Futures & FOPs Margin Requirements

Index futures are agreements whose value is derived from a financial index. Essentially, they are agreements to trade the value of an index at a future time, reflecting expectations of the index’s future direction in price. Originally intended for institutional investors, index futures are open to individual investors. Traders can use these contracts to speculate on the price direction indexes, such as the S&P 500 and the Dow Jones Industrial Average (DJIA).

Price predictions for stocks do not directly translate to success in options trading, particularly due to the short-term nature of options. Both these are valid questions at this point, and the answer to these questions depends upon the “Futures Pricing Formula”, a topic we will deal with at a later point in time. But the most important point to note at this stage is that the futures price has moved in line with the spot price, and both of them are down for the day. Before we proceed any further, let us relook at the futures contract and inspect a few key elements.

1. You must open an account with a brokerage firm to trade index futures.
2. In conclusion, venturing into options trading with a starting capital of 1000 Rupees is possible, but it comes with its set of challenges and limitations.
3. So, you might buy a futures contract when it’s trading at 5,000 points, resulting in a contract value of $250,000 ($50 x 5,000).
4. So, if an investor with a September futures contract shorts index futures and the market rises, the index futures would fall in value.
5. Debit transactions of mutual funds & bonds get an additional discount of ₹0.25 on the CDSL fee.
6. Because index futures don’t require investors to put up the full 100%, you need only to maintain a small percentage in your brokerage account.

Instead of buying TCS shares in the spot market, I decide to buy the TCS Futures (for reasons I will discuss in the next chapter). Having decided to buy futures, all I need to see is the price at which the TCS Futures is trading. In fact, the link to get details for a TCS futures contract is available on the spot market quotes. Given the volatility of oil prices, the market price at that time could be very different than the current price. If the oil producer thinks oil will be higher in one year, they may opt not to lock in a price now.

Futures and FOPs Margin Overview

Instead of buying individual stocks or assets, a trader can bet on the direction of a group of assets by buying or selling index futures. The fund manager could hedge all the downside risks of the portfolio or only partially offset them. The downside of hedging is that this reduces profits if the hedge isn’t required.

A retail trader has little need to receive 1,000 barrels of oil, but they may be interested in capturing a profit on the price moves of oil. A futures contract is similar to a forwards contract, where a buyer and seller agree to set a price and quantity of a product for delivery at a later date. Both types of contract can be used for speculation, as well as hedging.

They give investors the power and obligation to deliver the contract’s cash value based on an underlying index on a specified date at an agreed-upon price. Unless the contract is unwound before expiration through an offsetting trade, the trader is obligated to deliver the cash value on expiry. This differs from other types of futures, like those involving commodities, where a party might be obligated to hand over the underlying asset at expiry, not cash.

What positions are eligible?

This way they know in advance the price they will pay for oil (the futures contract price) and they know they will be taking delivery of the oil once the contract expires. When the contract expires, the buyer of the contract pays the agreed-upon price for the underlying asset, and the seller must deliver it. If you own a futures contract, you may hold it for as long as you’d like up to the expiry. Investors can often roll over the contract to the next month to avoid the costs related to settling the futures contract. Speculation is a sophisticated trading strategy not suited for many investors. Experienced traders tend to use index futures to speculate on the direction of an index.

Charges for optional value added services

1. The final profit or loss of the trade is realized when the trade is closed.
2. Popular futures include fractional index futures that trade at lower prices than those aimed at institutional investors, like the Chicago Mercantile Exchange’s (CME) E-mini S&P 500.
3. Hedgers use futures to lock in a price today to reduce market uncertainty between now and the time that good is to be delivered or received.
4. Unlike index futures, which are cash-settled, long-position holders of commodity futures contracts will need to take physical delivery if the position has not been closed out ahead of expiry.
5. The moment I press the F1 key (expressing my interest to buy TCS futures) on my trading terminal, a couple of things happen in the background.
6. A retail trader has little need to receive 1,000 barrels of oil, but they may be interested in capturing a profit on the price moves of oil.

In the last chapter, we learnt various concepts related to the futures market. Remember, the motivation for any trader entering into a futures agreement is to benefit financially. The trader needs to have a directional view of the price of the underlying asset. Perhaps it is time we take up a practical example of a futures trade to demonstrate how this is done.

The Futures Trade

For example, if the DJIA closes at 16,000 at the end of September, the holder with a September futures contract one year earlier at 15,760 reaps a profit. ICICIdirect.com is a part of ICICI Securities and offers retail trading and investment services. Before you start trading, it’s important to assess your risk appetite.

As the value of the trade climbs before expiration, the broker can require that more funds be added to the account. Investments in securities market are subject to market risks; read all the minimum amount required for future trading in india related documents carefully before investing. Before we proceed to discuss the TCS futures trade, let us quickly look at another ‘Futures Contract’ to rivet our understanding so far. Here is the snapshot of the futures contract of ‘State Bank of India (SBI)’.

Understanding Index Futures

A lot of traders either stay invested for a very short duration or a prolonged period, which increases the likelihood of losing money. As a trader, I believe that the TCS stock price reaction to the management’s statement is exaggerated. Here is my rational – If you follow TCS or any Indian IT sector company in general, you will know that December is usually a lacklustre month for the Indian IT companies. December is the financial year-end in the US (the biggest market for the Indian IT companies) and the holiday season; hence the business moves quite slowly for such companies.

But, if they think $75 is a good price, they could lock in a guaranteed sale price by entering into a futures contract. Underlying assets include physical commodities or other financial instruments. Futures contracts detail the quantity of the underlying asset and are standardized to facilitate trading on a futures exchange. The price of index futures tracks the value of the underlying index but won’t be precisely the same as it.

So, if an investor with a September futures contract shorts index futures and the market rises, the index futures would fall in value. The losses from the hedge would offset gains in the portfolio as the stock market rises. This means there will be no delivery of the underlying asset at the end of the contract. If the index price is higher than the agreed-upon contract price at the expiry date, the buyer makes a profit while the seller (known as the future’s writer) suffers a loss.