A futures contract’s expiration day is the date on which it will cease to exist. If you keep a contract past its expiration date, you will be obligated to buy the underlying asset.
Options allow you to exercise your rights in a variety of ways.
Futures do not work in this way.
You will be exercised whether you are long or short the futures contract until it expires.
What happens if you hold on to a futures contract until it expires?
Physical settlement is most commonly used for non-financial commodities including wheat, cattle, and precious metals. The clearinghouse matches the holder of a long contract against the holder of a short position when the futures contract expires. The underlying asset is delivered to the long position by the short position. To take possession of the asset, the holder of the long position must deposit the entire contract amount with the clearinghouse.
How long am I allowed to keep a futures contract?
A demat account is not required for futures and options trades; instead, a brokerage account is required. Opening an account with a broker who will trade on your behalf is the best option.
The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) both offer derivatives trading (BSE). Over 100 equities and nine key indices are available for futures and options trading on the NSE. Futures tend to move faster than options since they are the derivative with the most leverage. A futures contract’s maximum period is three months. Traders often pay only the difference between the agreed-upon contract price and the market price in a typical futures and options transaction. As a result, you will not be required to pay the actual price of the underlying item.
Commodity exchanges such as the National Commodity & Derivatives Exchange Limited (NCDEX) and the Multi Commodity Exchange (MCX) are two of the most popular venues for futures and options trading (MCX). The extreme volatility of commodity markets is the rationale for substantial derivative trading. Commodity prices can swing drastically, and futures and options allow traders to hedge against a future drop.
Simultaneously, it enables speculators to profit from commodities that are predicted to increase in value in the future. While the typical investor may trade futures and options in the stock market, commodities training takes a little more knowledge.
What happens if I don’t sell my futures before the expiration date?
It will not be rolled-over if you do not square-off futures. The payment will be made in cash. If you want to roll over, you must square-off manually and then buy stock futures for the next month.
What happens on the F&O’s expiration date?
You can buy another futures contract to sell 1000 shares of XYZ firm on the expiration date. The first contract to sell the shares is nullified by this new deal, which remains in effect. You would have to settle the price discrepancy, if any, in such circumstances.
Is it possible to sell futures before they expire?
Purchasing and selling futures contracts is similar to purchasing and selling a number of units of a stock on the open market, but without the need to take immediate delivery.
The level of the index moves up and down in index futures as well, reflecting the movement of a stock price. As a result, you can trade index and stock contracts in the same way that you would trade stocks.
How to buy futures contracts
A trading account is one of the requirements for stock market trading, whether in the derivatives area or not.
Another obvious prerequisite is money. The derivatives market, on the other hand, has a slightly different criteria.
Unless you are a day trader using margin trading, you must pay the total value of the shares purchased while buying in the cash section.
You must pay the exchange or clearing house this money in advance.
‘Margin Money’ is the term for this upfront payment. It aids in the reduction of the exchange’s risk and the preservation of the market’s integrity.
You can buy a futures contract once you have these requirements. Simply make an order with your broker, indicating the contract’s characteristics such as theScrip, expiration month, contract size, and so on. After that, give the margin money to the broker, who will contact the exchange on your behalf.
If you’re a buyer, the exchange will find you a seller, and if you’re a selling, the exchange will find you a buyer.
How to settle futures contracts
You do not give or receive immediate delivery of the assets when you exchange futures contracts. This is referred to as contract settlement. This normally occurs on the contract’s expiration date. Many traders, on the other hand, prefer to settle before the contract expires.
In this situation, the futures contract (buy or sale) is settled at the underlying asset’s closing price on the contract’s expiration date.
For instance, suppose you bought a single futures contract of ABC Ltd. with 200 shares that expires in July. The ABC stake was worth Rs 1,000 at the time. If ABC Ltd. closes at Rs 1,050 in the cash market on the last Thursday of July, your futures contract will be settled at that price. You’ll make a profit of Rs 50 per share (the settlement price of Rs 1,050 minus your cost price of Rs 1,000), for a total profit of Rs 10,000. (Rs 50 x 200 shares). This figure is adjusted to reflect the margins you’ve kept in your account. If you make a profit, it will be added to the margins you’ve set aside. The amount of your loss will be removed from your margins if you make a loss.
A futures contract does not have to be held until its expiration date. Most traders, in practice, exit their contracts before they expire. Any profits or losses you’ve made are offset against the margins you’ve placed up until the day you opt to end your contract. You can either sell your contract or buy an opposing contract that will nullify the arrangement. Once you’ve squared off your position, your profits or losses will be refunded to you or collected from you, once they’ve been adjusted for the margins you’ve deposited.
Cash is used to settle index futures contracts. This can be done before or after the contract’s expiration date.
When closing a futures index contract on expiry, the price at which the contract is settled is the closing value of the index on the expiry date. You benefit if the index closes higher on the expiration date than when you acquired your contracts, and vice versa. Your gain or loss is adjusted against the margin money you’ve already put to arrive at a settlement.
For example, suppose you buy two Nifty futures contracts at 6560 on July 7. This contract will end on the 27th of July, which is the last Thursday of the contract series. If you leave India for a vacation and are unable to sell the future until the day of expiry, the exchange will settle your contract at the Nifty’s closing price on the day of expiry. So, if the Nifty is at 6550 on July 27, you will have lost Rs 1,000 (difference in index levels – 10 x2 lots x 50 unit lot size). Your broker will deduct the money from your margin account and submit it to the stock exchange. The exchange will then send it to the seller, who will profit from it. If the Nifty ends at 6570, though, you will have gained a Rs 1,000 profit. Your account will be updated as a result of this.
If you anticipate the market will rise before the end of your contract period and that you will get a higher price for it at a later date, you can choose to exit your index futures contract before it expires. This type of departure is totally dependent on your market judgment and investment horizons. The exchange will also settle this by comparing the index values at the time you acquired and when you exited the contract. Your margin account will be credited or debited depending on the profit or loss.
What are the payoffs and charges on Futures contracts
Individual individuals and the investing community as a whole benefit from a futures market in a variety of ways.
It does not, however, come for free. Margin payments are the primary source of profit for traders and investors in derivatives trading.
There are various types of margins. These are normally set as a percentage of the entire value of the derivative contracts by the exchange. You can’t purchase or sell in the futures market without margins.
Does time pass in futures?
Futures and options are both derivatives, although their behavior differs slightly. Futures contracts, unlike options, are not subject to time decay and do not have a fixed strike price, therefore traders will have an easier time regulating price movement.
What happens if the F&O position is not squared off until the expiry day session ends?
- Buy position – The user will receive the shares in his demat account and will be responsible for paying the full amount due. If the user fails to meet his or her duty to pay the sum, Upstox will sell the shares to collect the money.
- Short position – The user must deliver the shares from his demat account, or the shares will be auctioned to complete the settlement process if the user does not have one.
Furthermore, the client is responsible for any losses or penalties incurred throughout the settlement procedure.
Can I invest in futures?
Most traders consider futures to be a form of short-term market trading or, at most, a way of hedging risk or arbitraging in the equity markets. Futures, interestingly enough, can be used to replace stock investments. Let’s take a look at the benefits and drawbacks of long-term futures holding. What are the implications and advantages of investing in futures for the long term? Above all, what are the greatest long-term assets for novice traders wishing to take futures positions? Futures can be used in three different ways for long-term investments.
Let’s look at a very simple example. If you own 1000 shares of Reliance Industries in cash, you can minimize the amount of money you have locked up by buying one lot of Reliance futures worth 1000 shares. You only pay a margin when you buy futures, so the rest of your money is freed up. However, if the price move goes against you, you must account for MTM margins. As a result, the remaining money can be split 20 percent in liquid funds and 80 percent in debt funds. We’ve projected that liquid funds will earn 6% annualized returns and debt funds will earn 10% annualized returns. This will ensure that you have cash on hand when you need it. Let’s take a look at how they stack up in a bullish environment.
Particulars
Purchase RIL on the open market.
Futures are a good way to invest in RIL.
In the liquid fund, there is a 20% balance.
Debt money account for 80% of the total.
Date of Purchase
Jan 1st 2018Jan 1st 2018Jan 1st 2018Jan 1st 2018Jan 1st 2018Jan 1st 2018Jan 1st 2018Jan 1st 2018Jan 1st 2018
PriceRs.920Rs.920Rs.920Rs.920Rs.920Rs.920Rs
Rs.1,60,000Rs.6,40,000
March 31st, 2018March 31st, 2018March 31st, 2018March 31st, 2018March 31st, 2018March 31st, 2018March 31st,
31st of March, 2018
Rs.990Rs.990Rs.990Rs.990Rs.990Rs.990Rs.990
Sell ValueRs.9,90,000Rs.9,90,000Rs.1,62,400Rs.6,56,000Profit bookedRs.70,000Rs.70,000Rs.2,400Rs.16,000Total ProfitRs.70,000Rs.88,400Total ProfitRs.70,000Rs.88,400Total ProfitRs.70,000Rs.88,400Total ProfitRs.70,000Rs.88,400Total ProfitRs.70,000Rs
The trader’s 3-month returns would have been 7.61 percent if he had used the cash buying approach, as seen in the figure above. He would have made a 9.61 percent return in three months if he had chosen a combination of futures and debt funds. That is the leverage potential of futures contracts. We’re expecting a three-month holding period here, so we can buy a three-month future right now. What happens, however, if you plan to retain the stock for a year? The concept of roll-over cost comes in helpful at this point. Consider a one-year futures holding with the roll-over cost factored into the futures cost.
Is it possible to use the futures approach if we have a one-year investment horizon? The difficulty could be that liquid futures are usually only available for the first and second months. That means we’ll have to roll the futures for two months at a time. In a year, that would suggest six rollovers. In the example above, how does the cost work out?
ParticularsAmount
ParticularsAmount
Rs.938.85 Reliance May Futures
Cost of a roll (4.65/938.85)
0.495 percentage point
Rs.943.50 Reliance July Futures
3.01 percent annualized roll cost
Rs.4.65Rs.4.65Rs.4.65Rs.4.65Rs.4.6
Let’s look at how this 3.01 percent yearly roll fee affects the profitability of futures vs cash investments.
Particulars
Purchase RIL on the open market.
Futures are a good way to invest in RIL.
In the liquid fund, there is a 20% balance.
Debt money account for 80% of the total.
Date of Purchase
Jan 1st 2018Jan 1st 2018Jan 1st 2018Jan 1st 2018Jan 1st 2018Jan 1st 2018Jan 1st 2018Jan 1st 2018Jan 1st 2018
Invest in Quality
Rs.9,20,000Rs.9,20,000
Rs.1,60,000Rs.6,40,000
Sell DateDec 31st 2018Dec 31st 2018Dec 31st 2018Dec 31st 2018Dec 31st 2018Dec 31st 2018Dec 31st 2018Dec 31st 2018Dec 31st 2018Dec 31
1,150Rs.1,150Rs.1,150Rs.1,150Rs.1,150Rs.1,150Rs.1,
Sell PriceRs.11,50,000Rs.11,50,000Rs.1,69,600Rs.7,04,000Rs.2,30,000Rs.2,30,000Rs.9,600Rs.64,000Rs.2,30,000Rs.2,30,000Rs.9,600Rs.64,000Rs.2,30,000Rs.2,30,000Rs.9,600Rs.64,000Rs.2,30,000Rs.2,30,000Rs.9,600Rs.6
2,30,000Rs.3,03,600Rs.2,30,000Rs.3,03,600Rs.2,30,000Rs.3,03,600Rs
If the trader decides to buy it in the futures market instead of the cash market and keeps the rest of the money in a combination of liquid and debt funds, he will still be approximately 500 basis points better off. This is one of the benefits of using futures as a long-term investment vehicle.
This is an intriguing method to use when there is a lot of volatility. You can profit by selling your cash position and buying futures instead if you are holding a stock and the futures are quoted at a deep discount to the cash market price (without dividend effect). For example, if you open a reverse arbitrage at -1.3 percent and then close it at +0.6 percent, you can gain 1.9 percent in a short amount of time. These are market-specific opportunities that will only be available for a limited time.
The moral of the story is that futures can be used as a higher-yielding alternative to cash markets. Of course, you must consider the tax ramifications of your decision!