The Futures Trade

By entering into this contract, in one year the producer is obligated to deliver one million barrels of oil and is guaranteed to receive $78 million. The $78 price per barrel is received regardless of where spot market prices are at the time. Traders use index futures to hedge or speculate against future price changes in the underlying equity index.

As a business we don’t give stock tips, and have not authorized anyone to trade on behalf of others. If you find anyone claiming to be part of Zerodha and offering such services, please create a ticket here. Speculators can use futures contracts to bet on the future price of some asset or security. 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.

1. Index futures are generally considered an educated wager—not a predictor.
2. Since option markets trade at a future date, trading in this market can turn out to be risky.
3. Price predictions for stocks do not directly translate to success in options trading, particularly due to the short-term nature of options.
4. Index futures contracts allow investors to make trades on various indices based on their predictions about the overall price movement of the particular index.
5. A futures contract is a derivative that obligates traders to buy or sell the underlying asset on a set day at a predetermined price.
6. Rather, the broker only requires an initial margin payment, typically of a few thousand dollars for each contract.

For example, one oil contract on the Chicago Mercantile Exchange (CME) is for 1,000 barrels of oil. Therefore, if someone wanted to lock in a price (selling or buying) on 100,000 barrels of oil, they would need to buy/sell 100 contracts. To lock in a price on one million barrels of oil/they would need to buy/sell 1,000 contracts. For example, a trader may buy grain futures if they expect the price of grain to increase before the delivery date. Any unexpected changes to the weather or growing conditions may cause the futures price to rise or drop.

Since many commodity prices tend to move in predictable patterns, it is possible to make a profit by trading futures, even if one does not have a direct interest in the underlying commodity. Traders and fund managers use futures to bet on the price of the underlying asset. Index futures may use different multiples to determine the contract price. For example, the E-mini S&P 500 futures contract, which trades on the CME, has a value of $50 times the value of the index.

An index tracks the price of an asset or a group of assets, such as equities, commodities, and currencies. A futures contract is a derivative that obligates traders to buy or sell the underlying asset on a set day at a predetermined price. Putting these together, an index future is a legal contract that obligates traders to buy or sell a contract derived from a stock market index by a specific date at a predetermined price. They may use futures contracts to lock in a price they will sell at, and then deliver the oil to the buyer when the futures contract expires. Since they like to plan ahead and always have oil coming in each month, they too may use futures contracts.

In the reverse scenario, the buyer suffers a loss while the seller makes a profit. It’s important to note that index futures contracts are legally binding agreements between the buyer and seller. But if you are an options seller, then options trading under ₹1000 is not possible since a seller requires a margin of at least 1-2 lakh rupees to trade.

Trading Futures Contracts

1. Please write the Bank account number and sign the IPO application form to authorize your bank to make payment in case of allotment.
2. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.
3. Only enter into futures once you’ve gained ample experience in the market, and never invest more than you can afford to lose.
4. Once TCS Futures is loaded on my market watch, all I need to do is press F1 and buy the contract.
5. Investors who take long positions speculate that the index’s price will increase, while those who take short positions bet that the price will drop.

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.

Futures and FOPs Margin Overview

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.

Are Futures and Forwards the Same Thing?

Allow me to repost the futures contract with a few important features highlighted. Notice, based on my thoughts (which I perceive as rational), I have developed a ‘directional view’ on the asset’s price (TCS). I believe the TCS (underlying asset) stock price will increase in due course of time from my analysis.

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.

Arbitrageurs trade futures contracts in or across related markets, taking advantage of theoretical mispricings that may exist temporarily. The difference between the entry and exit prices of the contract determines profits. As minimum amount required for future trading in india with any speculative trade, there are risks the market could move against the position.