Futures contract

A futures contract is a standardised agreement, traded on an exchange, to buy or sell an underlying at an agreed price on a future date. On NSE you get index futures on Nifty and Bank Nifty and stock futures on F&O stocks. The exchange's clearing corporation stands between buyer and seller, so neither side has to trust the other.

You do not pay the full contract value. You deposit a margin, and the position is marked to market every day: profit is credited and loss is debited at each day's settlement price. Both buyer and seller are obligated, unlike in options. Gains and losses are calculated on the full contract value, so a small percentage move in the underlying is a large percentage of your margin.

Each contract has an expiry, and several expiry months trade at once, with the near month usually the most liquid. To hold beyond expiry you roll over: close the near contract and open the next. Index futures are cash-settled. Stock futures on NSE carry delivery obligations if held to expiry, which is one more reason short-term traders exit or roll earlier.

The common mistake is looking at margin and not at contract value. A position that needs a modest margin can still control several lakh rupees of stock, and a 2 per cent adverse move on that is the real risk. A second trap is low-volume stock futures: wide bid-ask spreads make entries and stop-loss exits slip by more than the chart suggests.