A standardised exchange-traded contract obligating the buyer to purchase, and the seller to sell, an asset at a predetermined price on a specified future expiry date.
A futures contract is a legally binding agreement to buy or sell an underlying asset at a predetermined price on a specific future date. Unlike options (Call Option), futures carry an obligation — both parties must honour the contract at expiry. In India, futures are traded on the NSE (equity and index futures), MCX (Commodity futures), and NCDEX (agricultural commodity futures).
The mechanics of futures involve margin-based trading. Instead of paying the full contract value, you deposit an initial margin (typically 12-20% for equity futures). If Reliance futures trade at Rs 2,500 with a lot size of 250, the contract value is Rs 6,25,000, but you need only Rs 1,00,000-1,25,000 in margin. This leverage amplifies both gains and losses — a 5% move translates to a 25-40% gain or loss on your margin.
In Indian equity markets, single-stock futures are available on approximately 200 stocks, with monthly expiry on the last Thursday. Index futures (Nifty 50, Bank Nifty, Nifty Financial Services) also expire monthly. Futures prices typically trade at a premium to the spot price (called "basis" or "premium") due to the cost of carry (interest rate minus expected dividends). As expiry approaches, the basis converges to zero — the futures price equals the spot price at settlement.
Common futures trading strategies include: directional trading (buying futures to go long with leverage, or selling to go short), hedging (a portfolio manager selling Nifty futures to protect against a market decline), pairs trading (long one stock's futures, short a related stock's futures), and calendar spread (buying the near-month and selling the far-month, or vice versa, to capture the basis differential).
SEBI's 2024 regulatory changes significantly impacted futures trading: increased lot sizes raised the minimum contract value to Rs 5-10 lakh, Extreme Loss Margin (ELM) was increased on expiry day, and position limits were tightened. Stock futures that expire in-the-money are physically settled — actual shares are delivered. These changes aim to reduce speculative excess while maintaining the hedging function. Understanding margin requirements, daily mark-to-market settlement, and the risk of unlimited loss (on short futures) is essential before trading.
India Context
NSE equity futures: ~200 stocks + 3 major indices. Monthly expiry on last Thursday. Margin: 12-20%. Physical delivery for stock futures at expiry (since 2019). SEBI 2024: increased lot sizes and margins.