Contents
Definition
A futures contract is a standardized, exchange-traded agreement that obligates the buyer to purchase (and the seller to sell) a specified underlying asset at a predetermined price on a fixed expiry date. Unlike options, futures carry obligation, not choice — both parties must settle unless the position is closed before expiry. In India, equity futures trade on NSE (and to a lesser extent BSE) under SEBI's Securities Contracts (Regulation) Act, 1956, with F&O eligibility governed by SEBI circular SEBI/HO/MRD2/DCAP/CIR/2018 and its subsequent amendments. Underlyings include Nifty 50, Bank Nifty, Nifty IT, and individual stocks meeting SEBI's eligibility thresholds. Source: SEBI — Framework for Derivatives.
How It Is Structured
NSE lists three contract months simultaneously for each eligible underlying: near month (M), next month (M+1), and far month (M+2). All expire on the last Thursday of each month. SEBI F&O eligibility criteria for single-stock futures (as of 2024):
- Median quarterly sigma: ≥ 10% in last 6 months.
- Average daily delivery value: ≥ ₹10 crore in cash market over 6 months.
- Market-wide position limit (MWPL): 20% of non-promoter holdings; SEBI can put a stock in the F&O ban period when OI exceeds 95% of MWPL.
- Minimum lot size: SEBI revised in 2024 so that minimum notional contract value at time of introduction is ₹15 lakh (increased from ₹5 lakh set in 2015), reducing retail overleveraging.
Mark-to-market (MTM): Futures are marked to market daily. Gains/losses are debited or credited to the margin account end-of-day. This means losses can compound across days — a 5-day losing streak requires continuous margin top-up or forced closeout by the broker.
Market Mechanics
- Initial margin: SPAN (scenario-based) + Exposure margin. Typically 12–20% of notional for index futures; 20–30% for single-stock futures.
- Settlement: Index futures (Nifty, Bank Nifty) — cash settled at final settlement price (closing index value on expiry day). Single-stock futures — physically settled since October 2019 per SEBI directive; buyer/seller exchange shares.
- STT: 0.0125% on sell side for futures (SEBI 2024 rates); treat as cost in P&L calculations.
- Rollover: Holding beyond near-month expiry requires closing the expiring contract and opening M+1 — rollover cost = M+1 price minus M price (basis), driven by cost of carry (risk-free rate minus dividend yield).
Risk Profile
Leverage is the defining risk. At 12% initial margin, a 1% adverse move in the underlying erodes 8.3% of the margin. SEBI's July 2024 study on F&O retail participation found 93% of individual index futures/options traders lost money over FY22–FY24, with aggregate losses of ₹1.81 lakh crore over three years (gross of transaction costs). Median net loss per active trader: ₹1.1 lakh/year. This data is sourced from actual trade records submitted by brokers to SEBI — not a sample. The primary loss drivers were: leverage amplification of small adverse moves, MTM margin calls forcing exit at lows, and transaction costs (brokerage + STT + exchange charges). Physical settlement of stock futures introduces an additional risk: a seller who is short at expiry without delivery stock faces a buy-in at market price, which can be far higher if the stock is illiquid.
Worked Example
Nifty 50 spot = 24,500. Near-month futures trade at 24,540 (basis = +40, reflecting cost of carry). You buy 1 lot (25 units); notional = 24,540 × 25 = ₹6,13,500. Initial margin (12%) = ₹73,620. Over 5 trading days, Nifty falls to 24,100: MTM loss = (24,540 − 24,100) × 25 = ₹11,000 — a 14.9% drain on margin capital despite only a 1.8% index move. If margin falls below maintenance (70% of initial = ₹51,534), the broker issues a margin call. Close the position at 24,100: realised loss = ₹11,000 plus STT ₹30 (0.0125% × ₹6,02,500) = ₹11,030.
Caveats
- Basis (futures price − spot price) converges to zero at expiry but fluctuates intra-month — basis risk adds to directional risk for hedgers.
- F&O ban periods (OI > 95% of MWPL) prevent fresh positions in that stock's derivatives — existing positions must be reduced, not added.
- Futures P&L is taxed as non-speculative business income (Section 43(5) ITRA) — not as capital gains. Losses can be carried forward 8 years but only offset against business income, not salary or other capital gains.
See Also
Primary Source
NSE — Equity Derivatives; SEBI Study on F&O Retail Participation, July 2024
MintByte (ARN-314872 / APMI APRN-01658) provides this glossary for educational purposes only. Nothing here constitutes investment advice, a recommendation to buy or sell any security, or a guarantee of returns. Equity and derivatives trading involves risk of loss. Consult a SEBI-registered adviser before making investment decisions.