500 = Rs.39,250/-
Absolute Return for 9 days 5798 / 100,000 = 5.79 % 39250 / 82670 = 47%
% Return annualized 235% 1925%

All through we have discussed about rewards of transacting in futures, but what about the risk involved? What if the directional view does not pan out as expected? To understand both the sides of futures trade, we need to understand how much money we stand to make (or lose) based on the movement in the underlying. This is called the “Futures Payoff”.

4.4 – Leverage Calculation

Usually when we talk about leverage, the common questions one gets asked is – “How many times leverage are you exposed to?” The higher the leverage, higher is the risk, and the higher is the profit potential.

Calculating leverage is quite easy –

Leverage = [Contract Value/Margin]. Hence for TCS trade the leverage is

= [295,250/41,335]

= 7.14, which is read as 7.14 times or simply as a ratio – 1: 7.14.

This means every Rs.1/- in the trading account can buy upto Rs.7.14/- worth of TCS. This is a very manageable ratio. However if the leverage increases then the risk also increases. Allow me to explain.

At 7.14 times leverage, TCS has to fall by 14% for one to lose all the margin amount, this can be calculated as –

1 / Leverage

= 1/ 7.14

= 14%

Now for a moment assume the margin requirement was just Rs.7000/- instead of Rs.41,335/-. In this case, the leverage would be –

= 295,250 / 7000

= 42.17 times

This is clearly is a very high leverage ratio, one would lose all his capital if TCS falls by –


= 2.3%.

So, the higher the leverage, the higher is the risk. When leverage is high, only a small move in the underlying is required to wipe out the margin deposit.

Alternatively, at roughly 42 times leverage you just need a 2.3% move in the underlying to double your money.☺

I personally don’t like to over leverage, I stick to trades where the leverage is about 1 :10 or about 1:12, not beyond this.

4.5 – The Futures payoff

Imagine this – when I bought TCS futures the expectation was that TCS stock price would go higher and therefore I would financially benefit from the futures transaction. But what if instead of going up, TCS stock price went down? I would obviously make a loss. Think about it after initiating a futures trade, at every price point I would either stand to make a profit or loss. The payoff structure of a futures transaction simply highlights the extent to which I either make a profit or loss at various possible price points.

To understand the payoff structure better, let us build one for the TCS trade. Remember it is a long trade initiated at Rs.2362/- on 16th of Dec. After initiating the trade, by 23rd Dec the price of TCS can go anywhere. Like I mentioned, at every price point I will either make a profit or a loss. Hence while building the pay off structure; I will assume various possible price point situations that can pan out by 23rd Dec, and I will analyze the P&L situation at each of these possibilities. In fact the table below does the same –

Possible Price on 23rd Dec Buyer P&L (Price on 23rd Dec – Buy Price)
2160 (202)
2180 (182)
2200 (162)
2220 (142)
2240 (122)
2260 (102)
2280 (82)
2300 (62)
2320 (42)
2340 (22)
2360 (2)
2380 18
2400 38
2420 58
2440 78
2460 98
2480 118
2500 138
2520 158
2540 178
2560 198
2580 218
2600 238

This is the way you need to read this table, – considering you are a buyer at Rs.2362/- , what would be the P&L by 23rd Dec assuming TCS is trading is Rs.2160/-. As the table suggest, you would make a loss of Rs.202/-per share (2362 – 2160).

Likewise, what would be your P&L if TCS is trading at 2600? Well, as the table suggest you would make a profit of Rs.238/- per share (2600 – 2362). So on and so forth.

In fact if you recollect from the previous chapter we stated that if the buyer is making Rs.X/- as profit then the seller is suffering a loss to the extent of Rs.X/-. So assuming  23rd Dec TCS is Trading at 2600, the buyer makes a profit of Rs.238/- per share and the seller would be making a loss of Rs.238/- per share, provided that the seller has shorted the share at Rs.2362/-.

Another way to look at this is that the money is being transferred from the seller’s pocket to the buyer’s pocket. It is just a transfer of money and not creation of money!

There is a difference between the transfer of money and creation of money. Money is generated when value is created. For example you have bought TCS shares form a long term perspective, TCS as a business does well, profits and margins improve then obviously you as a shareholder will benefit by virtue of appreciation in share price. This is money creation or wealth generation. If you contrast this with Futures, money is not being created but rather moving from one pocket to another.

Precisely for this reasons Futures (rather financial derivatives in general) is called a “Zero Sum Game”.

Further, let us now plot a graph of the possible price on 23rd December versus the buyers P&L. This is also called the “Payoff Structure”.


As you can see, any price above the buy price (2362) results in a profit and any price below the buy price results in a loss. Since the trade involved purchasing 2 lots of futures (250 shares) a 1 point positive movement (from 2362 to 2363) results in a gain of Rs.250. Likewise a 1 point negative movement (from 2362 to 2361) results in a loss of Rs.250. Clearly there is a sense of proportionality here. The proportionality comes from the fact that the money made by the buyer is the loss suffered by the seller (provided they have bought/short the same price), and vice versa.

Most importantly, because the P&L is a smooth straight line, it is said that the futures is a “Linear Payoff Instrument”.

Key takeaways from this chapter

  1. Leverage plays a key role in futures trading
  2. Margins allow us to deposit a small amount money and take exposure to a large value transaction
  3. Margins charged is usually a % of the contract value
  4. Spot market transactions are not leveraged, we can transact to the extent of the capital that we have
  5. By virtue of leverage a small change in the underlying results in a massive impact on the P&L
  6. The profits made by the buyer is equivalent to the loss made by the seller and vice versa
  7. The higher the leverage, the higher is the risk and therefore the higher the chance of making money.
  8. Futures Instrument simply allows one to transfer money from one pocket to another, hence it is called a “Zero Sum Game”
  9. The payoff structure of a futures instrument is linear.


  1. sushil 12 says:

    Simple and easy. Too Good Sir:)

    • Karthik Rangappa says:

      Thx 🙂

      • pops says:

        You are simply owsum, in a short exp, you just understand us everything which was a question for lifetime , great ,

      • Shrirang Sarnaik says:

        Sir I am very beginner to future stock market…Till not taken single trade in equity future. I have one query….are future contracts also getting highlighted in Demat or it takes a couple of days…Pls clarify

        • Karthik Rangappa says:

          No, these contracts don’t come to DEMAT like stocks.

          • Shantanu says:

            Hi, If Future contracts dont come to demat how can see what profit or loss we have made from it ? Another query I have is , in Key points you have stated “Spot market transactions are not leveraged, we can transact to the extent of the capital that we have” but we get leverage depending on the volatility of the stock. Can you please explain this stmt.


          • Karthik Rangappa says:

            The P&L can be tracked from the position’s tab on Kite. Shantanu, can you please give me more clarity on the line “but we get leverage depending on the volatility of the stock”. Thanks.

    • Nagesh Cavatur says:

      The leverage is the reciprocal of margin percentage x 100. In the TCS example it becomes (1/14)x100 = 7.14.

  2. Santosh says:

    Really nice detailed explanation, though some of us trade futures but do not know the underlying concepts.
    Explanation on Leverage and Risk is beautiful.

    • Karthik Rangappa says:

      Thanks Santosh, glad you liked it. It is in fact quite important to know the nature of beast as it helps us tame it better 🙂

      • Rahul says:

        Absolutely correctly said phrase. Hearty gratitude for the detailed explanation on Futures.

        • Karthik Rangappa says:

          Most welcome 🙂

          • JEGANNATHAN AROCKIAM says:

            Dear Karthik,

            With respect to 4.4, advantage of leveraging you mentioned that more leveraging means ( i.e less margin amount) more risk of loosing capital when the stock price come down marginally. My question is if we loose capital, the amount also will be lesser, instead of 41335 we loose 7000 only. Moreover, why we loose that amount why not wait for increase in stock price? ( I mean within contract period)

            Please elaborate.


          • Karthik Rangappa says:

            The futures work on an M2M basis, so the funds have to be settled on a daily basis. This means the capital has to go out from your account on an at the end of the day (in case of a loss). Yes, you can hold the futures position for recovery but then you need enough money to fund M2M losses (if any).

  3. S.R.Badrish says:

    Hi, It gives a complete explanation about all the points pertaining to futures Trading. Should clear most of the doubts of a layman also.
    Just wanted to mention one point–As far as my knowledge goes, as per the example when TCS is bougt as stock, we can sell the stock even before it comes to our DEMAT Account.
    Anyhow Hats off to the entire team for their effort in putting up a module like this.

  4. amit kumar says:

    Very good explanation kartik, I want to know how much will be profit and loss keeping brokerage and spot and future price different, kindly explain, once again hats off to u nd ur team for doing wonderful job, keep it up.

  5. sushil 12 says:

    sir next chapter plz…? 🙂

  6. Mahesh Patil says:

    Dear sir,
    Please include topic on “GAP” in technical analysis.

  7. Vidhyalakshmi says:

    Hi Karthik. Thanks for taking the effort to clear our doubts. I have one regarding the costs of transaction (tax and charges). When I look at the brokerage calculator, I see a clear advantage in choosing intraday or FnO as a product type as opposed to delivery-based trades. My question is…”Apart varying margin requirements, is there a difference in transaction costs between choosing to trade futures in NRML or MIS?

    • Karthik Rangappa says:

      In fact chapter 7 (which is work in progress) talks about this in detail. However just to answer your question, the biggest difference is in terms of the margins that you need to deposit. Other charges (except brokerage) are calculated as a % of turnover hence it would not change much. Brokerage as you may know is flat at Zerodha (Rs.20/- per trade) and it does not really depend on anything.

  8. Vidhyalakshmi says:

    I have one more doubt. After I buy a lot of say TCS futures and it trades lower and lower for 3 subsequent days and on the 4th day goes back to the price point at which I bought it. Will the (negative) difference in price during those 3 days be deducted from my margin on a daily basis?

  9. Vidhyalakshmi says:

    The next chapter cleared all the fog around the subject. Thank you very much for explaining everything in such a light and lucid way!

  10. Sudarshan says:

    Once we buy the stock (for delivery to DEMAT) we have to wait for at least 2 working days before we can decide to sell it. This means even if the very next day if a good opportunity to sell comes up, we cannot really sell the stock.

    What you have mentioned above is wrong…

    • Karthik Rangappa says:

      Thanks for pointing this, in fact this was the first draft and I was to correct it in the 2nd draft, dont know how it skipped my attention. You are right, one can even do a BTST with the risk of short delivery.

  11. Muthu Selvan says:

    Could u pl. explain BTST?

  12. Shashi Shah says:

    I had invested in the Trading symbol MARUTI15JULFUT which had 15 July expiry then – however, the 15 July expiry futures seem to have vanished now! In place of the mid-month expiry futures, there are now month-end expiry futures. Has the expiry now changed to 30 July – how can I know this? I’m trading via Zerodha – how can I know my current profit / loss?

    • Karthik Rangappa says:

      The expiry of Futures and Options contract has always been on the last Thursday of every month and never mid month. I have a feeling you may inadvertently misread the expiry dates.

  13. Ragunathan says:

    Sir, I have a basic doubt… If the money made out of derivatives is coming from someone’s pocket then is it morally a good trade? Is it not like a daytime burglary or pick pocket? Hope you will clarify my long time moral doubt.

    • Karthik Rangappa says:

      Sir, I’m too inexperienced to talk about morality 🙂

      However here is my 2 cents on this topic – market is the only institution of sorts where merit is respected. Over the long run the knowledgeable trader always wins over the ignorant. An ignorant trader is always rash with his money, market facilitates this transfer of money from the ignorant trader to the knowledgeable trader in the most legitimate way. Think about it – what makes a person ignorant? It is his lack of willingness to learn – in other words his laziness right :).

      So for all the hard work you put towards learning…you should be rewarded right? 🙂 The ignorant trader will do just that – reward you for the knowledge you possess!

      • Ragunathan says:

        sir, great…. i thought you would neglect my question…but you established you are a good teacher. Its correct, knowledge should be rewarded but the ignorant not rewarding a well versed trader voluntarily like in a teacher student relation..isn’t it? definitely the looser whether he is ignorant or not will give the money to the gainer with tears… BUT IGNORANT CAME WITH GREED. HE PAY FOR HIS GREED. i know this is not an appropriate forum to discuss these type of morality questions because it’s BUSINESS. if we calculate in this regard no one did trade and got profit from the beginning of the HISTORY. its my longtime worry that what im doing… sucking others money? but your answer somewhat compromised. yes no trader is perfect…every one gives and gets money from the market and vice versa. but the question here is how much is the percentage….?

        • Karthik Rangappa says:

          Yes Raghunath, please don’t think too much about these issues. As long as you are designing and executing your trades well you are doing the right job, please don’t get worked on other matters.

          Good luck.

  14. Ragunathan says:

    Thank you sir…. -:)

  15. sudhi says:

    clear and very informative

  16. Deepali says:

    It is clear that the margin percentage varies from stock to stock.
    I have below queries:
    1. the margin percentage is prescribed by the exchange, is it right?
    2. where I can see this margin percentage ? is it available with BSE or NSE site?
    3. How I can know the margin amount required before buying contract in zerodha terminal?


  17. jitendra says:

    Simply superb modules

  18. Manoj Naik says:

    Hi Sir, What does derivative pricing means?.What exactly goes in to derivative pricing.

    • Karthik Rangappa says:

      Manoj – Derivatives are financial products that are sort of ‘made up’ to mimic the underlying price. Because these are completely different instruments, they need to be priced. Pricing of these instruments is what is generally called as “Derivative Pricing”.

  19. Manoj Naik says:

    Sir, Since forwards are OTC trades do we need to square off.?

    • Karthik Rangappa says:

      Yeah, only after you square off the trade is said to be complete.

      • Manoj Naik says:

        Hi Sir, In the example of gold we agree to buy gold at future price agreed upon. There will be another party who will sell the gold. On the date of settlement we will take the delivery of gold and the other party will get the money. So this trade is complete. My question is whether this trade can be called squared off or do i need to enter into counter position that is sell to square off.

  20. Manoj Naik says:

    Sir, Could you suggest me any site where i can get very good info on pricing of derivatives.

  21. Ankit says:

    Sir i want to ask very simple question

    I want to buy about 15 shares of MRF. For this I have to spend money 39200*15= 59000 (approx). I have much more money than this in my account.
    I want to buy stock of this company only. Then what should I do, should I buy stock from spot market or from future market.
    Besides leverage what other benefits are in future marketing trading

    • Karthik Rangappa says:

      If you want the shares in your DEMAT account, then you will have to pay Rs.588,000/- and take delivery. If you trade Futures then you will have to accommodate for daily M2M etc.

  22. PRASHANTH AV says:

    you have written that once we buy the stock for delivery, even though a good oppurtunity comes next day for selling we cant sell it.right. THEN HOW ARE BTST TRADES EXECUTED

  23. Varun says:

    Margins are available from brokers for intraday trading. This also can be considered as leveraging right ? How different is this from the leveraging in the futures market ?

  24. dipen says:

    hello sir,
    very nice and indepth chapter for futures trading.
    as you mentioned “zero sum game”, does it mean trading i futures no one makes money?
    will u please elaborte…
    thank u

    • Karthik Rangappa says:

      ‘Zero sum game’ is a line used to describe the fact that money is transferred from one account to another. So, smart and sensible traders end up making tons of money.

  25. dipen says:

    very nice…. thank you sir.

  26. nitin k says:

    Span margin calculator and equity margin calculators are showing different margin for same stock future. Why?

  27. Sauvik Das says:

    Hello Karthik,
    It is probable the best explanation and must read for any new comer , It really shows how clear you are in concept…
    Thanks a lot

  28. ABHISHEK says:

    I have a query. Say I have Rs 1lac in my account and the contract value is Rs 295250 as per the above mentioned scenario. Although the margin is 14% of the contract value which I’m able to pay with Rs 1 lac, but what about the remaining Rs (295259-41335(14%)). When do we have to pay the remaining about, do we have to pay it on the expiry date. If yes, what if I default and I don’t have the remaining debt to be paid in my trading account?


    • ABHISHEK says:

      the above scenario is for the case if I want to hold on to the agreement till the expiry. Also, what will happen if no one decides to buy the future lot during the tenure and it just gets expired.

      • Karthik Rangappa says:

        All derivative contracts are settled in cash by the exchange upon its expiry, so you will not be in a situation where you hold a contract with no buyers/sellers.

    • Karthik Rangappa says:

      Abhishek – you need not have to pay up the remaining funds. Futures trading works just on margins and M2M.

  29. vishal says:

    hi karthik,
    can anyone , sell the future contracts the same day , if price rises?

  30. VISHAL says:

    Hi Karthik,
    I was just checking the futures price of Tata power(Expiry 28 July, 2016), on Moneycontrol app, it was quoted at73.5, down by 0.6 points, 0.81%, & the closing price of tata power stock was 74.3, down by 0.6 points, 0.8% .
    So is it possible to buy Tata power futures, @73.5, as the price of Tata power stock is 74.3 .

    • Karthik Rangappa says:

      Yes, as long as you strongly believe the discount will be bridged and the futures price will move up!

  31. vishal says:

    In chapter 3, from the example of TCS, what I was able to understand is-
    – the price of TCS futures expiry 24DEC2014 is 2374.9, down by 93.05 points, 3.77% .
    – underlying value i.e the current price of TCS stock is 2359.95 .
    – so if one buys TCS futures expiry 24DEC2014 @ 2374.9, this means if price goes beyond 2374.9, on or before 24 DEC 2014, one will gain.

    I was not able to match what i understood in TCS example, with my observation in tata power futures price as stated above.

    • Karthik Rangappa says:

      Yes, for you to be profitable, TCS futures (or any futures in general) has to move up beyond your entry price.

  32. Madhusudan says:

    Hi again,
    As i see in above chapter,U have used 2362 as a buy price for stock buy and future buy price and 2519 as stock sell and future sell??If this is the case then is there no meaning to the running future index and its separate prices??I hope you understand .please revert asap??

  33. vishnu says:

    If we need minimum T+2 days to sell a share in a spot market which we own already, then how one do intraday trading?

    • Karthik Rangappa says:

      Its not T+2 Vishnu. When you sell from your demat, for all practical purpose the stocks are flushed out from you account the day day. However, while doing an intraday trade, you do not take stock to delivery so there is no question of settlement from the exchange at all.

  34. Dinesh says:

    Do we have bracket order possible on futures?

  35. John says:

    Does it really makes a difference if i invest through Bse or Nse.

  36. John says:

    Thankyou So much.

  37. sagar kumar nayak says:

    The article is great. it only takes me through the profit part of leverage. but how the loss is calculated? lets take that we have a future cont. of 250 and lot size is 1000. so i take 2 lots that is 500,000. the leverage is 1:12. the req amount is 38,461. and i have a 40,000 in my account. i take a trade and 38,461 is deducted from my account which leaves me at 1539. now i want to know when there will be a margin call ? lets say the 250 value changes to 248. this makes a loss of 4000 and makes my future contract value to 496,000. so will there be a margin call ? or what is the condition at which my trades will be automatically sold and margin call will be done?

    Please do suggest a solution.

  38. Khan says:

    Great work Karthik!
    I tried to buy futures of a stock I wanted to trade in but couldn’t find any. Later I realized, no all stocks listed have futures. Why so?

  39. p.shunmugaperumal says:

    This module help me learn more things about future trade i have few doubts regarding margin and leverage if increase leverage the margin will decrease vice versa obviously because margin is inversely proportional to leverage if i have a good balances and i choose a minimum lot size can I increase my leverage size

  40. salim says:

    Please correct this line , it will be (spot – strike) as it is long on trade not short. And you have mention (strike – spot)
    (As the table suggest, you would make a loss of Rs.202/-per share (2362 – 2160).)

  41. Vishal Oturkar says:

    Hi Karthik,
    there are lots of companies which r nt listed in derivatives , i mean i cn nt find there Future contract on NSE nor with Zerodha.
    some of them are.
    Tata Metaliks , Delta Corp LTD , MMTC Ltd , Coromandel International , Gujarat Pipavav Port Ltd. etc.
    can you please confirm why this is so.

    Thanks for your GR888 Study material.

    • Karthik Rangappa says:

      There are only about 270 companies listed under the F&O segment 🙂

      There are a set of trading criteria required for a company to qualify for listing in this segment…and as you can see, at this point only 270 odd companies qualify.

  42. Mohan Kabra says:

    I understand Warren Buffet has said that Financial derivatives are financial disasters for individuals and that they are fit only for corporates and institutions. What do you say about it?

    • Karthik Rangappa says:

      The only difference between corporates and individuals is the depth of pockets. End of the day, corporates are also run by humans and they too can burn up derivative positions.

      The key, according to me is learning how these instruments work and setting realistic expectations around what can be achieved with these instruments.

  43. Mohan Kabra says:

    Can we assume that about 270 companies which are registered for F&O are more or less better than the remaining companies?

    • Karthik Rangappa says:

      No….its just that these 270 companies have a wider market participation and therefore the volumes and trading activity are higher. Hence, they qualify for F&O. It have nothing to do with the actual performance of the company.

  44. mohit_1607 says:

    Excellent karthik..wonderful explanation..thnx a lot

  45. dhawal says:

    keep it up zerodha ..varsity

  46. Nihal says:

    Hi karthik,
    i have one doubt , if i have limited balance in my trading account and not able to get any futures , with the same amount can i deal in cash market ? am i able to get leverage ? how much % ? (specially in case Cash Market – Intraday -MIS )
    or i need to purchase shares worth of my balance only ? if i get leverage is it necessary to put SL in cash market ?
    i hope i hv nt made u confused. :-!

  47. Nihal says:

    In continuation with above question , with Zerodha in Cash segment(MIS) why there is not provided same leverage for all shares ?

  48. jswalia888 says:

    sir help me let assume 2% margin contract value rs 100 = 2rs margin is that
    leverages =contract value / margin so =100/2= 50 so 1:50 u said 1:10 value best so in this case 1:50 mean high leverages

  49. Kirit Dave says:

    Dear Sir,
    I am new to Zerodha & trading as well as. I am learning. I found your way of explanation very good and quite understandable.
    Thanks & regards,

  50. sko5prasad says:

    Hi Karthik,
    How one can earn profit also by shorting the TCS share as mentioned in the above lesson ?


  51. Suryaveer says:

    First, thanks for such wonderful tutorials.
    Second, I had a question, please don’t mind the silliness of the question. I am a complete greenhorn. THe question being, are there any mini or micro lots in futures contract as well? Can we do micro or a mini futures contract for the TCS? or its just the standard lot size?

  52. Ayush says:

    Will there be any initial margin deduction while shorting the futures?

  53. Ayush says:

    1. What is the maximum leverage one can get using CO or BO in equities?
    2. What is the maximum leverage one can get in futures using MIS,BO or CO?

  54. Ayush says:

    3. In case of equity if my leverage in more than 23 times in CO/BO, can’t i enter the trade?

    • Karthik Rangappa says:

      3) Leverage depends on the stock, if leverage is provided, you can take the a leveraged position.

  55. Ankit says:

    Hi karthik ,
    I want to know about GTM orders. Can be placed in indian market or not?

  56. Rahul Sharma says:

    HI karthik Sir
    I am big fan of zerodha. No doubt zerodha is one of the best and fastest growing brokerage house.
    Your service are really very good.
    But as far as leverage is concerned, zerodha is far behind.
    Many discount brokers provide 4x leverage or more (intraday) but zerodha provide 2.5X
    One broker provide facility of interday position only on span margin
    Why these zerodha does not provide? Zerodha is much bigger and more reputated, have more clients.
    However BO CO require less margin but can not be placed for banknifty on Thursday
    Please reply

    • Karthik Rangappa says:

      Thanks Rahul. Providing excess leverage is not really a big thing for a broker, but the real question to ask is –

      1) Is it good for the client?
      2) Is it good for the business?

      The answer is no for both.

      • prats says:

        Leverage should be in proportional to the Trader’s net worth and not a blanket one. A blanket leverage of 2.5x doesn’t mean it is beneficial. For a trader with high net worth but less capital, good amount of leverage is better. Anyways , we can see now more or less leverages for MIS have been 3x or above for most of the stocks

  57. Rahul says:

    1. Will i have to pay back leverage after trade?
    2. Suppose, i have 1000 rs and i got a leverage of 500rs and my bet size increases to 1500rs, what if i got a profit of 3000rs, will the leverage be deducted from my trading a/c?

    • Karthik Rangappa says:

      1) No leverage is just provided to you…no paying back as such.
      2) No, it does not work that way. You will be allowed to initiate a position worth 1500 with just 1000.

  58. Jay says:

    Hello Karthik,
    Im a beginner in Trading, I have some silly doubts. Hope you can help me to understand the things. So far i never executed leverage trades, please let me know whether my below understanding is correct in point 1.
    Point. 1) In case i have Rs.10,000 in my trading account. i would i like to by X stock worth Rs.500 each. it has leverage of 9X in MIS as per zerodha margin calculator. Using that leverage I can buy 181 stocks, instead 20. And it is under the condition either profit or loss I need to square off before 3:20 PM. As per Zerodha brokerage calculator my profit is Rs.130.45, in case i sell for Rs.1 profit. No other charges for the entire transcation I made.

    Point. 2) What is the benefit for brokerage firms when they give leverages to their customer and what are all the criterias taken into account to fix the leverage for each stock? This question is based on curiosity.

    • Karthik Rangappa says:

      1) Yes, that is how leverage works. Charges applicable are shown on the brokerage calculator. Besides this, stamp duty charges are levied. However, this is not a big component.
      2) Traders prefer to trade with leverage as they believe it is an efficient use of capital. Brokers are expected to provide this, a least on an intraday basis. Consider this as a value added service 🙂

      • Jay says:


        May 29, 2017 at 4:14 pm
        Hello Karthik,
        In addition to above query in point.1 , to use leverages in MIS, do i need to choose any specific option in trade window. for example, I have Rs.20,000/- in my trade account and in case i want to execute 2 leverage trading for 2 different stocks with the capital of Rs.10,000/- to each. Once my order for 1st stock executed using leverage (if no specific option is avaialble to choose whether its leverage or normal MIs trade). how come there will be some balance in my account to buy another stock. As per my understanding, if total buy value is Rs.100,000/- all the amount in my account (i.e., Rs.20,000) will be taken away for 1st purchase and Rs.80,000 will be leverage instead Rs.10,000 needs to be taken and Rs.90,000 as leverage. So, that i cuyan use the remaining Rs.10,000 to buy another stock. please extend your guidance.

        • Karthik Rangappa says:

          When you choose MIS, it implies that you are seeking intrday leverage. I’d suggest you use the calculator here. For example with 10K, I can buy only 100 shares in CNC whereas 300 odd shares under MIS. Check this –

          • Jay says:

            Is that mean,in case my cash balance is 20k and I can buy 2 different shares in MIS with base amount 10K each using margin in a same time?
            And in Leverage I can buy only in market price or I can also place order using SL?

          • Karthik Rangappa says:

            Yes, you can distribute the money across 2 stocks if you want. You can place a limit order under MIS.

          • Jay says:

            Let us assume I have Rs.50 lakh in trading account, i could see Amaraja Batteries with 14X leverage. In case I wish to use it, the total value cross Rs.5 crore. Is that possible to buy for this much big price… Because I remember, somewhere i read the total value cross Rs. 5 crore or total volume minimum 5 lakh is block deal( it will happen through separate window between institutional investors) and trading of 0.5% of the number of equity shares of a listed company is bulk deal and It must be reported to exchange by brokers on daily basis… please clarify.

          • Karthik Rangappa says:

            Leverage is provided in the futures and options segment….so you can probably buy 5Cr of stocks via futures with 50L capital. The bulk and block deal you are talking about is mainly for Equity delivery trade.

  59. Jay says:

    Hello Karthik,

    In addition to above query in point.1 , to use leverages in MIS, do i need to choose any specific option in trade window. for example, I have Rs.20,000/- in my trade account and in case i want to execute 2 leverage trading for 2 different stocks with the capital of Rs.10,000/- to each. Once my order for 1st stock executed using leverage (if no specific option is avaialble to choose whether its leverage or normal MIs trade). how come there will be some balance in my account to buy another stock. As per my understanding, if total buy value is Rs.100,000/- all the amount in my account (i.e., Rs.20,000) will be taken away for 1st purchase and Rs.80,000 will be leverage instead Rs.10,000 needs to be taken and Rs.90,000 as leverage. So, that i cuyan use the remaining Rs.10,000 to buy another stock. please extend your guidance.

  60. Hello KARTHIK,
    For EX, if i hold 3 months contract, is it possible to not involve in trade on intermediate days within these 3 months contract time?

  61. Ajay says:

    Let’s say I have Rs. 1 lakh in my account.

    I purchase 2 lots of XYZ company futures at Y% leverage. This is such that the price exceed the total deposit in my account, which is 1 lakh. Suppose there’s a loss, will I lose the entire amount in my trading account? And after that if there’s something remaining to cover the amount, can the debtor be sued?

  62. naarayanan says:

    futures mis is more effective than equity mis , is it? it seems so from margin calculator.

  63. anu says:

    Hi Karthik, I would like to thank you for guiding us so patiently and perfectly through Varsity. I have a few queries though regarding leveraged trades in the equity cash market:

    1) Since max leverage for BO/Co is 20 times, suppose i use cover order/bracket order and initiate a position by taking 10 times leverage of my account value, then can i take another leveraged trade of 10 times before closing the old trade?

    2) if a security is not allowed for shorting but i click on sell and try to open a short position then what will happen?

    3) If by using a BO/CO with maximum leverage I make some profit and close a trade, then can i use the profits for another leveraged trade on the same day?
    For eg. I made Rs. 1000 as profit with a capital of Rs. 20k in intraday using leverage at 12pm. Then can i open another leveraged trade at 12.05 pm by taking Rs.21K as margin (which will be Rs. 420000 after applying 20 times leverage)?

  64. Maha says:

    Hello Karthik,

    The way you have explained and the summarisation along with case study and the reply to each query of the market participants are mind blowing. I was having big fear on stock market. But, now i am gearing good confidence. Thanks a lot for the knowledge sharing

  65. Dinesh Kukreja says:

    Excellent Write ups. I am Glad that you have kept it free to read. Many Thanks for Knowledge Sharing !!!

  66. shyam says:

    Kartik, you have explained leverage beautifully by clearing all concepts. Thanks to you and your team.

  67. Suren says:

    Hi kartik. If I buy Dec 2017 nifty futures today in September 2017 is it necessary to square off on 24 Oct or I can keep it till Dec 17. Thanks

  68. Sachin says:

    Great learning…thanks for this. Well Futures and Options are aliens to me but I will learn it….so far gained good knowledge.

    I have one doubt suppose I buy 1 lot of DHFL 26-Oct-2017 expiry futures today that is 05-Oct-2017 @ 557.35 what happens if I do not square off position and let it expire on 26-Oct-2017 and assume price of DHFL futures is 600 on 26-Oct-2017. Will I get profit of 63,975? (1500*600 – 1500*557.35)

  69. Tushar says:

    Hi there
    Can you please explain the concept of MIS Multiplier. I checked the equity calculator, it says for MIS for ACC stock for instance i can purchase 14x shares. But say i am doing intraday trade on ACC and for instance the current share price is rs 100 and it says I can purchase 14x shares, so do i need to pay 14 x 100 =1400 rs ? I didnt understand how this works, can you elaborate please?

    • Karthik Rangappa says:

      Let’s say you have 75K in your account and you intend to buy a share whose stock price is 75. The number of shares you can buy is –



      However, if you intend to do MIS, you can leverage your capital and buy higher number of shares. Considering the leverage as 14x, you can buy –
      14285 shares, roughly 14 times more than what you can buy otherwise.

      • Tushar says:

        Thanks for your prompt response. But say suppose my account has 75,000 but I want to utilize only 10,000 for a particular share and take the leverage. That would obviously be possible right?

  70. Bharadwaj says:

    Hi Karthik,

    What if the future price fall lower than the margin?

    Thank you

    • Karthik Rangappa says:

      If you wish to carry forward the position, then you will have to bring in additional margins, failing which your position may get squared off.

  71. Megh says:

    Suppose I am trading intraday in futures and have traded twice in a single day. For eg let’s say first trade margin required was Rs1000/- and profit earned was Rs100/- Next trade was also same with margin required Rs1000/- and profit earned was Rs110/-

    So now how do we calculate ROI shall we add the margins on both trade meaning 1000+1000 =2000 and profit 100+110=210/- and ROI=210/2000 = 10.5% or 210/1000 = 21%. Which one is the correct method of calculating?

    At the end of the month, it will help to calculate the ROI monthly.

    • Karthik Rangappa says:

      If your intention is to calculate the ROI at the end of month, then its quite simple. Do the following –

      Starting capital on the 1st day of the month = 1000
      Ending capital on the last day of the month = 1200

      ROI = 200/1000

      • Megh says:

        This means no matter how many times we trade, each time amount invested in the trade is not added at the end of the month. IS this right way of calculating ROI because every time we trade we invest that amount as margin money..

  72. Dev75 says:

    Hi Karthik,
    This is my first post on Zerodha platform. Hats off to you and your team for commendable n high quality content.
    Very few has this god gift to put complex subjects to its bare essentials.
    I have few newbie questions
    1) Is it any difference between Leverage and MIS? If yes, what is that?
    2) Can u provide the link about list of companies operating in F &O segment?
    3) What is the minimum and maximum duration of futures contract?

  73. harshl says:

    1)how many times are use margin in different stocks
    2) any problem to do maximum stocks trade by using margin
    3)any charges
    4) any restriction to trade only one stocks trade using margin
    5) can i use daily margin in one stocks
    please answer me in one by one

  74. harshl says:

    sir my question ia margin related plase ans one by one
    1) Margin used equity not future any example through make profit example advice me
    2) Any you tube video buy and sell using marg
    3) Any zerodha any chapter reding in only equity margin is please prvide me
    4) zerodha using margin make 1 lk profit in case uaing margin 50,000 thousand imake profit 200% in my casb is it true
    4) please guide me uaing exmple

  75. Savan Patel says:

    I do not get last line of this chepter “Linear Pay-off …”?

    • Karthik Rangappa says:

      By linear pay off I mean that for every 1 point increase in price, the P&L also increases by 1 point. Likewise for a decline of 1 point. So both the price and P&L vary in the same proportion, hence its referred to as a ‘linear payoff’.

  76. Punita says:


    Please explain what happens on expiry of Future purchase. For e.g. I purchased TCS shares for Dec 17 and upon expiry if future price is less than my purchase price how it will get settled.


  77. Ajit says:

    As futures is a contract between 2 persons, if one person squares off, does another also gets squared off automatically? Like if I am sellling TCS at 1500 today and tomorrow future price is 1499, and buyer(Second Person) squares off, for any reason. Does my contract as a Seller still remains valid?

  78. Rajesh says:

    Explaination is simple.. Thank you
    What is initial margin(Span) and Exposure margin?

  79. Aakash says:

    Here we only have to pay the margin amount to get into future trading .Suppose at the end of contract i.e on expiry date TCS share price falls by more than 14% and let us suppose i have no money in my account apart from that margin amount(14% of contract value). Clearly in this situation i will not be able to pay total money to the opposite party.How this defaulter situation will be solved in this case?

  80. yogesh says:

    Sir, if I buy a futures contract (1 lot) of NMDC on 8th jan 2018( Expiry is on 25th Jan 2018) and currently future price of NMDC 162.2. I put the required margin in the trading account. Now if the futures price of NMDC goes down say by 5 rs in 1-2 days, then will i need to add more money to my trading account? Will I get any notification from Zerodha about it?


    • Karthik Rangappa says:

      At any point (i.e after you initiate the trade), you need to ensure that the margin maintained is equal to SPAN + Exposure. As long as this margin is in place, you need not really worry about margin calls.

  81. sravan says:

    Hi sir,
    Suppose at the end of contract i.e on expiry date TCS share price falls by more than 14% and let us suppose i have some 20k rs left in my account apart from that margin amount(14% of contract value). Clearly in this situation i have few doubts
    1.does the contract square off automatically when blocked margin gets zero.
    2.or the contract continues with remaining 20k balance till the trading account becomes ZREO.
    Plz explain in detail especially the 2nd question?
    Thanks in advance sir.

    • Karthik Rangappa says:

      1) Yes, the RMS team at the broker’s office will square off the position
      2) No – moment the margins go below the SPAN, the position will be squared off

  82. Santosh says:

    Hello Karthik,
    Thank you for wonderful content and making new traders or investors life easy. I have a question on Zero Sum Game. I agree to the point that trading in futures incur either profit or loss and that will replicate on counter party. Is it not true in spot market too? if someone is making profit means someone has to make loss? Does it not mean, if I make profit in spot market it is also coming from counterparty or a new trader who enters the market? I understand in futures it is very soon or can say one trader will make loss immediately and in large amount, which is less in spot market unless if stock price will be bullish only.

    Example – Assume a company registers in Exchange and issue an IPO at Rs/- 150 (I’m considering to explain from beginning b’coz it’s the time when a company enters into a market and people start to trade). After 10 days, price of stock is Rs/- 160, I think to square off my stock having Rs/- 10 as a profit, now I need to look for someone who agrees or wish to buy at Rs/- 160. This means a new trader will enter a market and buy from me or invest, he doesn’t make loss, however he is paying from his pocket.
    Consider a two possible situations,
    1. if the price goes up i.e. Rs/- 165 in next 10 days, the trader is happy as he made profit,
    2. what if price goes down to Rs/- 155, he is making Rs/- 5 loss? Here he is making loss after 10 days of his investment. No one can ever make loss in market if we always have bullish, which is not possible.

    To summaries, from my understanding a person trading in futures will make profit or loss in short term, similarly a person trading in spot market will make profit or loss either in short term or long term. Hence for me Zero Sum Game is not an appropriate phrase used to explain futures and also it is quite difficult to agree that future trading is not a creation of money. Please correct me if I am wrong.

    Thank you.

    Best regards

  83. SIMRAN says:

    Hello Sir,
    I haven’t understood the Leverage Calculation part.
    Could you please explain it to me ?

  84. Vikrant says:

    Just one doubt. When you say zero sum game, who shells out the money for the expired contracts, where the contract has neither been sold(buyer) or bought(short seller) by the holder. TIA

  85. Srikanth Chintala says:

    Hi Sir,

    My Doubt is how does Futures benefit the market as a whole as it is not creating wealth but transferring wealth.

    Earlier futures is used to trade physical material like gold/coffee where the farmer and trader both benefit to some extent as the product will be purchased in advance and reduce the risk of volatility and improve there business.
    But in shares futures are used just for the sake of price prediction and there is not underling business which benefits.

    My doubt is if futures is not wealth creation, why is SEBI regularizing it?

  86. trader says:

    why zerodha bo co intraday futures margin for stock futures got reduced to 33.3 from 55.5? till when is it expected to be like this?

  87. Priyam Gupta says:

    Hi Karthik,
    Suppose I have a Future contract of PC jewellers jan @500 ,lot size 1500 and suppose I paid 1.5 lac Rs for this contract.
    Now for some reason next day it fell down to 200 so I am seeing a loss of (500 – 200 = 300×1500 = 450000) . So Do I need to pay this much amout or my position will get square off automatically before that. And What If I don’t have the remaining amount to pay off ?

    • quickgainer says:

      Wew dude you are rekt tbh

    • Karthik Rangappa says:

      This is an example where the fall is quite dramatic and sudden. The position will make a loss (exceeding the margin required) and therefore the position will be closed by your broker….and you are legally bound to make good the losses to the broker.

      • Priyam Gupta says:

        Thanks for your reply Karthik,
        I am having one more doubt, just in case If I am unable to pay off my debt to the broker as I don’t have any more money, no business, no job, no property means I have nothing. I have already blown my full savings here then what legal action will be taken against me?

  88. Arun says:

    You shattered the mountain 🙂
    very good.novice can understand easily !!!
    Thanks a lot for this.

  89. Srivatsa says:

    Hi Karthik,

    I must admit the content on Future Trading is really explained beautifully.
    However at the risk of sounding stupid, I have a basic question that’s been nagging me.

    Suppose there is a Future contract for a company ABC ending 28th March at 833 with a lot size of 1000.
    But the CMP is already 845.

    What if I want to buy such a contract assuming that price will go even higher.?
    Is such a scenario possible?

    Please let me know
    Many thanks

    • Karthik Rangappa says:

      Yes, it certainly is possible. Here you are speculating that the price will go up by Rs.12, and hence make 12K on it. Likewise, if you have an opposite view that the share price will drop to 800, you can short it with a hope of making 33K.

  90. prabu says:

    is there interest to be paid for leverage taken ? and also explain what is
    Span ,Exposure, margin Total margin shown in margin calculator

  91. GIRISH says:

    just for curiosity
    suppose i have Rs 100000 in my account
    and i buy xyz future , req 98000 margin then Rs 2000 remaining in my account

    if stock goes down and i want to carry it for next few day

    it is required to maintain any amount in my account for every day ????
    if yes then how ?

    • Karthik Rangappa says:

      It is always good to have some extra funds in your account to accommodate extreme market moves. The 98K margin is further split between SPAN and exposure. Your position will be automatically cut once your losses exceed exposure margin plus the 2K in your account.

  92. Adishwar says:

    Hi Karthik!
    I am confused with Rs 17330 which you have mentioned here “After committing Rs.82,670/- as margin amount for 2 lots, we would still be left with Rs.17,330/- in cash”

  93. Vignesh says:

    Sir please explain when I sell the stock with this margin concept

  94. Pratik says:

    Sir, I am trading in options from last 6 months. But now after gaining confidence want to shift to futures. I trade only intraday. (Day trading) do not carry any positions overnight.
    I want to ask in 10 lakh capital how many bank nifty contract can be traded intraday (MIS option in kite). I got confused in different type of margins.
    I know it’s stupid question but please help.

  95. Harshad Patel says:

    Hi Karthik,

    I read all your previous Module and Chapters. (just like school time study and also do homework…)

    Anyways, can you please tell me how to keep patience with small volatility in future trading?

    I ask you here because when I do spot Market trade (with 10 or up 50 Qty) I can ignore if it happens and hold until my target not complete but in the future trade, I must have to place an order with a 1 lot of (100 or more Qty), and it is very very hard to ignore.

    So, please advice me as per your experience and knowledge.

    Harshad Patel

    • Karthik Rangappa says:

      Patience is a function of the overall capital you have plus how much of it you have exposed to the trade 🙂

  96. Amit K says:

    Hi Sir,

    Can you please tell me if zerodha provides any leverage for overnight positions in futures? And if yes where can we find it the rates? All I could find on website is leverage for intraday trading.

    • Karthik Rangappa says:

      No extra leverage, Amit. You will have to have enough margins SPAN+Exposure to carry forward the positions.

  97. Guru says:

    Hi Karthik,

    You mentioned futures is a zero sum game. For that matter, equity investment also is the same. Am I correct? In equity as well – wealth is not created rather just transferred from losers to winners (except on the IPO where the money goes to the company). Can you please clarify?

    Kind regards,

    • Karthik Rangappa says:

      Not really, you can buy stocks today and hold the same for years, all through which the capital appreciates and wealth is created.

  98. omkar says:

    hello sir,
    as you said that if the stock price goes down 14%, you will lose all your margin money…but what if hypothetically stock went down 20%, so will your position get squared off after 14% down automatically coz your margin money is lost and you cant pay more loss?
    thnk you

  99. Srinivas says:

    Hi – excellent tutorial.

    Let’s take two scenarios. Assuming one has a corpus of 10 lakhs. Scenario 1. Buy 10 lakhs worth HDFC stock, hold for 12 months and then exit at the available price, and Scenario 2. Buy 10 lakhs worth HDFC in Futures with a margin of say 1 lakh and keep rolling them over every month. Also deposit the remaining 9 lakhs cash in a Bank FD generating 7% (just an example).

    How would one evaluate the returns of these two scenarios? Scenario 1 has access to Dividends, scenario 2 would not. What other costs would one need to account for in scenario 2 e.g. (roll-over cost, cost of margin etc)?

    • Srinivas says:

      i must correct my statement – given the daily M2M requirement, let’s assume the remaining 9 lakhs is held in a liquid debt fund, as opposed to a bank FD. As and when additional margin is required, funds are transferred from the liquid debt fund to the trading account and vice versa.

      • Karthik Rangappa says:

        Yeah, but the question is, why would you want this additional headache? There are no incremental gains with this structure, given the daily volatility will keep disturbing your investment in liquid funds.

    • Karthik Rangappa says:

      If the idea is to hold for long term, you are better off deploying the capital in the stock. There is a daily mark to markets on the futures position, so you may have to pull funds from the 9L corpus. Besides, there will be a rollover etc, which will add to the cost of holding the futures position.

  100. Akshay says:

    Hi Karthik,

    If we make a leveraged intraday equity long or short trade, would not the payoff be similar to trading futures expiring the same day?


  101. Naina says:

    Hi 🙂
    Querry – traded nifty futures 1 lot with margin . What’s amount to be recorded in futures Purchases & future sale?
    Contract purchase cost – 7lakh
    Sold future contract – 7.016Lakh
    Margin when purchased 10,000.
    Margin When sold 11,600.

    What amount to be recorded for accounting purpose?

    • Nakul Kularni says:

      You will have to record the contract value for accounting. Your profit will be the difference between the sell value and the buy value. In the above case; 7,01,600 – 700000 = 1600 will be your profit.

      • Naina says:

        Ok. & turnover = ?

        • Nakul Kularni says:

          You may calculate the futures turnover as the sum of absolute profits and losses. The turnover for options can be calculated as the sum of absolute profits and losses and the sell value.

          For example, let’s say you executed the following trades:

          NIFTY SEP FUT: Buy Value – 7,00,000; Sell Value – 7,01,600; Profit – 1,600; Turnover – 1600
          NIFTY OCT FUT: Buy Value – 7,10,000; Sell Value – 6,80,000; Profit – (30,000); Turnover – 30,000 (Absolute Value)
          Total Futures Turnover – 1,600 + 30,000 = 31,600

          NIFTY SEP 10500 CE: Buy Value – 20,000; Sell Value – 32,000; Profit – 12000; Turnover – 44,000
          NIFTY OCT 10800 CE: Buy Value – 20,000; Sell Value – 12,000; Profit – (8,000); Turnover – 20,000 (Sum of absolute profit and sell value)
          Total Options Turnover – 44,000 + 20,000 = 64,000
          Total F&O Turnover – 31,600 + 64,000 = 95,600

          This has been explained in greater detail under chapter 6 (Turnover, Balance Sheet, and P&L) in module 7 (Markets and Taxation)

  102. Pavan says:

    Sir , is there any way we can know leverages ratio of each stock future in a table calculated on daily basis .is anything similar or a calculator available on ZERODHA or somewhere else ?

  103. Mahesh says:

    Leverage and pay off, very nicely explained.
    Here is one query
    1. I strictly intend to trade intra day only
    2. I am allowed to trade in to normal equity for up to Rs. 400000 (40xDeposit say 10000)
    3. In this case, if I decide to go for futures of equivalent sum (4 lakhs accommodating approx 1 lot of YesBank) I need to keep MIS margin of about Rs. 45000
    4. How come the leveraged trade is advisable in such case, what are monetory pros and cons

    • Karthik Rangappa says:

      1) Sure, no problem
      2) We don’t provide 40X leverage. Also, as a suggestion, it is best if you avoid excess leverage
      3) Yes
      4) Leverage can make or break your capital, Mahesh. Have explained in detail in the chapter.

  104. Shailendra says:

    Is trading in spot market money creation or money transfer
    Is money transfer a bad thing like gamble

  105. raj says:

    So my leverage is directly decided by what the margin is? Can I decide to increase my leverage or decrease my leverage and if I can, how will I do it?

  106. SadhaSivam S says:

    Hi Karthick,.

    Why can’t we buy the future and rollover everymonth and hold it for long term for 3 years like that on a stock or index. Will there be any impact ?

    • Karthik Rangappa says:

      It’s just that you will have to bear with all the mark to market swings plus you will have to roll over every month. Hence not a great idea according to me.

      • SadhaSivam S says:

        Karthick, just to confirm ,if we roll over everymonth, we are actually lossing the value of difference between the prices for those months right? On average Which would come around 5% to 8% in one year right?

  107. SadhaSivam S says:

    Hi Karthick,.

    Why can’t we buy the future and rollover everymonth and hold it for long term for 3 years like investment that on a stock or index instead of buying the stock. Will there be any impact ?

  108. Shailendra says:

    Some broker say that they provide 2 times margin in future market what does it mean

  109. neeraj says:

    sir, can you explain me the difference between spot intraday and future intraday?

    • Karthik Rangappa says:

      Both are intraday, except that in the spot you have to sq off the short position within the day but in futures, you can choose to roll over.

  110. Satish says:

    Good evening sir,
    Sir i want to know is this leverage applicable for intraday, or normal future contract?…..And sir where we can see future contract in demat account?

  111. Sai Prakash says:

    Hi sir, nowadays the f&o margin requirement seems to be very high when calculating in margin calculator. Is it correct? For example to buy 1lot of tatasteel it’s showing “313254” needed, meanwhile the actual price is only around “400000”. Is anything wrong with the system or leverage is less?

  112. Vinod Kumar says:

    Hi Karthik,

    Thanks for the modules and great & simple info though to understand how stock market works. Comments under each module clears all the doubts that arise at the end of completing each module. 🙂

  113. Pradip says:

    Hlw sir,
    I am new in this field.
    I have some queries.
    For holding (nrml) buying & selling in stock future minimum capital required…??
    Can I buy & sell any day the stok future for this particular month.

  114. Gaurav Pareek says:

    Hey! Amazingly written. I’ve a query

    Let’s say for example I’ve a bought a KOTAKBANK NOV 1600 CE NFO (NRML) on 8th Nov 2019 Lot Size [email protected]
    If KOTAKBANK hits beyond 1600 on expiry date which will be 28th Nov 2019. If I hold this NRML on expiry date and KOTAKBANK closes at 1650 what will be my profits? and if in case contract expires what will be my loss? I will be losing premium amount which I paid?

    Also, do I have to deposit full amount for eg 1650 (Kotak Share Price in Spot Market) @ 800 = 13,20,000 when the contract matures. Also, is there a limit like I’ve to buy the actual lot after T+7 days

    Sorry for so many questions 🙂 I’m new here. Thank you for your help once again 🙂

  115. Sumeet Chavan says:

    Hello sir
    What if i buy two lots worth margin of 40,000 each, and the total shares bought amount to about 5 lakhs.
    If the share price rises i benefit even if i dont have 5 lakh rupees.( As i had to pay the margin amount ). But what if the price falls? Will i incur loss on the initial amt of 5 lakhs? And if yes. Isnt futures too risky??

  116. Adithya Shourie says:

    Hi Karthik,
    Lucid explanation as always. Kudos to you for making this an exciting journey (I have also read Stock Market Basics, TA & FA on Varsity).

    PS: Varsity app is really useful. It was really helpful as our understanding about the concepts could be measured by taking quizzes. But it has only four chapters. Can you please update the app on iOS? It would be awesome to read concepts on the go instead of opening a browser on the phone. Thanks

    • Karthik Rangappa says:

      Thanks for the kind words 🙂

      The app is available on iOS, the same version as the andriod. We are making a few changes though.

  117. Janesh says:

    Hello Karthik,
    Thanks for writing good article. I have couple of questions.

    1). As we buy in equity we become as % involved in particular company. So what about when we buy Futures.. ?
    2). As in equity its transferred to DMAT account.. what’s in Future contact?
    3). Can we sell equity in next trading day.. as of today in Feb 2020.

    • Karthik Rangappa says:

      1) Equity shares exist for long, but futures contract has an expiry. So no ownership when you buy futures
      2) Held in the trading account
      3) Yes, you can do buy today sell t’row trades.

  118. Janesh says:

    When you say “Once we buy the stock (for delivery to DEMAT) we have to wait for at least 2 working days before we can decide to sell it. “. So we can’t sell on next day..??

  119. Veeresh Kerur says:


    If i have money 20000+ in my account, in there i have sold 1 lot Zinc mini @155 on date 3/10/2020 hold for next 3 days and next day (3/11/2020) Silvermic bought 1 lot @ 46480 Position. but 1st day (3/10/2020) charge 193 @ as Net obligation. on next day (3/11/2020) 983 rs charged for Net obligation.

    Can you please explain how it was charged.

    • Karthik Rangappa says:

      Veeresh, I’d suggest you speak to our customer helpdesk for this. They will explain all the charges for you.

  120. Akash says:

    I have following query:
    In the above TCS Futures example, suppose the BUYER of TCS Futures does the deal at Rs. 2362 but the SELLER of TCS Futures as SHORTED the TCS Futures at say Rs. 2800. In this case, even if TCS stock price goes up say to Rs. 2600, both the BUYER of TCS Futures and SELLER of TCS Futures are making profit. Who is making loss in this case?

    • Karthik Rangappa says:

      Not sure if I understand your query completely, but here is the thing, in a futures mkts the buyer’s loss is the seller’s profit and vice versa.

  121. Suresh Nair says:

    Were do we find the expiry for Comodities.

    For futures its the last thursday of every month.Is it the same for Comodity,Crude oil?

  122. Srikanth Arugula says:

    Hello Sir!

    First off thanks for these brilliant lessons. Really make it easy to understand these concepts.
    One doubt I had was regarding your mention about Futures being a “Zero Sum Game”. As you said in the spot market one can hold shares for a long time and benefit off of the performance of the company. But the performance of the company is what causes someone else to buy the trade at a higher value which explains the higher cost of the share. In both the cases, some other party has to buy at a higher value to increase the price of the trade be it futures or spot market.

    Then how are they different? Isn’t derivatives just a virtual wrapper over the existing spot market?

    Sorry if this question feels repetitive but did not want to have any doubt in my fundamentals about the markets.

    Thanks in advance 🙂

    • Karthik Rangappa says:

      What differentiates is the fact that if the company tends to do well, even the guy who has bought at higher levels can create wealth. When I say ‘create wealth’, I’m talking about new wealth being generated. In derivatives, money from one person’s pocket moves to another. No new wealth is created. Hence the zero-sum tag.

  123. Aravinth kalaiselvan says:

    hey Karthik,

    1) How does Zerodha finance the remaining amount of our future contract (we only pay some percentage of the amount we should pay as margin)? Like someone has to pay right? Do banks pay the remaining? And do we have to pay any interest?

    2) And what happens if my future margin(SPAN + Exposure) gets exhausted overnight? Say something huge happened to the underlying investment instrument? Of course, I’ll get a margin call. But will I have to pay anything extra, even if I don’t want to continue my position?

    • Karthik Rangappa says:

      1) The client is obligated to pay the broker dues, failing which a legal case can ensue
      2) Yes, as long as you have an open position you are obligated

  124. Akash says:

    can you please explain the difference between money creation and transfer with examples…?

  125. Rohit Kinger says:

    Still have a little doubt about margin.

    Lets say I have 5000rs as fund balance. And I want to Short Axis bank which is currently at 400 rs. Margin calculator shows I can buy 12 shares as CNC and 62 as MIS (5x Multiplier). When I try to buy it in the app as MIS, It shows 400 x 12 taking 4800 as margin.

    How do I buy 5x as shown in the calcluator?

    • Karthik Rangappa says:

      YEs, that’s could be the margin, but the number of shares can be 62. Please go with the calculator.

  126. Prasad says:

    Very good articles! Thank you! In subsection 4.4 I think it should be 1/42.17 = 2.3%…There is a typo (41.17).

  127. Krishant says:

    Sir, you said that if one buys a stock he has to wait 2 days to take the delivery and in order to sell whenever its the right time. Also that he cannot sell the stocks anytime before. But when I place CNC orders and the stock happen to make a big jump the next day or the day after, I can easily square off my position and exit. Why is it so?

  128. amit says:

    Thanks for the article explaining the leveraged gains and losses in detail.

    1. Would request a change in the article though – to bring out the risks in leveraged trades better . And critically important for investor education.
    The exact sections i would like to refer to are Sections 4.4 and 4.5 . The losses table in Section 4.5 are harder to understand than the gains table at 4.4 . To be precise – Section 4.5 deals with the results (losses) expressed in “loss per share” , whereas in section 4.4 the results (gains) are displayed in percentage terms. Reason being that the retail trader, like me, would like to know his the extent of loss as well as the loss percentage for a directional bet gone wrong. what happens when the spot price drops 5% or 10% in a futures contract (using the same example in 4.4 ) Can i loose more than just the margin money ? (yes as per your reply to other comments).

    2. are both losses and gains unlimited in either direction ?

    • Karthik Rangappa says:

      Amit, thanks for the suggestion. I will try and see what best I can do about this. Yes, in a futures contract both are theoretically unlimited.

  129. Dilip says:


    I would like to know if we can expect full fledged knowledge series on FnO like Hedging, Adjustments, Strategies etc..

    Awaiting reply.


    • Karthik Rangappa says:

      We have a ton of content here already, Dililp. Is there anything, in particular, you are looking for?

  130. TR says:

    I have an short sell open NRML position in Aurp futures, purchased on July 1st currently in am in negative profit due to price movement.


    While i have NRML position for AURO and wait for the price to drop for me to gain
    Can i initiate a MIS position on the same futures AURO ?

    Can you please explain with an example

  131. TR says:

    I dont think this works, i have faced an issue/discrepancy in the past, i can provide the details via email
    Can we discuss this further ? Infact i lost 40k due to this
    I have provided my email in the comment, please feel free to ping me

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