Futures Contracts: Margin, Lot Size & Settlement
Storyโ As a trader in the Advanced Realm, you've mastered the basics and now face the complex world of futures. The margin requirements and settlement processes are your next challenges to conquer.
In the ancient bazaars of India, merchants would strike futures agreements for goods to be delivered later, ensuring price certainty despite market volatility.
Mind Note
โFutures leverage amplifies both profits and losses, requiring disciplined risk management.โ
Lesson Content
Futures contracts in the Indian stock market are standardized agreements to buy or sell an asset at a predetermined price on a specified future date. The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) offer futures on indices like Nifty 50 and Sensex, as well as individual stocks such as Reliance Industries and TCS. Understanding margin requirements is crucial - initial margin must be deposited to initiate a position, while maintenance margin must be maintained throughout the contract's life. Lot sizes vary by contract; for instance, Nifty futures have a lot size of 75 shares, while Reliance futures may have 500 shares per lot. Settlement occurs either through physical delivery (rare for index futures) or cash settlement, where the difference between the contract price and the spot price at expiry is settled. The mark-to-market process daily adjusts margins based on price movements, affecting your account balance.
Key Takeaways
- 1.Margin requirements determine your trading capacity
- 2.Lot size varies by contract and affects position sizing
- 3.Mark-to-market settlement creates daily profit/realization
Trader Tips
- ๐กAlways maintain sufficient margin above the minimum requirement
- ๐กUnderstand the impact of lot size on your position sizing
- ๐กMonitor MTM adjustments daily to manage risk effectively
Important Notes
- โ ๏ธFutures trading involves substantial risk due to leverage
- โ ๏ธFailure to meet margin calls can lead to position liquidation
Cheatsheet
- โInitial Margin = SPAN + Exposure Margin
- โMaintenance Margin = 75% of Initial Margin
- โLot Size = Minimum quantity per contract
- โDaily Settlement = Mark-to-Market (MTM)
- โExpiry = Last Thursday of the contract month
TL;DR
- โขFutures contracts require initial and maintenance margin
- โขLot sizes vary by contract and exchange
- โขSettlement can be physical or cash-based
- โขMark-to-market process adjusts daily margins
Connected Lessons
Quiz Preview
In Indian futures markets, what does initial margin represent?
- A good faith deposit to cover potential losses
- The total contract value
- The profit from the trade
- Brokerage charges
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