Futures Contracts: The Obligation to Act

Buying a share of Reliance makes you a part-owner of a business. You pay the full price, you can hold it for a decade, and nobody can force you to sell. Buying a Reliance futures contract makes you none of those things. You own an agreement to transact at a fixed price on a fixed date, you pay a deposit rather than the full value, and if the position moves against you far enough, your broker can close it without asking.

The exchange fixes everything about the contract except the price. Lot size, the underlying, the expiry date, the tick size and the settlement method are all specified in advance. That standardisation is what creates liquidity — because every Nifty futures contract for a given expiry is identical, buyers and sellers can be matched instantly without negotiating terms. It is also what allows you to exit by simply selling the contract to somebody else rather than unwinding a private agreement.

The clearing corporation is the second structural difference. When you buy a futures contract on NSE, you are not legally exposed to the person who sold it. The clearing corporation becomes the buyer to every seller and the seller to every buyer, collects margin from both, and guarantees settlement. This is why exchange-traded futures survived events that destroyed over-the-counter derivative markets elsewhere.

Most futures positions never reach delivery. Index futures on Nifty and Bank Nifty are cash-settled by construction — you cannot deliver an index — so at expiry the difference between your entry price and the final settlement price is simply paid or received. Single-stock futures in India are physically settled, meaning an open position at expiry turns into an actual obligation to give or take delivery of shares, which the settlement module covers in detail.

You cannot trade one unit of Nifty. Futures trade in lots, and the lot size is the number of units of the underlying packed into a single contract. Under the post-2025 framework, SEBI requires index derivative contracts to carry a minimum value in the ₹15 lakh to ₹20 lakh band, and exchanges set lot sizes to comply. Nifty’s lot size stands at 75 units at the time of writing; lot sizes are revised as index levels drift, so read the current one off the NSE contract specification page.

Contract value is lot size multiplied by the price of the underlying, and it is the number that determines your real exposure. Suppose Nifty futures trade at 24,500. One lot carries 75 × 24,500 = ₹18,37,500. Every one-point move in the index is therefore ₹75 in your account, and a 100-point move — an unremarkable session — is ₹7,500. That figure has nothing to do with how much you deposited.

This is the gap that catches new traders. The margin required to hold one Nifty futures lot is a fraction of contract value, so the account sees a deposit of perhaps ₹2 lakh while carrying ₹18 lakh of exposure. The profit and loss is computed on the ₹18 lakh. A 3% adverse move in the index — which happens — is roughly ₹55,000 against a ₹2 lakh deposit, or about a quarter of the capital blocked, in a single session.

Before placing a futures order, the arithmetic worth doing is simple. Multiply lot size by the current price to get exposure. Divide the rupee amount you are willing to lose by the lot size to get your stop distance in points. If that stop distance is narrower than the instrument’s ordinary daily range, the position is too large — a conclusion the position sizing module reaches from several other directions as well.

A futures payoff is a straight line, and that single fact separates futures from options more clearly than any definition. Go long at 24,500 and every point above that is profit at ₹75 a point, every point below is loss at the same rate. There is no premium to recover first, no breakeven offset, and no decay. What you gain if the index rises 300 points is exactly what you lose if it falls 300 points.

Going short is the mirror image and is one of the genuine reasons futures exist. In the cash market, profiting from a fall requires borrowing shares, which is restrictive and expensive for a retail account in India. A futures contract lets you sell first and buy back later with no borrowing at all, because you are selling an agreement rather than an asset you must possess. A short Nifty futures position at 24,500 makes ₹75 a point as the index falls.

The symmetry cuts both ways, and this is where futures differ sharply from bought options. An option buyer’s worst case is the premium — unpleasant but finite and known in advance. A futures trader has no such floor. A long position has losses limited only by the underlying reaching zero, which for an index is theoretical but for a single stock is not, and a short position has losses that are genuinely unbounded because there is no ceiling on price.

Notice also what the straight line implies about time. An option loses value simply because days pass; that is the theta discussed in its own module. A futures position does not decay. Hold a long Nifty future for three sessions with the index unchanged and, apart from a small convergence in the basis, your position is worth what it was. Futures charge you for direction being wrong, not for time passing.

Margin is a good-faith deposit, not a part-payment. The exchange calculates it in two pieces: SPAN margin, which models the worst plausible one-day move in the underlying, and exposure margin, an additional buffer. Together they typically come to a low-to-mid teens percentage of contract value for index futures, but the number is recalculated daily as volatility changes, so it must be read from the exchange margin file rather than assumed.

Because the leverage is large, the exchange cannot afford to wait until expiry to find out whether you can pay. So it settles every evening. This is mark-to-market, or MTM: the exchange values your open position at the day’s settlement price, debits the loss from your margin account and credits it to the other side, in cash, that same night. Profit is credited the same way and is available to withdraw. Your position then restarts the next morning from the new settlement price.

The consequence is that a futures position consumes cash on the way to being right. Suppose you go long one Nifty lot at 24,500 with ₹2,20,000 blocked as margin. Over five sessions the index dips before recovering to 24,690. You finish 190 points ahead — ₹14,250 on one lot. But on the third evening the running balance sat at ₹1,96,000, below the requirement, and a margin call for the shortfall would have landed the next morning. Being right at the end does not exempt you from funding the middle.

If the call is not met, the broker squares the position off at market. That is the mechanism that closes most retail futures positions at the worst prices — not a stop-loss decision, but a funding failure on a morning when the account had no spare cash. The practical defence is unglamorous: hold materially more free cash than the initial margin, so an ordinary adverse run does not become a forced exit.

Open any quote screen and the futures price will not match the spot price of the underlying. The gap is not a mispricing, and it is not a forecast. It is arithmetic. If you buy the share today you pay cash now and receive any dividend declared before expiry. If you buy the future you keep your cash until expiry, earning interest on it, but you forgo the dividend. The futures price adjusts so neither route is free money.

That relationship is the cost of carry. In a normal market, where the interest a buyer saves exceeds the dividend they give up, the futures price sits slightly above spot. Suppose Nifty spot is at 24,500 and the near-month future trades at 24,585. The 85-point gap is the basis, and it is not profit waiting to be collected — it is the cost of deferring payment, priced in.

The basis shrinks as expiry approaches, because the amount of time left to carry the position shrinks. On the final day the two must be equal: the settlement price of the future is derived from the spot market itself, so any remaining gap is closed by arbitrageurs who buy the cheaper leg and sell the dearer one for a locked-in profit. Convergence is not a tendency; it is enforced.

For a directional trader this matters in one specific way. If you hold a long futures position that is flat on the index, you can still lose a little as the basis decays toward zero, and a short position gains the same amount. It is small on an index and rarely decides a trade. It becomes material only when the basis is unusually wide, which is itself a signal that positioning is stretched in one direction.

When the futures price sits above spot and each further-dated contract sits above the one before it, the market is in contango. This is the ordinary state of an equity index in a normal interest rate environment, and it carries no directional message whatsoever. A trader who reads a premium in the futures price as bullishness is reading the interest rate, not sentiment.

Backwardation is the opposite: the future trades below spot. In equity indices this is uncommon and shows up in two situations. The first is mechanical — a heavy dividend season, where the dividends given up exceed the interest saved. The second is behavioural, when a burst of hedging or panic short-selling in the futures market pushes the contract below the cash market faster than arbitrage can correct it. The second kind is genuinely informative and worth noticing.

Because every contract expires, a view that outlasts the contract has to be rolled. Rolling means closing the near-month position and simultaneously opening the same position in the next month. It is normally executed as a spread so both legs fill together. The cost of the roll is the difference between the two contract prices plus the extra brokerage and taxes on two more legs, and over several months that cost compounds quietly against a long-held position.

Rollover data is watched for what it says about conviction. When a large share of open interest moves from the expiring contract into the next one, positions are being carried forward rather than closed, and the price at which they roll indicates whether longs or shorts are paying to stay. Open interest analysis is covered properly in its own module, but the rollover window at each month-end is where futures traders read it most closely.