Futures Trading Basics: Lot Size, Margin, MTM and Expiry

What a futures contract is

A futures contract is a standardised agreement to buy or sell an underlying asset, such as the NIFTY index or a stock, at a price agreed today, for settlement on a fixed expiry date. In India, equity futures are cash-settled for indices and physically settled for stocks held to expiry, and they trade on the exchange like shares.

The price of a future usually stays close to the spot price, with a small difference called the basis, mostly reflecting interest cost until expiry. As expiry approaches, the future and the spot converge.

Traders use futures to take a view on price (long if they expect a rise, short if they expect a fall) and investors use them to hedge existing holdings.

Lot size and contract value

Futures trade in lots, a fixed quantity set by the exchange. If a stock's lot size is 500 shares and the futures price is ₹1,200, one lot represents ₹6,00,000 of stock. Index futures work the same way using index points: a lot size of 75 on an index at 24,000 is a contract value of ₹18,00,000.

Lot sizes are revised periodically, so check the current value before trading. The key point is that even one lot is a large position for most individual traders.

Margin and leverage

You do not pay the full contract value. You deposit margin, a percentage set by the exchange based on volatility, often in the range of 12-20% for many contracts. On an ₹18,00,000 contract, that might be around ₹2.2-3.6 lakh.

Leverage cuts both ways. If the index moves 1%, an ₹18,00,000 position gains or loses ₹18,000, which could be 5-8% of the margin deposited. A 3% adverse move could wipe out a large part of it. This is why futures need careful position sizing and stop-losses.

Mark-to-market (MTM)

Futures are settled every day. At the end of each trading day, your position is valued at that day's settlement price, and the profit or loss is added to or taken from your account in cash. This is called mark-to-market.

If losses reduce your account below the required margin, you must add funds or the broker may close the position. You do not have to wait until expiry to feel losses; they hit your cash daily.

Expiry and rollover

Each contract has an expiry date, after which it stops trading. Exchanges list contracts for the near month and a couple of later months. Expiry dates follow exchange rules and are moved when they fall on a holiday.

If you want to keep a position beyond expiry, you roll over: close the current month's contract and open the same position in the next month's contract. The difference in price between the two is the rollover cost or benefit.

Long and short

Going long means buying a future, expecting the price to rise. Going short means selling a future without owning the underlying, expecting it to fall. Both use the same margin rules, which makes futures a simple way to express a bearish view or to hedge a portfolio of stocks.

A hedge example: someone holding ₹6 lakh of a stock who expects short-term weakness could sell one lot of that stock's future. If the stock falls, the gain on the short future offsets part of the loss on the shares.

A worked example: one index lot over three days

Say you buy one lot of an index future at 24,000 with a lot size of 75 (contract value ₹18,00,000) and margin of about ₹2,70,000. Day 1 the settlement price is 24,120: +120 points x 75 = ₹9,000 is credited. Day 2 it settles at 23,950: -170 x 75 = ₹12,750 is debited. Day 3 you exit at 24,060: +110 x 75 = ₹8,250.

Net result: +60 points x 75 = ₹4,500 before charges, about 1.7% on the margin used, while the index itself moved only 0.25%. On day 2 your account showed a loss of ₹3,750 overall. With a bigger adverse move, MTM debits would have required topping up margin.

Futures vs options in one paragraph

A future moves almost point for point with the underlying, has unlimited gain and loss in both directions, and needs margin. Buying an option costs a premium, limits the maximum loss to that premium, and loses value as expiry approaches if price does not move enough. Selling an option collects premium but carries large potential losses and needs margin. Each suits different views and risk appetites, and each needs its own practice.

Risks to understand first

Leverage magnifies both gains and losses on your capital. Overnight gaps can move price well past a stop. Daily MTM can force you to add funds at the worst moment. And because lot sizes are large, a single position can be a big share of a small account.

Many learners practise with virtual money until they can consistently follow position sizing and stop-loss rules before considering real futures trades.

Practise futures on iTradeChart

Search for an index or stock and pick its future (for example "NIFTY FUT"). Paper trading supports long and short futures with realistic margin, carry (overnight) or intraday, stop-loss and bracket orders, charges, and automatic settlement at expiry.

The option chain page also lists the near futures for each index, and the OI buildup page shows which futures saw long buildup, short buildup, short covering or long unwinding on the last trading day, to help you learn how open interest and price move together.