What is Futures contract?
It's an agreement between two parties either to buy or sell an asset at a certain time within the contract period (on or before the contract period).
Futures have contract specification like expiry date, trading cycle (1 month contract, 2 month contract, and 3 months contract), lot size etc. Some futures are settled in cash and some are physically settled. If you are 100% sure, you can trade on futures, since loss and profit will be very much on the higher side. If you are in loss and if you are correct about your prediction roll it over to next month contract. Example: GOLDM (GoldMini): You would have bought at 30,000/- in the current month contract and on expiry date, it may be trading at 29,000/-. If you sell the contract then you lose 10,000 rupees i.e. (30,000-29,000) * 10, where 10 is the lot size. To avoid loss, you sell the current contract and buy buy the next month contract at current price (i.e.) 29000 rupees. If your predictions are correct and if it increases to 31,000/- you can book profits
(10000 rupees) and exit.
Why stop loss is necessary?
Even though our gold and silver futures trading session ends at Indian midnight time, trading of gold and silver continue to trade round the clock in international market. The price movements in international markets will be reflected on Indian markets (mcx, ncdex) when it opens up next morning. If you have left any un-winded positions, you may wake up to see your huge loss or huge profits (if you are very lucky) depending upon the International price movements. Hence, always you must trade with strict stop loss since I have seen investors losing more than 30,000 rupees on a silver single lot in mcx due to international movements within a night.
Note: We have given examples on stock futures, index futures, commodity futures and currency futures below. The examples explained below are without STOP LOSS, WITHOUT BROKERAGE COMMISSION AND STATUTORY CHARGES.
1. How to buy and sell Stock Futures in NSE or BSE in online trading?
Stock Futures example:
Instead of buying stocks and holding them in your DEMAT account, you can buy stock futures.
To buy 4000 shares of Andhra Bank (price is around 100 rupees) in STOCK CASH market, you need "4 lakh rupees" and you can buy the same 4000 shares at 68,710 rupees in futures market.
After buying in the futures market, hold it for some time and sell later within the life of the contract. If Andhra Bank price goes down, then you need sufficient amount to hold Andhra Bank Futures.
Mark to Market (MTM) margin is a term refers to the profit or loss that you made on a particular future.
In the above mentioned example, lot size is 4000 and if share value goes below from 95 to 94, then you lose 4000 rupees (4000 * 1) i.e. MTM is 4000 rupees.
If share value goes below by 5 rupees, then your loss is 20,000 rupees (4000 * 5) i.e. MTM is 20,000 rupees. So the margin amount 68,710 rupees that you invested will become 64,710 in the first scenario and 44,710 in the second scenario. So you broker will request you to credit more money into your account to keep the required margin.
If share value increases, then, you can request the broker to pay some amount to you. If the share value increases by 10 rupees, then you gain 40000 (4,000*10) rupees. With minimum investment, you get huge profits.
2. How to buy and sell NSE Index Futures in online trading?
You can buy/sell futures on several indexes on BSE and NSE.
Let us consider the example of NIFTY FUTURES, WHEN YOUR EXPECTATION IS BULLISH.
Date: 15-Mar-2013 - Instrument Name: FUTIDX - Underlying: NIFTY -
Expiry Date: 28-Mar-13 NIFTY Price: 5800 - 1 LOT SIZE OF NIFTY: 50.
- If NIFTY GOES ABOVE to 6300 BY 500 POINTS, then you get profit of 500*50 = 25,000 rupees, where 50 is the lot size.
- IF NIFTY GOES BELOW to 5300 BY 500 POINTS, then you get loss of 500*50 = 25,000 rupees. Your loss is dependent on the NIFTY movement.
If it closes down by 1000 points, then you lose 1000*50=50,000 rupees.
- When you hold it until the expiry date and you may get profit or loss. (Note: You can sell it also whenever you think on before the expiry date)
3. How to buy and sell Commodity futures in MCX/NCDEX in online trading?
If you want to make profits on gold, either you can buy physically 1 kilogram of gold (you need 28 lakhs), and keep it safely for some time and sell it later. Or you can buy the same kilogram of gold in futures market with a margin of 1, 20,000 rupees in mcx and sell it when the prices go up. If the gold price goes down, you need sufficient amount for MTM (mark to market) to hold your gold. Gold has many lot sizes in MCX and based on the lot size that you buy, you get more/less profit or more/less loss.
Example: If you buy GOLD, then lot size is 100. If gold price increases by 1000 rupees, then you get
1000*100 = 1, 00,000 rupees as profit. With less amount of money, you get profits.
4. How to buy and sell Currency futures in MCX-SX in online trading?
If you are sure that INR will depreciate/weaken and USD will appreciate/strengthen, you can buy USD in spot market. Let us assume that for 40 rupees, you can buy 1 dollar. So to buy 1000 US dollars, you need 40,000 rupees. After 1 year, 1 USD may be 50 rupees and you get a profit of 10 rupees per US dollar. For 1000 US Dollars, you get profit of 10,000 rupees.
To get that profit of 10,000 rupees, you should have had 40,000 rupees in your hand in spot market; whereas if you have around 3000 rupees, you can buy USDINR future in MCX-SX or NSE and hold it for a period of time and make the same profit of 10,000/-
On the contrary, if USD gets depreciated/weakened, then you need sufficient amount for MTM (mark to market) to hold your USDINR. With less amount of money, you get profits.
Stock Options Commodity Tips