The other half of F&O — understanding futures contracts
While options give you the right but not the obligation, futures give you both the right AND the obligation. A futures contract is a binding agreement to buy or sell an asset at a predetermined price on a specific future date. Futures are simpler than options in concept but carry significantly more risk because of leverage. Before you trade Nifty or Bank Nifty futures, you need to understand margin, mark-to-market, rollover, and how leveraged losses can exceed your capital.
What Is a Futures Contract?
A futures contract is a standardized agreement between two parties to buy or sell an underlying asset at a fixed price on a future date. Unlike options, there is no choice — if you hold the contract at expiry, you must settle it.
Think of it like a farmer and a dal mill owner. The farmer agrees in March to sell 10 quintals of chana at ₹5,000/quintal in June, regardless of what the market price is. If market price rises to ₹6,000, the farmer loses ₹1,000/quintal in opportunity cost. If it drops to ₹4,000, the farmer is protected. Both parties are locked in.
Long Futures (Buyer)
- You agree to buy at the fixed price
- You profit when the price goes UP
- No premium paid — only margin deposited
- Profit/Loss = (Exit Price - Entry Price) × Lot Size
- Loss is unlimited — no cap
Short Futures (Seller)
- You agree to sell at the fixed price
- You profit when the price goes DOWN
- Same margin requirement as long position
- Profit/Loss = (Entry Price - Exit Price) × Lot Size
- Loss is unlimited — no cap
Futures P&L — Linear, Symmetric, Unforgiving
LONG FUTURES P&L DIAGRAM
Unlike options where your loss is capped at the premium, futures have symmetric, unlimited risk on both sides. A ₹100 move in Nifty Futures means ₹100 × 75 = ₹7,500 profit OR loss per lot. A 500-point gap-down (which happens on global crisis days) means ₹37,500 loss per lot — instantly, with no way to exit until the market opens.
The Margin System — How Leverage Works in Indian Futures
You do not need to pay the full contract value to trade futures. You deposit a "margin" — a fraction of the total value — and control the entire contract. This is leverage, and it is a double-edged sword.
Initial Margin (SPAN + Exposure)
The amount you must deposit to open a futures position. For Nifty futures, it is typically 10-12% of contract value. If Nifty is at 23,000 and lot size is 75 (revised by SEBI in Nov 2024), contract value = ₹17,25,000. Margin = ~₹1,70,000-2,00,000.
Maintenance Margin
The minimum margin you must maintain. If your account balance falls below this (typically 75-80% of initial margin), you get a margin call. You must add funds immediately or the broker will square off your position.
Mark-to-Market (MTM)
Every single day at market close, your futures position is settled at the closing price. If Nifty closes 100 points against you, ₹7,500 is debited from your account that night. This happens daily, not just at expiry.
Peak Margin (SEBI Rule)
SEBI checks your margin at 4 random snapshots during the day. If margin is insufficient at any snapshot, you face a penalty of 0.5% of shortfall for the first 3 days and 1% per day thereafter. Your broker may auto square-off before this.
Leverage Reality Check: With 10% margin, you get 10x leverage. A 1% move in Nifty = 10% gain or loss on your margin. A 3% gap-down (which happens 2-3 times a year) = 30% of your margin wiped out overnight. During COVID crash in March 2020, Nifty fell 13% in one day — that was 130% loss on margin. Traders who held overnight lost more than their entire deposit.
Indian Futures — Lot Sizes and Contract Details
| Contract | Lot Size | Tick Size | Contract Value (Approx) | Margin (Approx) |
|---|---|---|---|---|
| Nifty 50 Futures | 75 units | 0.05 (₹3.75/tick) | ~₹17,25,000 | ~₹1,70,000-2,00,000 |
| Bank Nifty Futures | 15 units | 0.05 (₹0.75/tick) | ~₹7,65,000 | ~₹80,000-95,000 |
| Reliance Futures | 250 units | 0.05 | ~₹7,50,000 | ~₹1,20,000-1,50,000 |
| TCS Futures | 175 units | 0.05 | ~₹7,00,000 | ~₹1,10,000-1,40,000 |
| HDFC Bank Futures | 550 units | 0.05 | ~₹9,35,000 | ~₹1,40,000-1,60,000 |
Contract Months: NSE offers futures in three monthly series — current month, next month, and far month. For example, in March 2026 you can trade Mar futures (current), Apr futures (next), and May futures (far). Most liquidity concentrates in the current month. Far month contracts have wide bid-ask spreads and should be avoided by retail traders.
Contango and Backwardation — Futures vs Spot Price
The futures price is almost never exactly equal to the spot price. The difference between the two is called the "basis." Understanding basis is critical because it affects your actual returns.
Contango (Normal Market)
- Futures > Spot (futures trade at a premium)
- Normal in bullish or neutral markets
- Premium reflects the cost of carry (interest cost of holding)
- Example: Nifty Spot = 24,200, Nifty Futures = 24,260 (premium of 60 points)
- Premium decays toward zero as expiry approaches
Backwardation (Fearful Market)
- Futures < Spot (futures trade at a discount)
- Happens when market is fearful or bearish
- Heavy short selling pushes futures below spot
- Example: Nifty Spot = 24,200, Nifty Futures = 24,140 (discount of 60 points)
- Strong backwardation = extreme bearish sentiment
Rollover — How and When to Roll Futures Positions
Every futures contract expires on the last Thursday of the month. If you want to continue holding your position beyond expiry, you need to "roll over" — close the current month position and simultaneously open the same position in the next month.
When to Roll
Most traders roll 2-3 days before expiry (Tuesday-Wednesday of expiry week). Liquidity shifts from current month to next month during this period. Rolling on expiry day itself often gives poor fills.
Rollover Cost
The cost of rolling = difference between next month and current month futures price. If current Nifty futures is at 23,080 and next month is at 23,140, rollover cost is 60 points = ₹4,500 per lot (60 × 75). This eats into your returns.
Rollover Percentage
Market participants track what % of open interest has rolled over. High rollover (>75%) means strong conviction to carry positions. Low rollover (<50%) means traders are booking profits and exiting.
Rollover as Sentiment
If Nifty futures roll over at a high premium (contango widening), it signals bullish sentiment. If rollover happens at a discount (backwardation), it signals bearish sentiment. Track this on NSE derivatives data.
Basis and Cost of Carry
The "cost of carry" is the theoretical reason futures trade at a premium to spot. When you buy a stock in cash market, you pay the full price and tie up capital. When you buy futures, you only pay margin. The interest you would have earned on the rest of the capital is the "cost of carry."
Fair Value Calculation
Futures Fair Value = Spot Price × (1 + r × t/365)
Where: r = risk-free rate (RBI repo rate ≈ 6.5%), t = days to expiry
Example: Nifty Spot = 24,200, Days to expiry = 20
Fair Value = 24,200 × (1 + 0.065 × 20/365) = 24,200 × 1.00356 = 24,286
If actual futures = 24,340 → overpriced (bullish sentiment lifting premium)
If actual futures = 24,220 → underpriced (bearish sentiment pulling it down)
NSE Settlement and Auto Square-Off Rules
Daily Settlement (MTM)
At 3:30 PM every day, NSE calculates the closing price and settles all futures positions. If you are ₹5,000 in profit, ₹5,000 is credited to your account. If ₹5,000 in loss, it is debited. This happens every single trading day.
Final Settlement (Expiry)
On the last Thursday, final settlement happens at the weighted average price of the spot index in the last 30 minutes of trading. All open positions are cash-settled. There is no physical delivery for index futures.
Auto Square-Off by Broker
If your margin falls below the maintenance level, your broker will auto square-off your position — usually without warning. Most brokers do this at 3:00-3:20 PM. Some brokers charge ₹50-100 per auto square-off as penalty.
Stock Futures: Physical Delivery
Unlike index futures, stock futures that are ITM at expiry may result in physical delivery (you receive/deliver the actual shares). SEBI mandates physical delivery for stock derivatives. Margin requirements increase dramatically in the last week.
Futures vs Options — Key Differences
| Parameter | Futures | Options (Buying) |
|---|---|---|
| Obligation | Must settle at expiry | Right, not obligation |
| Max Loss | Unlimited | Capped at premium paid |
| Capital Required | ₹1,70,000-2,00,000+ (margin) | ₹2,000-10,000 (premium) |
| Time Decay | None (no Theta) | Loses value daily (Theta) |
| Complexity | Simple (linear P&L) | Complex (Greeks, non-linear) |
| Best For | Strong directional conviction | Defined-risk directional bets |
| Overnight Risk | Very high (gap risk) | Low (max loss = premium) |
When to Choose Futures Over Options: Use futures when (1) you have strong directional conviction, (2) you want to avoid time decay eating your position, (3) you need a clean hedge for your stock portfolio (buy Nifty Puts is expensive — shorting Nifty Futures as a hedge has no time decay), and (4) you can afford the margin and tolerate mark-to-market swings overnight.
Risk Warning — Leverage Can Destroy You
The Math of Leveraged Losses
You buy 1 lot Nifty Futures at 23,000 with margin of ₹1,85,000. Contract value = ₹17,25,000 (lot size = 75). Leverage = 9.3x.
Scenario 1: Nifty -1%
Loss = 230 × 75 = ₹17,250
That is 9.3% of your margin
Scenario 2: Nifty -3%
Loss = 690 × 75 = ₹51,750
That is 28% of your margin gone
Scenario 3: Nifty -5% gap
Loss = 1,150 × 75 = ₹86,250
That is 47% of your margin — margin call
In Scenario 3, you would owe your broker ₹86,250 — and if you do not pay, they liquidate your position at the worst possible price.
Futures trading demands iron discipline. Use strict stop-losses. Never risk more than 2% of your total capital on a single trade. Avoid holding positions overnight unless you are prepared for gap risk. And never, ever add to a losing futures position — that is how accounts go to zero.
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Now that you understand futures, explore the options side and specific index strategies:
- Options Basics — Understand calls, puts, and defined-risk derivatives
- Options Strategies — Multi-leg strategies for every market condition
- Bank Nifty Trading — Deep dive into India's highest-volume index
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