Futures Contracts: The Obligation to Act

When you buy a share of Reliance, you become a part-owner of the business. You pay the full price, you can hold it for ten years, and nobody can force you to sell. A Reliance futures contract is different in each of these ways. You own only an agreement to trade at a fixed price on a fixed date. You pay a deposit, not the full value. If the position moves against you far enough, your broker can close it without asking you.

The exchange fixes everything except the price: the underlying, the lot size, the expiry date, the tick size and the way of settlement. This standard form is what makes trading easy. Every Nifty futures contract for one expiry is identical, so buyers and sellers are matched in a moment. You can also leave early by simply selling the contract to someone else.

The clearing corporation is the second difference. When you buy a futures contract on NSE, you are not exposed to the person who sold it. The clearing corporation becomes the seller to every buyer and the buyer to every seller. It collects margin from both and guarantees the settlement.

How a contract ends depends on what it is written on. Index futures, such as Nifty, are settled in cash at expiry, because you cannot deliver an index. The difference between your entry price and the final settlement price is paid or received. Stock futures in India are settled by physical delivery, which means an open position at expiry becomes a duty to give or take actual shares. The settlement article in this series explains this in detail.

You cannot trade one unit of Nifty. Futures trade in lots, and the lot size is the fixed number of units in one contract. SEBI’s framework asks exchanges to set index lot sizes so that the contract value stays in a band of ₹15 lakh to ₹20 lakh on the day of review. NSE reduced the Nifty lot from 75 to 65 from the January 2026 series (NSE circular dated 3 October 2025). Lot sizes are revised from time to time, so always read the current one from the NSE contract page.

Contract value is lot size multiplied by the price. Suppose Nifty futures trade at 24,500. This is a round number for illustration. One lot carries 65 × 24,500 = ₹15,92,500. Every one-point move is worth ₹65 to you. A 100-point move, which is an ordinary day, is ₹6,500. This amount has nothing to do with how much you deposited.

This gap surprises new traders. The margin for one lot is only a part of contract value, so your account may show a deposit of, say, ₹1.9 lakh while carrying ₹15.9 lakh of exposure. Profit and loss are counted on the full ₹15.9 lakh. A 3% fall in the index is about ₹47,800 on one lot. Against a ₹1.9 lakh deposit that is roughly a quarter of the money, lost in one day. The ₹1.9 lakh here is an assumption. The real margin is set by the exchange and changes daily.

Before any futures order, do two sums. First, multiply lot size by price to know what you carry. Second, divide the rupee loss you can accept by the lot size to get your stop distance in points. If that distance is smaller than the index’s ordinary daily range, the position is too large for you.

A futures payoff is a straight line. Buy at 24,500, and every point above earns ₹65 while every point below costs ₹65. There is no premium to recover first and no time decay. If the index rises 300 points you gain what you would lose if it fell 300 points: ₹19,500 either way. The table below shows it.

Going short is the mirror image and is a real use of futures. In the cash market, benefiting from a fall needs borrowed shares, which is hard for a small investor. In futures you can sell first and buy back later. A short Nifty position from 24,500 earns ₹65 for every point the index falls.

The equal size of gain and loss is the point to remember. A bought option cannot lose more than its premium. A futures trader has no such floor. A long position can lose until the price reaches zero, which is far-fetched for an index but possible for a single share. A short position has no upper limit because a price has no ceiling.

Notice also what does not happen. A future does not lose value just because days pass. Hold a long Nifty future for three days with the index unchanged, and apart from the small basis effect explained later, your position is worth the same. Futures charge you for being wrong on direction, not for the passage of time.

Margin is a good-faith deposit, not a part-payment for the contract. The exchange works it out in parts. One part, called SPAN, is based on a risk model of a sharp move in one day. Another part, the exposure margin, is an extra cushion. The total is only a fraction of contract value and is recalculated as volatility changes, so read the current number from your broker’s margin calculator or the exchange, and do not assume it.

The exchange cannot wait until expiry to learn whether you can pay, so it settles every evening. This is called mark-to-market. Your position is valued at that day’s settlement price. A loss is taken from your margin account and given to the other side in cash that night. A profit is added to your account. Next morning your position begins again from the new price.

This has a practical result: a futures position uses up cash on the way to being right. Suppose you buy one Nifty lot at 24,500 and your account holds exactly ₹1,90,000 as margin. Over five days the index falls and then recovers to 24,690. You end 190 points ahead, which is ₹12,350. But on the second and third evenings your balance was ₹1,85,450 and ₹1,69,200, below the ₹1,90,000 needed, so a margin call would have come. Being right at the end does not excuse you from funding the middle.

If you do not add money, the broker closes the position at the market price. This is how many retail futures positions end: not by a stop-loss decision but because the account had no spare cash on the wrong morning. The practical defence is dull but effective. Keep much more cash than the minimum margin, so an ordinary bad run does not become a forced exit.

Open any quote screen and the futures price will not match the spot price. The gap is not a mistake and not a forecast. It is arithmetic. If you buy the share today, you pay cash now and you receive any dividend that comes. If you buy the future, you keep your cash until expiry and earn interest on it, but you give up the dividend. The futures price adjusts so that neither route gives free money.

This is the cost of carry. Think of paying rent versus paying a lump sum: waiting has a price. In a normal market the interest you save is more than the dividend you give up, so the future sits a little above spot. Suppose Nifty spot is 24,500 and the near-month future is 24,585 (both illustrations). The 85-point gap is called the basis. It is the price of deferring payment, and it is already built in.

The basis shrinks as expiry comes closer, because there is less time left to carry. On the last day the two prices must be equal, because the final settlement price is taken from the cash market. If a gap remained, traders who buy the cheaper one and sell the dearer one would remove it. So this closing of the gap is enforced, not just expected.

For a directional trader this matters in one small way. If the index does not move, a long futures position can lose a little as the basis shrinks to zero, and a short position gains the same amount. On an index the effect is small. It becomes important only when the gap is unusually wide, which can be a sign that many traders lean one way.

When the future is above spot, and each later month is priced higher than the one before, the market is in contango. This is the normal state for an equity index. It carries no message about direction. A trader who reads a higher futures price as bullishness is reading the interest rate, not the mood.

Backwardation is the reverse: the future is below spot. On an equity index it is uncommon. It happens in two ways. In a heavy dividend season the dividends given up may exceed the interest saved, which is plain arithmetic. It can also happen when a wave of hedging or panic selling pushes the futures down faster than traders can correct it. The second kind is more informative, but it can also reverse quickly.

Every contract expires, so a view that lasts longer than the contract must be rolled. Rolling means closing the near-month position and opening the same position in the next month, often as one spread order so both legs fill together. The cost of rolling is the price gap between the two months plus brokerage, charges and taxes on two more trades. Over several months this cost adds up.

Traders watch rollover data near each month end. When many positions move from the expiring contract into the next, people are carrying their views forward. The price at which they roll shows whether buyers or sellers are paying to stay. This is a clue about positioning, not a forecast.