2. Futures

A futures contract is an agreement to buy/sell an asset at a fixed price on a future date. In India, equity & index futures are cash-settled (no physical delivery for index; stock futures are now physically settled).

Key terminology

Term	Meaning
Underlying	The asset (stock, index) the future tracks
Lot size	Fixed contract quantity (e.g., Nifty = 25, Reliance = 250)
Expiry	Last Thursday of the month (monthly); weekly available for indices
Contract value	Lot size × futures price (your full exposure)
Margin	What you actually pay (~15–25% of contract value)
Spot	Current cash market price of the underlying
Basis	Futures price − Spot price
Premium / Discount	Futures > Spot → premium; Futures < Spot → discount
Open Interest (OI)	Total outstanding contracts (not volume)
Rollover	Closing current month, opening next month before expiry

Why basis exists

Theoretical futures price:

$F = S \cdot e^{(r - d) \cdot t}$

• $S$ = spot, $r$ = risk-free rate, $d$ = dividend yield, $t$ = time to expiry.
• In normal markets, futures trade at a small premium (cost of carry).
• A discount signals bearishness or expected dividends/corporate actions.

Example

Nifty spot = 24,500. 1-month future = 24,560. Basis = +60 (premium of ~0.24%). Healthy.

If suddenly the future drops to 24,440 while spot stays — the discount signals heavy selling pressure or hedging.

Margin types

Margin	Purpose
SPAN margin	Risk-based, set by exchange
Exposure margin	Additional buffer
MTM margin	Daily settlement of unrealized P&L

Total initial margin ≈ SPAN + Exposure. Brokers may demand more.

Leverage cuts both ways. Nifty future at ₹6.1L value with ~₹1L margin = ~6× leverage. A 2% adverse move = 12% loss on margin.

Open Interest — what it really tells you

OI = number of open contracts (not closed). Different from volume.

Price	OI	Interpretation
↑	↑	Long buildup (new buyers) — bullish
↑	↓	Short covering — fading bullishness
↓	↑	Short buildup (new sellers) — bearish
↓	↓	Long unwinding — fading bearishness

This is the OI matrix — memorize it. It separates real buying from squeezes.

Rollover

Last week of expiry month, traders shift positions to next month.

• High rollover % with rising OI = trend continuing into next month.
• Low rollover = positions being squared off, trend may reverse.

Use cases for futures

1. Directional speculation

Cheaper than buying the cash equivalent (margin vs full cost). High risk.

2. Hedging a portfolio

Long ₹10L of Nifty 50 stocks? Short 1 Nifty future (~₹6L) to neutralize ~60% of market risk. Cheap insurance.

3. Pair trading / arbitrage

Long undervalued stock future, short overvalued one. Market-neutral.

4. Cash-Future arbitrage

Buy spot, short future when premium > cost of carry. Locked spread.

Common futures pitfalls

• Rolling at the wrong time — rolling on expiry day = wide spreads, high cost. Roll 2–3 days earlier.
• Ignoring overnight risk — F&O can gap massively on news; SLs may get jumped.
• Sizing as if it’s cash — leverage means a “small position” is actually huge.
• Trading illiquid stock futures — most stock futures have terrible liquidity except the F&O top-30.

Position sizing for futures (the real formula)

You’re sizing on contract value, not margin.

$\text{Lots} = \frac{\text{Capital} \times \text{Risk \%}}{|\text{Entry} - \text{Stop}| \times \text{Lot size}}$

Example

Capital ₹5,00,000, risk 1% = ₹5,000. Buy Nifty future at 24,500, SL 24,400 (100 pts risk). Nifty lot = 25.

$\text{Lots} = \frac{5{,}000}{100 \times 25} = 2 \text{ lots}$

Even though margin allows 5+ lots, risk-based sizing says 2. Always trade risk, not margin.