What Are Index Futures? Definition, Types, and How to Profit

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 minimum amount required for future trading in india 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.

Fees in Options Trading (Options and Move Contracts)

While it is possible to trade forwards on OTC markets, they are less regulated and less accessible to retail investors. This means that there are also more opportunities to customize a forward agreement according to the buyer’s and seller’s needs. Producers or purchasers of an underlying asset hedge or guarantee the price at which the commodity is sold or purchased. They use futures contracts to ensure that they have a buyer and a satisfactory price, hedging against any changes in the market.

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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.

Types of Futures Contracts

1. To lock in a price on one million barrels of oil/they would need to buy/sell 1,000 contracts.
2. Unless the contract is unwound before expiration through an offsetting trade, the trader is obligated to deliver the cash value on expiry.
3. Futures contracts detail the quantity of the underlying asset and are standardized to facilitate trading on a futures exchange.
4. In this scenario, the investor holding the contract upon expiration would be responsible for storing the goods and would need to cover costs for material handling, physical storage, and insurance.
5. An index tracks the price of an asset or a group of assets, such as equities, commodities, and currencies.
6. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.

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.

1. Various factors can move markets, which means they can go in any direction, though some directions are more likely than others.
2. But, if they think $75 is a good price, they could lock in a guaranteed sale price by entering into a futures contract.
3. If the account is in debit balance, any order placed will be charged ₹40 per executed order instead of ₹20 per executed order.
4. Depending on the contract, the values exchanged can be settled in cash.
5. A price scanning range is defined for each product by the respective clearing house.

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.

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).

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.

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.

They are not required to pay $55,000 ($55 x 1,000 barrels) for this privilege, though. Rather, the broker only requires an initial margin payment, typically of a few thousand dollars for each contract. Retail traders and portfolio managers are not interested in delivering or receiving the underlying asset.

Businesses frequently use commodity futures to lock in prices for the raw materials they need for production. Futures contracts don’t require the buyer to put up the entire value of the contract when entering a trade. Instead, buyers must keep just a fraction of the contract amount in their account. The information mentioned herein above is only for consumption by the client and such material should not be redistributed. If you are new to the trading terminal, I suggest you read through the chapter on the Trading terminal. Once TCS Futures is loaded on my market watch, all I need to do is press F1 and buy the contract.

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 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)’.

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.

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.